During the first week of launch in a new city, activity tends to be very strong, which has been no different in D.C. this week, where OPEN sold 1,992 deals in the first week. What is most encouraging in their data vs. TZOO is how many deals they are selling and the consistent price point. TZOO, while having done daily/weekly deals since mid-July, has managed to sell approximately 12,000 deals at prices from $10 to $99, while OPEN, having just launched it's first deals in NYC and Boston in early August, has managed to sell well over 26,000 deals at an average price of ~$25, netting them almost $700K gross additional revenue in a month and a half, in only 7 cities. The reason I have harped on this again after only one week is that they have only launched in 7 large markets (netting an annualized gross revenue of ~$5.4), while there are probably an additional 20 or more markets that could easily bring in these number of deals each week if they can maintain the quality of restaurants and another 30 in smaller markets that could bring in 1/3 as many deals.
While you may look at this as a skeptic and say the market is crowded and there are 200 daily deal guys out there offering a similar service/product, I would retort that there are not many that are peddling the high-end like OPEN and there aren't any that have the same diner brand recognition, restaurant relationships and distribution that OPEN does in this particular space. If you're still skeptical and you think the fad will go away, ask yourself: if you got a 50% off deal one week for a favorite restaurant nearby, then the next week you got a similar offer from another restaurant you really like, would you pass on the second one and say, 'nah, I already saved money last week, no reason to do it again'. Of course not...recession or not, people like to save money and you'd buy a deal every week if you were presented with quality, desirable restaurants and that's what I believe OPEN aims to do.
Since I published this piece originally on Friday afternoon to my Blog, Barron's came out with a full story over the weekend regarding the rich price of OpenTable shares. The piece makes several good points that have been harped on by every short seller or naysayer on the stock, mainly that it's expected growth (or lack thereof) does not justify it's high multiple. Barron's says, "it's valuation, at 110x this year's estimated earnings of 59 cents a share, and 75 times next year's forecast of 87 cents, could lead to sever indigestion." While I don't disagree that it may be time to take some profits off the table if you own and probably not the best time to get in if you do not, the article neglects to properly highlight the basis for the recent moves in the shares - the Spotlight deals. With only one brief mention towards the end of the piece, Barron's doesn't seem to grasp the growth potential of this new revenue source.
I'll leave the conversations of valuation to another forum (expensive for my blood given the recent run up), but keep in mind that if they can earn $5.4MM gross revenue on 7 cities, what happens when that is 25 cities or 50 cities? Below is a conservative snapshot of the impact of daily deals for this year (2 cities, ramping to 14) and 2011 at only 25 cities.
Disclosure: Small Long position in TZOO, no position in OPEN
Good post Nathan, I have done similar analysis but have also considered the telephone reservation, advertising, and restaurant ads in the revenue model. I would be glad to share my model. Just let me know your email. Also, how did you arrive at the 30% cut for OPEN? My email is rjackson4@gmail.com
ReplyDeleteVery fascinating, always wondered the cut for OPEN on these spotlight deals. How did you derive at the 30%? And you're right about the brand recognition that OPEN has. Haven't really seen many other companies cater to the higher end of the spectrum, but sometimes I do wonder if and when this "recession" ends, will restaurants want to rebrand themselves to those who can truly afford dining at their restaurants as opposed to making the quick buck off of discounts due to low volume? Afterall, it's already a low margin business to begin with for restaurants, so beyond supplying to 50% discount and then the 30% cut, how sustainable is it for this in the long run for restaurants?
ReplyDeleteOh, and ironically, I found your blog through seekingalpha, via your link to my post on Minetta Tavern. Thought I'd pay you a visit. Good stuff.
Hi Jess, thanks for your comment. The 30% was an educated guess based on the fact that Groupon, who is clearly a leader in the space, gets 50% cut of their deals. Based on OPEN being kind of late to the game, I am almost certain they are not able to get the same deal leverage as Groupon, so below 50%. Additionally, they are working with a white label deal company called NimbleCommerce that I assume is taking some sort of cut or fee that lowers their margin as well. I felt that 30% was adequately conservative for investment research, but it could be anywhere between there and say 40% in my mind.
ReplyDeleteI think as long as the restaurants that offer the deals are quality, they'll get repeat business that will make it worthwhile for them. There have been complaints by proprietors that used Groupons that business does not pick up after, but I feel that is likely more a product of their store than Groupon's fault. Bottom line is that if you produce quality products or food, I think people will come back even without the discount.