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Nearly 25% of Bay Area restaurant reservations made online; OpenTable tackles foreign markets

By Sara Lannin | 20 Apr 2011

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Restaurants can use OpenTable's hardware to manage online reservations, or use Connect, OpenTable's cloud-based service. (Photo: courtesy of OpenTable)

When you want to make reservations for hotels, airplanes, or concert seats, where do you go?

If you’re like the vast majority of people in the United States, you probably sit down in front of a computer or whip out a smart phone to make those arrangements online. And yet, for a very similar type of booking – restaurant reservations – the number of people who turn to online resources is significantly lower.

San Francisco-based OpenTable (NASDAQ: OPEN) wants to change that. The 12-year-old company is the largest provider of online restaurant reservations, with over 20,000 participating restaurants to choose from worldwide. Their core products include the Electronic Reservation Book, a client hardware device that enables restaurants to manage their inventory digitally, and Connect, a lighter, cloud-based solution for restaurants that don’t need an entire management system.

In the Bay Area, which was one of the company’s first markets, OpenTable powers nearly a quarter of all restaurant reservations, a figure their Chief Executive Officer Jeff Jordan says is just the tip of the iceberg.

“If you look at other analogous verticals like hotels, airlines and event tickets, you’ll see 50-70 percent of their reservations are already made online, and that’s growing each year,” Jordan said. “Our envisioned future is every reservation-taking restaurant has an Electronic Reservation Book or access to Connect product, and that diners make reservations for restaurants just like they do for any of those other key ‘seat’ verticals.”

With OpenTable currently only responsible for about 9 percent of North American restaurant reservations, there is potential for significant growth in the domestic market. However, the most nascent components of OpenTable’s business are its international efforts.

“Our North American business has been around for over a decade,” Jordan said. “It’s now cash-flow positive, and it’s relatively mature… although we still have a ton of room to grow! Our international side is completely in an investment stage.”

Expanding to the international market is a wise move, according to Morgan Keegan analyst Justin Patterson. “The restaurant industry is strongly tied to the health of the economy,” he said. “Having international restaurants diversifies [OpenTable’s] revenue streams and prevents them from being subject to American economic cycles.”

Jordan said the company is focusing on three crucial markets for international expansion: the U.K., Germany and Japan. Why? According to Jordan, those three markets, plus the United States, compose approximately two-thirds to three-quarters of current global e-commerce.

“That will probably change over time as China and Brazil grow,” Jordan said, “but currently, according to the best data sources we can find, they’re the majority… So we want to compete effectively and win in those markets.”

So far, the company has been successful at recruiting overseas restaurants to join its network. Between the U.K., Germany and Japan, OpenTable now has over 2,000 restaurants, and the number is growing.

OpenTable is expanding in the United States, while trying to have a presence in the U.K., Germany and Japan. (Photo: Creative Commons)

The next challenge is enticing consumers to use its online service. “We have to prove that…diners [in international markets] want to use our product at the same rate they’re using it in the United States,” Jordan said. “We have encouraging early results on that, but we still have a long way to go before those markets are at the same level of competitive development as the U.S.”

Although the Japanese market is one of OpenTable’s primary interests, Patterson says it is currently “only a small part of their international business.” He does not expect the country’s recent tragic events to significantly affect OpenTable’s international efforts.

OpenTable received a large boost in international growth in the fourth quarter of 2010, thanks to the acquisition of U.K.-based competitor toptable.com. Toptable.com contributed 3,680 installed restaurant additions, approximately 774,000 seated diners, and $3 million of revenue in the fourth quarter.

Aggressive international goals, including the purchase of toptable, do not come without a price, however. For the fourth quarter, the company recorded a loss of $3.3 million from international operations (compared to a loss of $1.2 million in the fourth quarter of 2009), and a full-year 2010 loss of $8.1 million (compared to a 2009 loss of $5.9 million). The increase in international costs was primarily driven by a 55 percent increase in headcount, including 66 people from toptable.com.

According to Jordan, who joined OpenTable in 2007 after working at eBay, Inc. and PayPal, Inc., headcount is difficult for any company attempting to globalize. “Finding great people to drive the local business is the biggest challenge in every international business I’ve ever been in,” he said.

OpenTable’s international operations are primarily sales and operations functions. Jordan credits great local managers in the U.K. and Japan for helping the company identify and recruit the best local talent.

In addition to the U.K., Germany and Japan, OpenTable has restaurants in 14 other countries, including Singapore, France and Mexico. Jordan said the company has no intention of actively expanding further at this time.

“Our model is a very slow-build model,” he said. “We have to sell restaurants and install restaurants one at a time to get inventory on the site to enable diners to book. It’s very operationally intensive… So we’re just focusing on the largest markets.”

To make a mark on its most critical markets, OpenTable is focusing on recruiting restaurants in those areas as quickly as possible. “We want to get our international footprint to a critical mass as fast as we can,” Jordan said. “Where we have aggregated a lot of the restaurants, we find more people want to make restaurant reservations online.”

Patterson is optimistic about OpenTable’s tactics towards expansion. “OpenTable is a network business. The more restaurants that join the network, the more valuable the service becomes,” he explained. As far as expansion goes, “OpenTable is being an early mover. They’re getting a head start and making it difficult for new ventures to move into those markets.”

To expedite the process of recruiting restaurants, OpenTable developed its Connect product. Connect is a cloud-based solution that helps restaurants to allocate inventory to OpenTable. It allows restaurants to use OpenTable’s services without purchasing the hardware electronic reservation book, which includes full in-house management systems.

“The whole Connect product was built to help grow our international restaurant base faster to compete in the local market conditions,” Jordan said. “Then someone said ‘Hey, that would probably also work in the United States.’”

Since OpenTable began rolling out the service to American restaurants, it has become the company’s fastest-growing product. “We debuted it in the second quarter of last year [Q2 2010], and exited the year with 1,000 new restaurants already installed in the U.S.,” Jordan said.

“It’s a misnomer that every restaurant needs a full-functionality electronic reservation book,” Patterson said. “Some restaurants are just looking for a source of incremental diners. The Connect product is great for those businesses. It has a much lower fixed-cost, and appeals to a totally distinct type of restaurant.”

So what’s ultimately at stake with OpenTable’s international efforts?

“International expansion is really important to our long-term success,” Jordan said. “If we’re able to replicate the kind of network we have in North America in those markets [U.K., Germany, Japan], we think we can essentially double the value of the company. We think the addressable market in those three countries is about the same as it is in North America.”

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