Restaurants are grueling businesses, and as any industry insider, operator or investor knows: the real money is in providing services to those businesses.

　　Restaurants are grueling businesses, and as any industry insider, operator or investor knows: the real money is in providing services to those businesses.

　　So Priceline’s acquisition of the largest player in this space, at least in the US, is unsurprising.

　　The group benefits by inserting itself in another point of the travel ecosystem. For restaurant owners, the benefits of Priceline’s $2.6 billion purchase of OpenTable are far from clear.

　　As a restaurant owner and reporter covering the industry, let’s take a look at the financial and behavioral economics of the business, what Priceline gets out of this transaction and how this transaction sets fire to the discussion of whether restaurants should be considered travel products.

　　The true economics of this business should drive all conversations

　　I’ve owned a restaurant for nearly two years now, and if there’s anything that restaurant ownership teaches, its that this is a harsh, unforgiving business that is perilously difficult to run profitably. While everyone seems to want to own one, most folks don’t truly grasp the financial economics of running a restaurant.

　　So let’s start by laying out the industry standard cost structure:

　　30% or less on cost of goods (32% or less on food, 20% on liquor, 28% on bottled beer, 18% on draft beer, 40% on wine)

　　30% or less on labor

　　6% or less on payroll taxes and benefits

　　18% or less on controllable expenses (marketing, linen, admin, menus, utilities etc)

　　12% or less on non-controllable expenses (insurance, rent, property taxes, etc)

　　That leaves about 4-8% of net profit before taxes (and debt service) for a restaurant performing at a standard level. This is an important reminder that the economic structure of this business is far different than any other segments in “travel” (we’ll get to the evolution of the industry’s definition next).

　　So when a company comes in and attempts to sell a restaurant on a margin-diminishing middle man situation, they had better a) be intensely understanding of the business, and b) provide clear increased revenues for the (time AND money) investment.

　　There’s just no room for waste in this business, and there’s nothing more that angers a stressed restaurant owner than a middleman prospering while squeezing the day-to-day profitability of the operation. Initial reaction to a larger overlord for OpenTable is to avoid OpenTable at all costs – or is it?

　　The behavioral economics are equally important here, as different restaurants serve different constituencies. Of course, there are tourist traps like Margaritaville and Bubba Gump that are exclusively focused on non-local tourists.

　　However, the majority of restaurants are locals-first. We serve mostly locals in a locally-anchored place, and we most definitely don’t move people from A to B like a traditional travel business. We do provide a taste of the local communities we serve, in the sense that we are inherently a local, “only here” product for on-site/nearby consumption only.

　　Behaviorally, we have to take care of our neighbors first because they matter most – both to us as passionate hospitality people and as savvy business owners.

　　Ultimately, however, the majority of restaurants are not targeting travelers exclusively, and most definitely don’t see themselves as part of the travel industry. We serve people food, and that’s that. Understanding that focus – and how the passion for hospitality differs with restaurants – is a key component here.

　　Why did Priceline buy OpenTable – for a 46% premium?

　　Priceline knows that OpenTable has already cracked the restaurant nut – they’ve got 20% penetration in the US, and it has been built off of a better-than-average understanding of both unit economics and behavioral trends towards restaurants. They’ve done the legwork. They’ve gotten the meetings. They’ve deployed the integrations. They are ready to rock – and poised to pop in Europe against TripAdvisor’s LaFourchette.

　　By leveraging Priceline’s reach, marketing and existing relationships, OpenTable can take the product and expand internationally far more quickly and deftly under the Priceline Group umbrella – and reverse some of the general stagnation that has been creeping in as of late as the company seeks to increase revenues through new restaurants and subscriptions.

　　That’s the obvious stuff – Priceline can help OpenTable improve its own economics, which gives the combined businesses more upside potential. What else?

　　Priceline gets access to an immense amount of data.

　　OpenTable, both via its individual programs and loyalty program, is a data-generation machine that offers another layer of insights into how both travelers and locals dine out.

　　Priceline gets hardware.

　　OpenTable has done that work, and has a hardware product already deeply integrated into the restaurant experience. Of course – and this applies to the software as well – OpenTable has not been executing as well as it should be. Evolving the OpenTable.com interface and product is a huge opportunity for PCLN – and will be a huge loss if it’s not addressed immediately. Of course, cloud computing changes this dynamic, so the relationships with restaurants are even more valuable moving forward.

　　Priceline gets to remind TripAdvisor who’s boss.

　　Or something like that. The fact that LaFourchette ended up in TripAdvisor’s hands meant that OpenTable needed a bigger partner to expand internationally while protecting the home turf. And Priceline needed to match TripAdvisor’s moves to ensure that it wasn’t caught off guard with a newly-integrated travel lifecycle that now includes restaurants.

　　Priceline is executing a wholly original strategy.

　　The company steadfastly delivers on a select few acquisitions. Whereas TripAdvisor trends more on the “snap it up” side, Priceline’s strategy is measured. First it was Booking.com to gain global access and reach; then it was Kayak to give it a metasearch boost; recently it’s been Qlika to help it deliver better ads across platforms via super-micro-targeting and now OpenTable to deliver more places to serve ads in addition to a steady revenue stream via in-restaurant integrations. Each time, it’s been about placing expertise into a fragmented vertical and bringing it together.

　　So that means that OpenTable will benefit from a better advertising product that can be deployed across metasearch and booking sites (including its own), and bring restaurant reservations directly into all aspects of a traveler’s trip – and allow restauranteurs to target these consumers in specific stages and locations during a trip, using not only better ad units but also better, more relevant data.

　　This information is intensely valuable and could take away from Google as restaurant marketers seek scale of a different sort to reach visiting customers. Marketing targeting on Google would be for locals and PCLN would be for travelers.

　　And, of course, PCLN can do all of this on mobile – a very important component of the deal that deserves its own analysis.

　　After going through these scenarios, OpenTable might be yet another wicked move by Priceline – remember, Booking.com was a fantastic move in the last decade – and this might prove to be one of the most significant transactions of this decade.

　　It all depends on how metasearch plays out as far as profitability – there are clearly far more meals eaten in a day than airline tickets purchased and with a hefty commission of $1 per booking, plus hardware fees, this business is equally profitable at scale. Finally, while metasearch is arguably close to peak penetration (ie. everyone’s doing it), the growth in getting restaurants online has immense upside.

　　Of course, as a restaurant owner that despises reservations – and the inherent cancellation dramas – growth through on-boarding more restaurants is an immense challenge due to limited supply. The trend in restaurants is definitely away from reservations, and many of the larger chains already have proprietary technology – especially with the shift to mobile.

　　The true test will be how the PCLN support allows the team to further execute new revenue streams to diversify the business into more of a support system for successful restaurant operations rather than simply a middle man snagging a buck per reservation from a limited slice of fine dining restaurants.

　　That will be the only way to gain a foothold in restaurants that don’t take reservations whatsoever, and build the business beyond reservation portal saturation.

　　On-boarding restaurants is also much different than on-boarding hotels. Many independent restaurants rarely have a management structure larger than maybe two or three people, each of whom are over-worked and time-starved.

　　Frankly, I would never want to sell to myself, and so the key challenge to grow share is to deliver a savvy sales pitch in a concise manner that can be turned on with zero effort by the restaurant itself. That seamless reality is the only way that the vision to on-board restaurants-as-hotels will occur – and part of OpenTable’s appeal is that they have a battle-hardened sales team intimately familiar with this landscape.

　　Restaurants as a travel product…or not?

　　For myself as an independent restauranteur, it’s interesting – and perhaps a bit worrisome – that restaurants are now considered part of travel.

　　We focus on locals first, in everything we do.

　　If we don’t serve our neighbors well, we will be out of business. That’s a fact – regulars are our life-blood. And tourists generally aren’t around more than once or twice a year. Not to mention that the “travel like a local” trend means that tourists simply want to go where the locals go, so if you get the locals, you get the tourists.

　　For larger restaurant groups, however, this becomes less of an issue as they need to focus on bringing more butts in seats than an average restaurant. Larger groups also have more capacity to absorb middlemen marketing charges, and are able to see more economies of scale with more leverage in fee negotiations.

　　The ability to spread costs across multiple restaurants also means that larger groups generally have better technology to market, seat, and analyze customers.

　　Larger groups are likely to welcome to a Priceline purchase insofar as perhaps having additional integrations will drop the average costs of doing business with OpenTable.

　　Or perhaps Priceline will offer value-adds, such as easier group bookings from the other travel products, that will focus the benefits of the combined services on increasing the bottom line of the restaurants.

　　Restaurants also benefit from being considered a travel product, as celebrity food culture and local recommendations startups have thrived. This makes eating out a core component of any trip, and thus increases the overall pie for the industry as they are able to lean on both locals and visitors to thrive.

　　More business means more growth which means more restaurants, revenue, and jobs – a virtuous circle that is a vital reminder to anyone playing in restaurant services to offer true value to restaurant customers as a rising tide does lift all boats.

　　With our ongoing focus on locals though, how can restaurants be a travel product? Or is travel just moving into local, and coming up against the likes of Groupon, Google and others seeking to dominate the local search/local marketing/local purchasing ecosystem? Or is it a bit of both?

　　From where I am as an independent restaurant owner, restaurants are always differentiated and thus cannot be commodified like other travel products. I’m sure there are people who disagree – however, just look at the incredible struggles of the full-service casual segment. This is an undifferentiated segment that was once popular due to this sheer lack of clear brand perspective.

　　Now the executives in charge of these establishments are scrambling to catch up with those brands successfully setting themselves apart through brand, food and atmosphere.

　　The surge of fast casual shows that the only way to thrive in the food business is to differentiate your product through brand positioning, quality product and a specific atmosphere with perspective.

　　Restaurant seats are not created equal – and in a restaurant, seats are our inventory. We basically rent seats by selling food and drink.

　　Differentiation is also key in an increasingly competitive environment – there are more restaurants in America than there are airlines, tour operators and hotels combined. Of course, this size is what makes it appealing to larger travel brands seeking growth. There are millions of us and we’re generally less organized and not at all as tech savvy as other segments in the local/travel space.

　　However, unlike hotels, our competitive landscape is micro-specific, with a neighborhood-by-neighborhood mentality that prevents a wholesale linkup like hotels have experienced over the past decades – plus, our margin is lower and thus our appetite for commission-based transactions is virtually non-existent.

　　In addition, there are so many moving parts every day in a restaurant that it’s hard enough to keep your head screwed on – not to mention find time to on-board another system (i.e. another detail to manage, another thing to break, another thing to train people on, another thing to get in the way, another THING…)

　　We have immensely varied needs without much spare capital for external services to address those needs – a complicated landscape, to say the least.

　　Nothing is defined yet – and that’s thrilling

　　The sudden insertion of restaurants into larger travel companies has mixed it all up.

　　The ability of a large travel company to help restaurants increase revenues through more reservations from travelers is a valuable one; however, if restaurants begin to focus on the larger travel picture and less on the immediate local realities, the business is doomed to fail.

　　As I’ve said, restaurants are ultimately a local experience and should never forget that. Restaurants also should never forget the day-to-day margin pressures that define the business, and move to improve systems (and yes, even experiment with the business model) to deliver a better experience each day.

　　The question for restauranteurs thus becomes: what are TripAdvisor and Priceline going to do to help me better serve my locals – the regulars that keep me in business all year long – while not simply focusing on increasing the corporate bottom line by distributing more reservation inventory to a wider, less-targeted audience?

　　Could local marketing be the next step for these businesses? TripAdvisor is already doing that for hotels, so could restaurants be next? What is Priceline going to do with OpenTable’s hardware expertise and market domination? What do both of these purchases mean for restaurants outside of the US?

　　And what about restaurant owners’ favorite nemesis, Yelp? The company has recently acquired a new reservation and seating system for restaurants called SeatMe to also compete in this space.

　　The reservations system is free (plus a flat-fee structure for more features) and replaces a partnership with OpenTable.

　　So the restaurant services market is now increasingly saturated and price competitive, with two large competitors now swallowed whole by even larger conglomerates.

　　Restaurant owners are not enamored with Yelp, so will it be able to compete without the larger integration benefits of a travel company?

　　Time may reveal another large acquisition, especially if other larger players – we’ve got Expedia, Orbitz or maybe Concur – see restaurants as the newest vertical in travel. Or if restaurants remain a local search/marketing play, then perhaps a Google, Apple, Facebook or Yahoo is interested in the review site.

　　The independence of Yelp might be ending soon, and we’ll learn an immense amount about where restaurants land by whichever suitor closes the transaction.

　　Other smaller restaurant technology companies should welcome this emerging trend, as the valuations for companies successfully serving restaurants and bars are definitely going to increase.

　　These large companies have now entered the vertical, and will be seeking consolidation and cohesive product lines as each executes a specific strategy in the marketplace. Sure, maybe the acquisitions are limited to consumer facing technologies, but the reality is that these companies prosper when more people visit restaurants – and will be looking to acquire their way to more customers.

　　Regardless, this new frontier in travel is exciting for forward-looking restaurant owners seeking a more engaged, tech-savvy industry. An industry that finally reaps the promise of technology in the form of better processes, integrated systems, and ultimately healthier profit margins that allows for better wages and more ROI for all.