Eating Opentable's lunch

A recent post by a disaffected San Francisco restauranteur complains eloquently that Opentable is sucking the whole margin out of the restaurant business just for processing the bookings - about $10 on a four-cover booking, which assuming that table spends $200 at a normal 5% margin means Opentable is keeping all of the profit on the booking leaving the restaurant with, err, nothing. If that's true it's bad for restaurants but bad for Opentable too - a parasite that kills all of its hosts doesn't have much in the way of long-term prospects.

The bad news for the restaurant industry is that the problem of Opentable carving out a position for itself as a new middleman in the eating-out value chain arose because of a basic strategic error made by the restaurants themselves. The good news is that the error is relatively simple for the restaurants themselves to reverse.

Restaurants charge for meals but give away reservations. Since the reservations also have value, this creates two problems for the industry. First, pre-digital restaurant reservations were broken. To book a table you rang round some restaurants, you found one that had a vacancy on the day you wanted and you gave the guy on the other end your name. That's what the restaurants themselves decided was the way to allocate tables - a first come, first served queue, with the exclusivity or scarcity of specific establishments merely expressed as the need to book months in advance (or have appeared in OK magazine sufficiently recently for the doorman to recognise your face).

This was a wearisomely inefficient customer experience, and more to the point the economic surplus the restaurants created by giving potentially valuable reservations away was simply handed over to whoever happened to ring them up first (in other words a combination of people in the know, people with good PAs and lucky idiots - almost pure social waste).This created an opportunity for Opentable - along with a number of very similar competitors such as Toptable and Urbanspoon - to build a central marketplace where none previously existed by aggregating the bookings system and transferring the surplus that the restaurants had left on the table to themselves.

More importantly, there was - and still is - no secondary market in these valuable reservations. Partly because they have no face value and partly because the coordination problem has simply never been solved, a reservation made three months ago for a table tonight at the Ivy might be worth ten or fifty or a thousand pounds to someone else today but if it turns out I'd rather have the cash than the chance of dining four feet from a B-list celebrity there is no way of realising that value. Unless I happen to value my reservation at more than the (currently-unknown) market rate, it's simply a waste that my only option is to turn up to dinner rather than sell my place on. By the same token, I might be willing to pay a hundred pounds to dine at Hakkasan tonight, but because the reservations have been given away weeks ago the book is full and I have no way to convey my willingness to buy to any of the hypothetical sellers whose names appear therein. 

Opentable solves one of these problems but not the other - it has a created a sort of primary market for reservations in which the restaurants pay it for diners. If the restaurants want to take back the economic surplus they once handed over to diners and have now handed over to Opentable, they need a pricing strategy for reservations that goes beyond merely giving those reservations away to the first person in the queue. Instead of giving away their valuable reservations, they should make those reservations a transferable currency (rather than a name scribbled in a book) and then distribute them via an online auction platform. Then they should withdraw, preferably collectively, from Opentable. A real (primary and secondary) market in restaurant reservations would make bookings more of a commitment to turn up; it would satisfy customers by making their reservations potentially more valuable as the due date drew near; it would incentivise satisfied customers to book again and then widely promote the excellence of the place at which they'd eaten; and of course the restaurants could take as large a cut of the new market as they wished. Better still, it would let them leave Opentable out of the feast. 

 Update: more discussion of the idea by Citywire's Rich Harris is here:  Rich comments

"it would make the experience of restaurant booking similar to that of booking planes and hotels - you have to book far in advance to get the best deal and even then you feel anxious that you could have done better. Or worse, you'd have to deal with the restaurant equivalent of ticket touts."

No disagreement here - as I've argued lots of times before, tickets are another product suffering from massive underpricing in the primary market.

(Photo from informatique on Flickr)

Comments

[James MacAonghus]

I knew someone who ran a market in reservations for The Ivy. As long as you were happy to appear under imaginary names, he could "sell" you a table.

I didn't understand your point though. I don't see how OpenTable changes the ages-old process of booking. OpenTable won't magically make tables at the Fat Duck appear.

I use OpenTable because as a geek I'd rather book online than talk to someone on the phone. Not to mention it's usually quicker. I have no allegiance to OpenTable and no interest in what they do - they are just an app on the restaurant website and if the restaurant wrote their own, or used the same app from someone else, I'd click on that. It is all the same to me.

[seamusmccauley]

James - if you don't know what I'm on about I've obviously not said it right. I'll have another go tomorrow.

[Rich_Harris]

It's such an obvious idea I can't help but wonder if it's already been tried! It strikes me that an individual restaurant could, if it was usually in a position to turn potential customers down, try charging for reservations without disadvantaging itself (though obviously this only creates the primary market, the secondary market would have to wait until the idea gained traction).

My fear is that if restaurants did start charging for reservations, booking a table would quickly become as soul-draining an experience as booking a flight, and diners would have to deal with 'table touts' (granted, in the rarefied world of economics, touts are a force for good...).

Nourishing food for thought in any case - thanks. Have started a discussion on it over at Citywire (http://www.citywire.co.uk/money/markets-in-everything-restaurant-table-reservations/b450448) - will be interesting to see the response.

[Michael]

I'm not sure this is true for all restaurants since reservations generally aren't a scarce commodity.

A reservation at the Ivy might be scarce but in my experience getting a reservation at the other 95% of restaurants isn't hard.

What is scarce is my time. OpenTable and others provide an aggregation service that has value for the customer.

If I know I want to go to the Ivy then I can call them and (try to) make a reservation and might fail. However, if I want to find a restaurant near the theatre I'm going to, for example, then reservations in aggregate aren't scarce. Reservations might be scarce at a particular restaurant but I don't want to spend time calling any given restaurant to find out if they have space when OpenTable already has that information for me.

Your proposition that reservations have value has some merit, but I think that at present the value of the reservation for 95% of restaurants is less than the transaction costs.

[Sriganeshr]

Wow, I realize that the demand and supply situation is skewed in favor of the restaurant owners.

But if Opentable or any such aggregators are the need why can't restaurant owner demand a share of the booty that Opentable collects. A combined bargaining power will work.

[seamusmccauley]

Michael - interesting point, but we are talking about disrupting Opentable which caters to 14k restaurants. There are - I see from a glance at the first result on Google - about 800k restaurants in the US alone. So Opentable doesn't even handle bookings for 5%. Admittedly we don't know the crossover though.

Sringaneshr - collective bargaining could work, of course, which seems to be what the original article I linked to was proposing.

Rich - thanks for the link. And welcome to Twitter, I think - I seem to have been your third tweet!

[Gareth]

The restaurant would not benefit from a secondary market in reservations in any case. You may profit from selling a reservation, but that does not guarantee that the diner you sell to will spend as much as you would in The Ivy. Indeed, if we presume you booked The Ivy to commit a Food And Splishy Error, and whoever you sold it to bought your reservation in order to breathe the same air as a B-List Celeb, it's likely they'll pay The Ivy less than you would, unless The Ivy works out a way to sell celebrity-tainted air.

For the most part, though, Opentable is not in the business of turning Glutton reservations into Celeb-chaser reservations, they are the business of turning lossmaking empty tables into profit-neutral online reservations. If our restaurateur in SF feels that Opentable is converting more profitmaking tables into profit-neutral tables than it is converting lossmaking empty seats, well, he just needs to stop using the service, because he doesn't need it. Oh look. He did stop using it. Well done him.