On a chilly late-December night in West Berkeley, the dining room at Riva Cucina was warm with candlelight and dark wood, the smell of tomato sauce hanging heavy in the air like a familiar memory. Only about four tables were filled in the cozy Italian restaurant, which has room for maybe sixty diners. But according to chef-owner Massi Boldrini, business has picked up dramatically after a near-disastrous, recession-ravaged summer of 2009.
The key to that upturn, according to Boldrini, is OpenTable, by far the world's most popular online restaurant reservation site — with more than 15,000 dining establishments listed internationally — whose rapid growth has been a definitive game-changer for restaurants and diners alike. As part of its contract with the San Francisco-based company, Riva Cucina uses a computer terminal, which sits unobtrusively behind the bar area, to keep track of upcoming reservations and monitors the progress of each table's meal — one quick glance and you can see when one table is ready to place dessert orders, or when a party of two hasn't shown up a half hour after the time slot it booked.
It used to be that if you were stuck at the office with no fixed dinner plans, you had little choice but to phone restaurant after restaurant to search for an available table. And a pen-and-paper reservation book was the only way for restaurants to keep track of who was coming in to dine on any given night. With OpenTable, all it takes is a few seconds on your computer or smart phone and you're presented with a dozen or more dining options for your party within a two-mile radius of your present location. A couple more clicks and you can narrow those choices further by price range and type of cuisine, and view them all on a handy Google-powered map. Before you know it — voila! — you've got yourself a table, instantly confirmed and at no additional cost.
It's no wonder, then, that for many diners — especially those in busy metropolitan areas like the San Francisco Bay Area, where there are currently more than 1,000 restaurants listed on OpenTable.com — the site has become their first, and often final, destination when deciding where to go out to eat. But it turns out that's not necessarily a good thing for restaurants.
Despite the astronomical number of diners seated through OpenTable.com every day — more than 41 million in 2009 in North America alone — it's not clear that restaurants are making money from the service. That's because, while the reservation site is free for users, restaurants are the ones who have to foot the bill for the privilege of being listed in OpenTable's online database. The fees — which can range from several hundred to upwards of one thousand dollars a month — are far from insignificant, especially in an industry that's notorious for its paper-thin margins.
Here in the Bay Area, at least a handful of restaurant owners have begun to cry foul. This past October, Mark Pastore, the owner of San Francisco's Incanto, fired an opening salvo of sorts in his strongly worded editorial, "Is OpenTable Worth It?," which was published in the San Francisco Chronicle. Pastore's piece reverberated through the local restaurant community and beyond — it's been tweeted and retweeted (at least three hundred times as of this printing), and has been linked to and debated on dozens of blogs and online discussion boards.
Pastore's answer to his titular question is, in a word, no — not by a long shot. He argues that OpenTable's near-monopolistic hold over the online reservation market allows the company to charge fees so high that it becomes exceedingly difficult for the restaurant to break even, much less make a profit, on those customers that the site brings in. What's more, he says, by allowing OpenTable to control access to the diner at the point of his or her decision about where to eat, "restaurants find that they themselves no longer own the customer relationship." By this logic, OpenTable's fees become a sort of "toll" that restaurants now must pay to access even return customers. After all, there's an increasing number of diners who now make nearly every restaurant decision and booking through that web site. As one user on the restaurant discussion board Chowhound.com recently put it, "Since [a restaurant is] not on OpenTable it simply doesn't exist for me, and I see no reason to seek it out, because OpenTable gives me more options than I can handle as it is."
Clearly, some restaurants are seeing benefits from OpenTable. Riva Cucina's Boldrini explains that his restaurant has always been at a bit of a disadvantage because it isn't part of a shopping plaza or busy downtown area. For his business, joining OpenTable was like moving into a sort of "Internet strip mall," Boldrini said. "People could just show up and look for an Italian restaurant within a radius from where they were with their cell phone, and our restaurant came up. And we've had a lot of new customers through that."
While Boldrini isn't sure exactly how much of the restaurant's improved financial status is directly attributable to OpenTable, he does know that he gets a significant number of bookings from the site each month — including nearly all of the diners eating at the restaurant tonight. At the very least, Boldrini says, he's been seeing a lot of new faces since he signed up for the service this past June.
Pastore agrees that there are benefits to online reservations. Although Incanto has never been an OpenTable client, the restaurant's own web site nevertheless does allow diners to reserve tables online 24/7, just like on OpenTable.
Rather, Pastore writes, "the more important question is whether OpenTable's role, as the Web's exclusive gatekeeper to this country's restaurant seats, is a good thing for restaurants and their customers."
Do OpenTable restaurant owners really feel as resentful as Pastore seems to be implying? According to an informal survey conducted by the Incanto owner, they do. It revealed that only one out of a dozen restaurant owners actually felt that joining OpenTable had been a worthwhile investment. Pastore also says that these dining establishments only keep the service because they fear they'll lose even more business if they give up access to the OpenTable site's loyal network of diners.
In other words, what's a win-win for diners is becoming a lose-lose proposition for restaurants.
Mike Dodson, OpenTable's senior vice president of sales, dismisses this claim, citing internal surveys that indicate a whopping 97 percent of the company's restaurant clients "would say OpenTable is a value for the money" — a statistic which, if accurate, would seem to undermine Pastore's argument.
The truth probably lies somewhere in between. Here in the East Bay, quite a few restaurant owners say that they do, in fact, feel satisfied with the services that OpenTable provides, especially from a simple marketing standpoint — Boldrini's Riva Cucina is just one of the restaurants that, by all outward indications, has benefited in this respect.
Robert Lauriston, whose Berkeley restaurant Locanda da Eva closed down this past November just four months after opening, says that OpenTable was both more effective and less expensive than the other promotional tools he tried. For instance, when the restaurant opened, Lauriston placed one-time ads in several local theater and concert programs: "The total cost was equivalent to about two months' OpenTable bills, but it didn't seem like we got much response."
By contrast, being listed on OpenTable's search engine not only allows a restaurant to reach the eyeballs of prospective diners but, unlike other marketing ploys, it does so in a way that produces quantifiable results, at least insofar as you can keep track of how many reservations come through the site.
While Pastore doesn't go so far as to call these satisfied clients "suckers," he does believe that many of them may not have adequately considered the long-term implications of the OpenTable business model. And even before the Incanto owner published his criticism of OpenTable, there were a number of local restaurant owners who had already begun to question their allegiance to the company.
Daniel Patterson is the chef-owner of San Francisco's Michelin two-starred Coi, which is listed on OpenTable. But when he opened Plum in Oakland's Uptown neighborhood earlier last fall, he decided to look for an alternative means to handle the restaurant's online reservations — even though he himself still uses OpenTable sometimes as a diner.
"Their basic model, which is free to the consumer, cost to the restaurant is great," Patterson said. "So from a consumer standpoint ... I find it an easy system to use, an efficient system to use. The problem is it's just too expensive."
It's instructive, then, to delve into the economic nuts and bolts of OpenTable. All of OpenTable's revenue comes from its restaurant clients, and the company's pricing structure is broken up into three basic components. First, there's an installation fee, which costs between $600 and $700 depending on a restaurant's location and includes the installation of the touch-screen computer terminal you'll see at most OpenTable restaurants, as well as training of the restaurant staff. Then there's a $199 monthly fee, which pays for ongoing use of the company's electronic reservation book software, which, among other things, allows the restaurant to keep track of its bookings and keep tabs on the preferences of its regular customers. Even if you call to make the reservation the old-fashioned way, the restaurant still uses OpenTable's system to record your information and secure your table. That $199 figure increases if the restaurant opts to add various licenses that, for example, might allow it to have multiple reservation terminals at different locations within the restaurant.
Perhaps the biggest sticking point is an additional "pay-to-play" cover charge for every diner that's seated through OpenTable. Every time you book a table on the OpenTable web site, the restaurant has to pay $1 per diner in your party — so $4 for a party of four. And even if you book your table by clicking through the restaurant's own web site, the restaurant still has to pay a reduced fee — $0.25 per seated diner, or $1 for that same party of four. (There's no charge when you call the restaurant directly to make your reservation.)
In other words, the more diners that OpenTable provides for restaurants, the more the restaurants end up paying in fees. Which helps explain OpenTable's impressive cash flow. Since the company started in 1998, near the height of the dot-com boom, it has grown steadily, and in recent years its revenues have soared from $27.2 million in 2006 to $41.1 million in 2007, to $55.8 million in 2008, to $68.6 million last year.
While OpenTable might initially appear to be mutually beneficial proposition, Pastore argues that the company's fees are more prohibitive than you might imagine. In his essay, Pastore estimates that, once you factor in all the different fees, a party of four that's booked through OpenTable will cost the restaurant $10.40 on average — a number that, on the face of things, doesn't appear too unreasonable. But, as Pastore notes, the industry-wide average profit margin for restaurants is only 5 percent. Assuming that those four diners spent a total of $200 in food and drinks, before tax and tip, then the restaurant's actual profit on that table would only be $10 — an amount that's entirely eaten up by the OpenTable fees. It's worth noting, too, that there's no distinction made between breakfast, lunch, or dinner, nor is the per-diner cover charge any lower for restaurants that aren't quite so high-end. So if the total bill for four is only $80 or $100 dollars, then it's easy to see how a restaurant might end up losing money on that transaction.
Pastore's original estimate was based on a calculation that Jonathan Wegener, a New York-based technology and marketing blogger, made by analyzing the data that OpenTable released when the company went public early last year. Using the company's 2008 figures, Wegener simply divided the average amount of money a restaurant pays OpenTable each month ($515) by the average number of "new" customers who are seated via OpenTable on a monthly basis (197, which doesn't include customers who book through the restaurant's own web site, since those would have ended up eating at the restaurant with or without OpenTable). Based on that calculation, Wegener determined that it costs a restaurant $2.61 for each new customer that OpenTable sends its way — Pastore simply multiplied this by four to arrive at his $10.40 figure.
Part of the difficulty, though, lies in determining what exactly makes a customer "new," since so many diners in OpenTable-saturated markets like San Francisco routinely use the site to make the vast majority of their restaurant reservations, even for places where they may be regular customers. OpenTable estimates, conservatively, that in order for a restaurant to break even on its investment, only 10 to 15 percent of the diners who book through OpenTable need to be truly "incremental," meaning these are diners who would not have eaten at the restaurant if they didn't see its listing on OpenTable. But if you even change Wegener's calculation using that lower percentage, then all of a sudden the restaurant is paying between $17 and $26 for each diner that's truly "new" — an amount that seems outrageous by any standard.
Coi's Daniel Patterson sums up the challenge presented by OpenTable's fee structure another way: "If you're getting extra customers whom you would not otherwise, you can't really apply the same economics as you can for money towards the rent or this or that. You have to look at the raw costs."
In other words, applying that same 5 percent profit margin, if a restaurant pays OpenTable roughly $600 a month, or $7,200 a year — as Patterson does at Coi — then OpenTable would need to generate not $7,200 but rather $144,000 in additional revenue annually in order to just break even, and earn no profits ($7,200 is 5 percent of $144,000). Plus, Patterson adds, 5 percent is actually generous in this economy: "If you're making 5 percent, you're like a hero."
Then again, one could argue that a restaurant might lose business if it wasn't listed on OpenTable. But Patterson isn't so sure. "I don't know," he said. "I do know I wouldn't lose $140,000 a year in business."
However, Patterson concedes that, because of the reputation he's built up over the years, he has the luxury of a built-in customer base. Chances are that restaurants like Coi and Plum will have little trouble filling tables regardless of what system they use — after all, The French Laundry famously keeps one table available via OpenTable each day, but it's not as though chef Thomas Keller is going to be hurting for business if he decides to go in another direction.
But a less popular restaurant, or one that has less to distinguish it from its competitors, might rightly fear that a departure from OpenTable would lose them enough customers that it would be a devastating blow. It's for this reason that Mark Pastore argues that restaurant owners feel as though they're "held hostage" by OpenTable.
According to Mike Dodson, OpenTable's senior vice president, the key to the whole thing is the incremental — or "new" — diners who are being delivered. He likens a restaurant with empty tables to an airplane that has empty seats: "At some point, they're going to take whatever they can take ... because they've got the fixed expense of that plane taking off."
Dodson says that Patterson's and Wegener's calculations don't consider the fact that many of a restaurant's costs are fixed — the lights are already on, the food has already been purchased (and in some cases might even get thrown out if it isn't used up quickly enough): "All of those things are going to happen anyway, so if OpenTable can help deliver a few extra diners a night that are incremental, it'll pay for the balance of that thing," he said.
So, even if the OpenTable fees mean that the meal is essentially being offered at a discounted rate, the restaurant is still not going to lose as much money on that transaction as it would if the table just remained empty. In fact, Dodson cites internal studies that say that as little as three incremental reservations a month, each for a party of three diners, is enough for most restaurants to break even on its OpenTable investment.
But OpenTable's formula conveniently fails to factor in the hundreds of dollars that a restaurant has to pay in fees each month for diners who clearly are not incremental — who would have eaten at that restaurant even if OpenTable didn't exist. Plug those numbers in, and breaking even becomes a more difficult proposition.
Meanwhile, in Pastore's view, this whole notion of an incremental diner is specious at best, especially in a market that's as OpenTable-saturated as the Bay Area. If people — for reasons of convenience or whatever — consistently use the site to book tables even at restaurants they've already decided to go to, then OpenTable's role as middleman begins to seem more and more burdensome for restaurants saddled with ever-mounting fees.
"Once everyone is using OpenTable, then these fees are no longer about bringing 'new' business to a restaurant," Pastore said in a follow-up interview. "It's just a toll that you have to pay to reach your existing customers."
That said, Dodson takes issue with the idea that OpenTable's ability to "put butts in seats," so to speak, is the only thing of value that it has to offer. He cites as one example a drastic reduction in no-shows when the reservations are made through OpenTable, a product of the fact that the diner receives an instant e-mail confirmation and can cancel his reservation with one click. He also points out that restaurants that don't want to pay a high monthly fee can opt for a cheaper package known as OpenTable Connect, in which the restaurant pays $29 a month to be listed on OpenTable but doesn't buy the whole electronic reservation book. It's only fair to note, however, that the cover charge for the Connect package is an even steeper $2.50 per seated diner, meaning that any potential savings get largely wiped out if that marketing exposure is overly successful.
Finally, Dodson notes that OpenTable was selling its electronic reservation book well before online reservations took off. Restaurant owners were willing to buy it because they felt that it had value, especially for high-end restaurants that wanted to keep track of and collect data on their regulars and VIPs.
Nicolas Francois, the restaurant general manager at Wente Vineyards in Livermore, says he finds the OpenTable system's reporting capabilities especially useful, as they allow him to keep track of the number of times a guest has visited, what his or her dining preferences are, and more: "I can pull a report that will show me all guests who attended our Chef Dinners in the last eighteen months. Then I can send them an invitation for the upcoming dinner. Or I can pull a report showing my top twenty guests. Or I can pull a list of all recorded guests whose birthday is coming up next month."
There's no question that all of this data is of value to a restaurant, but it's difficult to quantify that value, especially in the absence of a viable competitor to OpenTable — one that can provide similar tools for managing customer relationships, but perhaps at a slightly more palatable price point.
One company trying to take on that task is the restaurant information and review web site Urbanspoon, which in May launched its own restaurant reservation system called RezBook. Mani Dhillon, Urbanspoon's general manager, is quick to point out that his company's intent isn't to poach current OpenTable clients, but that doesn't prevent him from touting RezBook's various advantages: There's basically no setup or training required, since the software is essentially just an iPad application and, as such, is simpler and easier to use than the OpenTable system. RezBook is also a lot less expensive — again, there's no setup fee except the cost of purchasing an iPad, the monthly fee is only $99, and there's no cover charge for reservations made through a restaurant's own web site. And, for the time being, even the standard $1 cover charge for bookings made through the Urbanspoon site is being waived.
What remains to be seen, however, is whether RezBook can really compete with OpenTable on the marketing side of things. Urbanspoon.com has plenty of users who look to the site to find general restaurant information, but it hasn't yet emerged as a destination for diners looking to make reservations — and probably won't do so until the company builds upon the two hundred-some restaurants that are currently using its system.
That didn't keep Daniel Patterson from choosing RezBook to manage his reservations when he opened Plum. In addition to the more appealing price point, Patterson also preferred the sleekness and the easy-to-use interface of the iPad system, describing the OpenTable computer terminal as "clunky" and "ugly."
"You can't go wrong with an IBM solution," said Urbanspoon's Dhillon. "But it's not until a Mac or an Apple product comes out that people can see that there is a difference and a benefit."
In the end, though, the concerns of Pastore and other OpenTable critics have more to do with the long-term implications of the company's business model than with the short-term hit on a restaurant's pocketbooks. Again, for Pastore, the biggest issue has to do with a loss of control of customer relationships, as the customer's loyalty veers more toward OpenTable and less toward any individual restaurant.
He explains that, on a basic level, the partnership between OpenTable and a restaurant is problematic because OpenTable's interests are fundamentally different from those of the restaurant owner: OpenTable wants as many people to book through its site as possible to maximize the fees it can collect; it doesn't matter where exactly they end up eating. Restaurant owners, on the other hand, obviously want diners to choose their particular restaurant — and prefer them to make their reservation over the phone or through the restaurant's web site, in order to minimize those fees.
Yet various OpenTable policies and promotions ensure that customers will likely continue to choose the most expensive booking option for restaurants. For example, its Dining Rewards program offers cash-redeemable "points" for every reservation made through OpenTable, and no points, of course, for reservations made through the restaurant web sites.
Perhaps the most egregious example of this is the 1,000-point reward program that restaurants can choose to participate in, mainly to fill tables during off-peak times (paying an astounding $7.50 per cover for those bookings). Customers who book those specific tables via OpenTable (which are clearly labeled as part of the promotion) receive 1,000 dining points — the equivalent of $10 cash.
So, as Locanda da Eva owner Robert Lauriston speculated in a Chowhound.com discussion thread, "When a customer goes to OpenTable.com with the intent of making a reservation at a particular restaurant, they might be distracted by some of OpenTable's promotions and end up eating somewhere else."
In that case, being listed on OpenTable can actually become a drawback, as it puts the restaurant in the unexpected position of having to compete for the diner's attention on the web site itself.
Pastore's other fear is that OpenTable is quickly becoming a monopoly within its market, lacking a viable competitor in the realm of online reservations — RezBook's potential as a challenger notwithstanding. He argues that the lack of serious competition is what allows OpenTable to charge such high fees — and puts them in the position to charge even more in the future.
Customers have already suffered the consequences of this type of monopoly, Pastore warns, pointing to the hold that Ticketmaster has over the online sale of concert tickets, which allows the company to charge exorbitant fees: "It would be hard to argue that Ticketmaster is providing 40 percent of the value of a concert ticket, but since there is no alternative, they command the fee."
None of the restaurant owners interviewed for this article spoke of raising their prices in order to cover OpenTable's fees, but in a monopolistic situation, it's easy to imagine that restaurants might have no choice but to pass those costs on to customers.
But OpenTable's Dodson scoffs at the notion that the company is a monopoly, citing the fact that 92 percent of restaurant reservations nationwide are still done over the telephone. What's more, OpenTable hasn't raised its prices since 2002, and, in fact, actually lowered the cover charge for diners booked through a restaurant's own web site from $1 down to $0.25 — not the actions you might expect from a company that's out to gouge its clients.
Nevertheless, there are certainly signs that OpenTable's market share is getting stronger and stronger. The company's own internal estimates indicate that nearly half of the restaurants in North America that accept reservations use OpenTable to manage those reservations. And, given the continued prevalence of the telephone reservation, it's quite likely that a large percentage of the restaurants that aren't using OpenTable simply don't offer online reservations at all.
As more of these pen-and-paper holdouts give in to the irresistible tide of technology, it's certainly not inconceivable that Pastore's fears might come to fruition. And so, depending on the success of potential OpenTable rivals like RezBook, the future of online restaurant reservations remains very much up in the air.
Pastore's advice? If there's a restaurant that you care about and that you'd like to do well financially, eschew those Dining Reward points for once and pick up your telephone when you go to book a table.
Meanwhile, even Riva Cucina's Boldrini holds out hope that a less costly alternative to OpenTable will emerge: "I'm from Italy ... but I know that in this country that's the way it goes," he said. "Somebody has a good idea and it gets started, and you have the unique feature for a while. And somebody else will try to make it cheaper, and they'll get a slice of the market. So it's only a matter of time."