Online Dining Is Getting Hot

Nathaniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

While large deals have been few and far between over the last few years, some big companies whom you may be very familiar with are making small deals as of late.

A company in which I personally use quite often, Yelp (NYSE: YELP), announced late last week it would be pursuing market share within the increasingly competitive restaurant reservation business.  On Thursday the company announced it would be acquiring a recent start up, SeatMe, for $12.7 million in cash and stock. While a relative newcomer within the reservation space, SeatMe has be growing in popularity due to its simplicity for both customers and local restaurants alike. 

Founded in 2011, SeatMe provides technology solutions to make managing reservations easy and affordable to a broad array of restaurants and nightlife establishments. The deal should allow Yelp to move even closer to being the one stop shop for every restaurant consumer. 

By leveraging SeatMe through Yelp's current industry position and technology, one million U.S. businesses listed on Yelp in the restaurant and nightlife categories will come even closer to their target audiences. This deal comes after the news earlier in the month where Yelp announced it would be launching a platform that allows local businesses to take orders and have transactions processed through its websites. By allowing customers and clients, to reserve, order, and pay for their transactions directly though Yelp, the company is adding a potentially lucrative revenue stream to its advertisement supported revenues.

Daily deals?

However, Yelp isn't the only one looking to make a dent in the online dining industry. While Groupon (NASDAQ: GRPN) is well of the highs seen after its initial public offering near the end of 2011, shares have done exceptionally well over the last 6 months as fears of bankruptcy have subsided. Earlier this month the company announced it would be looking to combine its daily deals service with the online booking trend to open up an entirely new revenue stream. The service, Groupon Reserve, is said to be "the premiere destination for the finest things to eat, see, do and buy." Early on customers were welcomed to steep discounts of almost 40% to some of the best local restaurants.

I like this move by management, by combining the company's traditional discount business model with the new online booking trend, the company is setting itself apart in the competitive industry. More over, small business owners whom have used the website, or new restaurant owners all together, may be looking to Groupon over Yelp. New owners especially may not have built a significant reputation on Yelp, therefore may be overlooked on the website. 

Who hurts?

The relative veteran in the online reservation space, OpenTable (NASDAQ: OPEN) may be facing growing competition in the near future. 

Imitation is the sincerest form of flattery right?

Well OpenTable may be flattered, but in reality the company can't be excited about the copycat shops opening up on some of the largest, high traffic websites. SeatMe makes it pretty simple for restaurant owners to compare its service to that of OpenTable. Below lets take a look at the comparison table sourced from SeatMe's website:

While SeatMe has a long list of benefits versus competitor OpenTable, we will only take a look at a couple of the important distinctions. The first is cost, if you are a small restaurant owner or a recent start up you are almost always cash strapped as the margins within the restaurant space aren't fantastic. By avoiding a contract, set up fee, cover fees, and web access fees, the owners will be able to redeploy capital into other pieces of their business including the ever critical advertising category. 

Second, OpenTable has actively pushed customers to competing restaurants, while this may sound good for revenues, customer loyalty goes out the door. With SeatMe, the restaurant owners are offered an email marketing strategy in which customers are urged for repeat business. Both OpenTable and SeatMe can be successful, I am not trying to scare any longs out of their position nor bad mouth OpenTable, I just want to make it clear that the competition within the space is definitely heating up.

Wrap-Up

The online dining space is growing increasingly competitive as Yelp, Groupon, and many others are vying for OpenTable's customer base. Through SeatMe new restaurant owners can build customer loyalty while avoiding heavy costs during the early stages of operating. The next few years will be exciting for those involved; it's too early to tell if the online dining space will eventually become as fragmented as the daily deals space.

For the time being I would avoid OpenTable until we have some time to digest the competition. When your dealing with a company trading at 56 times earnings, fears of increasing competition can lead to multiple contraction as it did within the daily deals space a couple years ago. For the shorter-term trade, I like Yelp on the news, the company has done very well over the last few months and with high short interest, 16.4%, any positive announcements could push the stock higher on the back of short covering.  


Nathaniel Matherson has no position in any stocks mentioned. The Motley Fool recommends OpenTable. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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