At a time when consumers grapple with high inflation and economic uncertainty, charging them more with a surprise fee won’t go over so well, as restaurant management software provider Toast (NYSE:TOST) found out the hard way. Despite reversing its controversial decision, TOST stock fell sharply, likely because of the necessary reassessment that investors must conduct.
Earlier this month, Toast imposed a controversial 99-cent online order processing fee that was applied to online orders of $10 or more. The idea centered on helping to fund software improvements. However, the immediate and intense backlash forced management to quickly reconsider the move.
“While we had the best of intentions — to keep costs low for our customers — that is not how the change was perceived by some of you,” Toast CEO Chris Comparato mentioned in a statement. “We made the wrong decision and following a careful review, including the additional feedback we received, the fee will be removed from our Toast digital ordering channels.”
Although the company — which offers fully integrated point-of-sale (POS) systems — took responsibility, TOST stock cratered. Essentially, investors must now crunch new numbers and estimate the potential impact to the business.
Why So Much Anger Against TOST Stock?
On surface level, a one-dollar fee might not seem so much considering the long-term erosion of the greenback. However, it’s the principle of the matter that seems to anger both customers and business owners, thus burning TOST stock.
As Fox Business pointed out, the 99-cent processing fee applied to customers directly, thus bypassing the underlying restaurants. Thus, part of the frustration centers on the furtive nature of the policy. After all, many guests of Toast-empowered eateries have never heard of Toast, let alone agreed to conduct business with it.
“People are freaking out. Business owners are freaking out,” Tony Naser, an owner of four pizza shops in Massachusetts and New Hampshire told Fox Business. Since lay customers don’t typically know about their favorite restaurants POS systems, the fee negatively impacts Toast clients’ reputation.
“The politest way I can put this is that it’s a back-door way to steal from restaurants,” said restaurateur Trent Patterson of Five12 Restaurant Concepts in Houston, Texas.
Toast Requires a Realignment
At the most basic level, TOST stock plunged because of the implied loss of “free money.” According to a 2017 survey focusing on online food orders, 34% of respondents stated that they spend up to $50. Moreover, 12% stated that they spend up to $75 while 14% spent up to $100.
Therefore, if public outcry never materialized, Toast would have raked in considerable money directly from restaurant goers. Of course, because of the outcry, the company believed it had to reverse course. Otherwise, it would risk not only losing customers but also longstanding relationships with its enterprise-level clients.
But now, as Bernstein analyst Harshita Rawat argued, investors must adjust for new realities. “The financial impact (of the fee sustaining) would have been sizable and some buy-side numbers likely already reflected a potential ~7-10% run-rate impact (some were even higher) on gross profit,” Rawat stated in a note to clients.
Currently, Wall Street analysts peg TOST stock as a consensus moderate buy with a $26 price target, implying 14% upside. Still, experts may decide to rethink their individual ratings given the fierce backlash.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
