The Second Derivative of Digital Dining

Over the past two years, the restaurant industry has largely been focused on expanding digital ecosystems through consumer-facing initiatives (mobile order & pay, delivery), with minimal regard to execution or long-term implications. As restaurants seek to increase digital utilization, capture customer data, build loyalty and enhance margins amidst increasing cost pressures, we expect the focus will shift to developing holistic strategies to optimize operations in an omni-channel world.  Welcome to the second derivative of digital.

We see three ways to make money in restaurants: 1) leverage the box; 2) expand the global footprint; and 3) improve margins. We view technology as a key driver in the elements of value creation going forward, with restaurants focused on how to best leverage technology to unlock value in a historically antiquated industry with low profit margins.

1. Leverage the Box 

Increase digital utilization — Expect a continued, and increasing, focus on driving digital adoption through pickup (mobile order & pay, web ordering, kiosks) rather than delivery, which has been the primary driver of digital growth. We believe restaurants will look to add loyalty/rewards programs in a more meaningful way, allowing companies to capture data to be used to incentivize behavior and increase competitive positioning. 

Execution over implementation — Over the past two years, restaurants have largely focused on adding consumer-facing capabilities (digital app, mobile order & pay, delivery). Going forward, there will be greater focus on optimizing digital channels within the restaurants to enhance the in-store and digital customers’ experiences: modifying store layouts with separate sections for digital orders to reduce friction, assigning employees dedicated to digital orders, investing in specific packaging and providing employees tools for best execution (i.e. upgrade POS systems, digital scanners, digitized labels, etc.).

Integration of digital channels — Restaurants will look to upgrade digital assets for more seamless integration across all digital channels, integrating third-party delivery within broader ecosystems and integrating delivery within consumer-facing digital apps. There will be less exclusivity in third-party delivery, and integration directly in POS systems should help mitigate the “multiple-tablet” problem, improve accuracy and minimize lost/forgotten orders. Additionally, we expect more restaurants will seek to integrate third-party delivery within their apps to limit the customer shift to third-party aggregators from their platforms.

2. Expand the Global Footprint

New formats — Given the challenges posed by the addition of new digital channels, restaurants will design new formats to mitigate friction of multiple channels and encourage higher digital utilization. In New York City, Starbucks opened a mobile-forward store while sweetgreen and Chopt have introduced digital/delivery-focused stores, Chipotle has introduced mobile order pickup lanes and is testing walk-up windows, McDonald’s is approaching the end of its Experience of the Future remodels, and Dunkin’ has released its NextGen image for remodels.

Ghost kitchens — More restaurants will explore the potential for turnkey solutions like ghost kitchens to increase the number of access points, enter new markets and mitigate disruption from operating multiple channels within restaurants.

3. Improve Margins

Back-of-house opportunities — The shift in focus to back-of-house opportunities is one of the more significant changes going into 2020. Restaurants will integrate technology to optimize operations and realize cost-savings, moving beyond consumer-facing initiatives, to reduce non-value add tasks, simplify roles, reallocate resources and better leverage data across the system. Examples would include:

• Administrative tasks – Consider labor deployment software, automated scheduling, inventory management tools, digitized invoices, and predictive analytics

• Equipment – Digitize elements of the transactions (labels, third-party integration) 

• Decision logic technology – If the kitchen is slower, a smart system could suggest menu items that won’t compound the   problem

• Voice technology – Voice has consumer-facing applicability already in the marketplace and capabilities being implemented for back-of-house operations. Domino’s, arguably one of the most tech-forward restaurant companies, has been vocal about its bullish view on voice, and recently introduced a voice inventory app. Chipotle has rolled out AI-powered voice assistants across its system. McDonald’s acquired Apprente, an AI platform, in 2019, with intentions to roll out voice technology at the drive-thru; we view this as a key milestone in the future of voice technology, as deployment by McDonald’s would (1) train consumers on the mainstream applicability of voice technology and (2) accelerate advancements from other companies to follow in its footsteps. While companies are often hesitant to suggest technology will reduce labor costs or employees, we anticipate it could be necessary to offset increasing workforce challenges and regulatory pressures that are unlikely to subside.

• Willingness to invest — As consumers’ expectations evolve and the restaurant industry faces ever-increasing cost pressures, investing in technology is critical to enhance four wall economics through top-line leverage and cost savings. Technology can offer restaurants the ability to understand optimal labor schedules and inventory necessary on a store-by-store, day-by-day basis, limiting unused capacity and waste. Going forward, we expect an increased willingness to invest in technology as restaurants recognize the digital shift requires a holistic strategy that permeates across the organization.

Companies Mentioned
(Price as of 17 January 2020

• Chipotle Mexican Grill Inc. (CMG.N, $878.15)

• Domino’s Pizza Inc. (DPZ.N, $286.47)

• McDonald’s Corp. (MCD.N, $211.98)

• Starbucks Corp. (SBUX.OQ, $93.92)