Digital dining: How restaurants are applying technology to drive sales

Daniel Spelman, Equity Analyst | February 24, 2014

  • Restaurants are modernizing dining with consumer-centric tech focus.
  • Large chains are the leaders, investing more and increasing market share.
  • Innovation is boosting efficiency and reducing costs.

In a $680 billion industry that is notoriously low margin, competitive and high touch, restaurants are increasingly using technology to differentiate themselves from the crowd. Advancements in digital ordering, loyalty, payments and convenience are improving the consumer experience, leading to higher revenue and increased market share for successful brands. With almost one million restaurant locations in the United States and thousands of transactions needed to drive sales, the slightest incremental edge can have an outsized impact on the bottom line. Technology is also being used, particularly by the larger publicly traded concepts, to capitalize on their scale and improve back-end operations and efficiency. Investors would be wise to pay attention to which companies are investing to be on the front of the innovation curve.

The large national pizza chains are leaders when it comes to digital ordering. Papa John’s and Domino’s Pizza now derive more than 45% and 40%, respectively, of domestic sales from online channels. Domino’s U.S. digital orders have reached a $1.4 billion run rate ($3 billion globally), $459 million of which is from mobile. The company’s smartphone app has been downloaded 7.4 million times and provides consumers the ability to reorder favorite items in just five clicks or 30 seconds. Gone are the days of waiting to get through to someone on the phone or having an order misunderstood due to a bad connection. Because orders are more accurate, food waste is dramatically reduced. The large national brands are using digital as a competitive advantage to enhance convenience and drive frequency, since regional chains and independents cannot keep up technologically. In fact, while only 12%-14% of domestic pizza category sales are digital, the big three (Papa John’s, Domino’s, and Pizza Hut) account for 80% of this spending.

Starbucks has been incredibly innovative in using technology to enable loyalty and payments. The company has over 7.3 million active domestic members in its My Starbucks Rewards program and 10 million customers using its mobile payment app (contributing to five million weekly mobile in-store transactions). Over $1.4 billion is currently loaded on Starbucks Cards globally, and together, mobile and Starbucks card payments represent over 30% of total U.S. tender for the company. In a sign of his commitment to technological advancements, CEO Howard Schultz recently announced he will be stepping away from day-to-day management of the business to focus on “innovation and next generation retailing and payments initiatives.” Starbucks is one of the few retailers that will soon have a digitally enabled loyalty program shared across brands and channels, from owned stores to purchases of packaged coffee made at grocery stores. In August of 2012, the company formed a partnership with mobile payments startup Square that will likely result in even more seamless mobile transactions in the future.

Casual dining has been slower to embrace technology, but this is starting to change. Brinker International, the owner of Chili’s, will have Ziosk tablets installed at all company owned locations by the end of this fiscal year. These tabletop devices allow customers to order their food and drinks, reducing human error and ensuring that meals are made as desired. The software is designed to suggest additional items, which sometimes servers forget to do, leading to higher average checks. Ziosk tablets also have entertainment options such as games to help children pass the time. Importantly, the tablets let customers check out and pay their bills quickly, so tables turn faster. Since credit cards never leave their owner’s hands, the risk of fraud drops significantly. Brinker will likely be able to leverage labor expense over time, and servers do not mind the tablets because tips tend to be higher. Lastly, the Ziosks help capture important customer data such as email addresses, so patrons can be targeted for future marketing messages. To date, 80% of guests have interacted with the tablets at Chili’s locations with the offering, and 50% of guests have used them to pay at the table.

For many consumer industries, technology can be friend or foe. A number of publicly traded restaurant companies are spending on digital innovation to drive traffic, average check and market share. While firms such as Olo and Grubhub Seamless are helping independents and smaller chains with their consumer-facing technology, large national brands appear to have a head start. In addition to driving sales, these investments also help on the back end by reducing food waste, improving labor management and broadly capitalizing on scale. By combining loyalty, payments, convenience and efficiency gains, restaurants are learning that not all successful innovation has to come from the kitchen.

Sources: Company documents/earnings transcripts, Olo, Ziosk, Crone Consulting and National Restaurant Association.

The securities listed are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable.

 

 

Daniel Spelman

Equity Analyst
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