"When I say, 'The Internet changes everything,' I really mean everything."
-Larry Ellison in 1999
That quote seems mundane today, but 15 years ago that statement was visionary. The Internet not only changed the way we access news and how we shop for material goods with websites like Amazon and eBay, it also changed the way we buy food. Many restaurants are taking advantage of an ever-growing trend of customers preferring to order their food online.
Grab a slice online
For years calling for a pizza has been the norm, so it's not a huge surprise that online ordering has naturally been successful in the pizza business. This past year online sales made up 45% of Papa John's (NASDAQ: PZZA ) domestic sales and 40% for Domino's (NYSE: DPZ ) . Both pizza companies have been pleased with this online growth because in comparison with telephone or in-store orders, online orders tend to be larger and have a better customer retention rate.
Domino's proudly touted its mobile app in its conference call, and CEO J. Patrick Doyle said that the company's app is now compatible with 95% of the smartphone market. This app has been updated so that now a person can order a pizza "in as little as 5 clicks or about 30 seconds." This is a competitive advantage for the 10,000+ Domino's stores out there. Smaller pizza chains --notably new fast-casual chains -- don't have customer bases that are as large. What for Domino's is a small IT cost could prove cost-prohibitive for others.
Meanwhile Papa John's flaunted its industry-leading 45% domestic online sales. This lead is attributed to the company being a first-mover in the segment, as it had online ordering available across its entire system in 2001.
Doyle implied in Domino's conference call that "the big three" pizza chains -- Pizza Hut, Domino's, and Papa John's -- will continue to grow online sales by stealing customers from smaller chains. He cited that the industry as a whole only received 12%-13% of all orders online in 2012. That means that the lion's share of online orders go to the big three chains. As customers continue to prefer online ordering, it seems that they will turn away from the smaller chains and toward the online-friendlier big chains.
Not just pizza
While it was skimpy on the details, in its most recent conference call Noodles & Company reported that online (including mobile) sales nearly doubled over the past year.
This presents both an opportunity and a challenge for Noodles. It's an opportunity because in the fast-casual business, it's all about how many customers you can serve in any given hour. Online orders increase customer throughput by reducing the line and allowing customers to go directly to the register.
However, it's also a challenge to assure that the restaurant is correctly staffed to meet increased online demand. Someone must attend to the online orders without neglecting the in-store diners.
Noodles expects online sales to continue growing at a fast pace for the foreseeable future.
One company that should think about it
New hot-stock Chuy's Holdings (NASDAQ: CHUY ) reported decent comparable sales for the quarter. Comp-sales grew 3.1% in a quarter when many restaurants -- like those in Darden's portfolio -- struggled. However, although this growth was respectable, it only included a 1.1% increase in traffic. Many analysts feel like this young restaurant should be posting more positive numbers than that.
Online ordering is a completely untapped opportunity to grow traffic for Chuy's. Many casual dining restaurants offer online ordering, such as Brinker International's Chili's and DineEquity's Applebees. By offering online ordering Chuy's would be catching up to its peers in this important category.
My closing thoughts
Investors are going to be pretty demanding of Chuy's in upcoming quarters, as they will want to see Chipotle-esque growth. The pressure will be there, but fortunately for the company there are still many untapped opportunities -- such as online ordering -- to boost numbers.
Noodles will be looking to expand its recent successes. I'd keep on eye on any changes it makes to online ordering, and specifically if those changes are modeled after Domino's and Papa John's successes.
Online ordering isn't new, but it is a restaurant trend that continues to grow. As consumers continue to show a preference for ordering online, restaurants that accommodate this trend should stay ahead of the curve.
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