These Restaurants Are Leading the Digital Revolution

E-commerce is nothing new in today’s retail environment, but it still remains a small proportion of sales for many businesses. The picture for certain restaurants is slightly different. Online ordering is increasingly becoming the dominant sales channel for pizzas while technology is also playing a bigger part in both ordering and payment for other operators.

Feb 17, 2014 at 12:00PM

There is no doubt that consumers are experiencing a digital revolution today. Not a single day passes without us being connected via the Internet and our smartphones. Restaurant operators are increasingly aware of this trend and Domino's Pizza (NYSE:DPZ), Brinker International (NYSE:EAT), Buffalo Wild Wings (NASDAQ:BWLD) are incorporating technology into their customer touch-points as a form of differentiation.

Digital pizza king
While Domino's Pizza only introduced online ordering six years ago in 2007, the company is now the undisputed digital leader in pizza. Domino's Pizza currently has close to a third of the market share for U.S. online pizza sales; digital sales accounted for 40% of the company's revenue in the third quarter of 2013. In certain parts of the U.S. such as San Francisco, New York, and Washington as well as countries that include the U.K. and Australia, online sales have even surged past the 60% mark.

In dollar terms, Domino's Pizza's trailing-twelve-month digital sales amounted to $1.3 billion to more than double its 2009 digital sales of $539 million. It's clear from the numbers that an effective digital engagement strategy has become critical for pizza sellers, as fewer people will either walk into restaurants or order pizza over the phone.

A big part of digital sales (about  a third for Domino's Pizza) comes via mobile apps and Domino's Pizza has made its mark there as well. As of January 2014, consumers have downloaded Domino's Pizza's apps from various mobile platforms more than 10 million times. Its apps are also rated higher than those of its competitors. On Google Play, the Domino's Pizza USA app receives a 4.7-star rating, while the apps of Pizza Hut of Yum! Brands and Papa John's received only 4.3 stars.

Although competitors could eventually catch up with the company in terms of digital capabilities, Domino's Pizza has sought to differentiate its digital offerings to further improve customer captivity while its first-mover advantage lasts. For example, Domino's Pizza launched online pizza profiles in August 2013. With this innovation, its online customers save their order information every time they buy online. Subsequently, it doesn't take a return customer more than five clicks or 30 seconds to reorder their past purchases.

As of the end of 2013, Domino's Pizza boasts more than seven million unique customer profiles. This results in higher customer loyalty and greater recurring revenues for Domino's Pizza, as a significant portion of these seven million customers are more likely to buy their next pizza from Domino's Pizza in the name of convenience.

Tabletop magic with tablets
The digital revolution in restaurants isn't limited to mobile apps and online ordering. Brinker introduced tabletop screens to select Chili's-branded restaurants in early 2013 and about 400 of its company-owned and franchise restaurants had been equipped with these tablets as of the second quarter of fiscal 2014. Customers can place their orders, play games, and foot their bills by swiping their credit cards with these tablets. Based on the results of Brinker's internal survey, the customer acceptance level of these tablet devices is as high as 80%.

There are three key benefits associated with the usage of these tablets which accrue to Brinker. Firstly, the tablets act as a trigger for additional purchases. Most restaurants make higher margins on beverages and desserts, but not all diners order these items together with the main course. Brinker's tablets flash pictures of these items during customers' meals, which helps to stimulate orders. Secondly, customers can now order food and pay their bills much faster. This is especially important for peak periods like lunch when the absence of these tablets results in the usual long queues. A key source of customer dissatisfaction at restaurants is usually long waiting times. Thirdly, the tablets help the company save on labor costs, as fewer waiters and waitresses are needed. However, Brinker claims that its current priority is to improve the customer experience, rather than saving on costs with the tablets.

Since the digital revolution is still under way in restaurants, there are still a lot of uncertainties associated with customer touch-points. Thankfully, Brinker's digital strategy is very prudent, since revenue from Brinker's tablets helps to offset the capital expenditures associated with tablet installation.

Hot on Brinker's heels is Buffalo Wild Wings. The company also started its trial of table-top tablets in 2013 and it currently had these tablets rolled out at 145 of its locations as of February 2014. As a sports-bar restaurant chain, Buffalo Wild Wings intends to customize the tablets' capabilities in line with its sporting focus. In addition to the usual trivia and arcade games available on tablets, Buffalo Wild Wings plans to include match-day results, sports news, and fantasy sports gaming in its tablets' contents. 

Foolish final thoughts
Of the three companies, I am the most optimistic on the prospects of Domino's Pizza, especially since the sales mix for pizzas is moving online in a big way. In contrast, table-top tablets are more complementary to the core businesses of Brinker and Buffalo Wild Wings, which primarily serve walk-in customers. 

Top stock picks beyond restaurants
There's a huge difference between a good stock and a stock that can make you rich. Domino's Pizza is a good restaurant stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings and Google. The Motley Fool owns shares of Buffalo Wild Wings, Google, and Papa John's International. 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.

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