Labor costs are a major expense item for restaurants, and many companies are already turning to automation to boost profitability and improve customer service.
In this episode of Industry Focus: Consumer Goods, the team considers the big picture implications and timeline for when such technology may lead to job losses and significant shifts for the industry. On the flip side, they also discuss how service could become a feature of higher-end establishments, something that can differentiate competing brands.
A full transcript follows the video.
This video was recorded on Jan. 26, 2017.
Vincent Shen: For our final topic of the day, getting more high-tech, is the idea -- and this is something that I think we had some pretty fun discussions about in the past -- of fast food workers going away. I think we can't deny that calls for higher minimum wages or something that you see quite often in headlines. Even here in the D.C. region, the city recently approved a $15 minimum wage that will gradually reach that level by 2020 in the city. From what I could find for the industry at a McDonald's, labor costs are a very significant piece of their cost structure, usually around 20% to 25% for these chains. What do you think? How do you think this is going to mold things?
Dan Kline: There's going to be two phases of this. The current phase we're in now is Starbucks, Panera, Dunkin' Donuts that are using technology not to take employees out of stores, but to make stores more efficient. Chipotle is starting to do that. The Chipotle order app, where you can mobile order and pay, they're running separate lines. The line you see at the front of the Chipotle where the person makes your food, in the back, there's another one of those. So, they're not necessarily firing employees, or using less people in stores. They're putting more people into production.
That's what Starbucks is doing. So, instead of somebody having to take your order in the line, they're making your drink, so people go through faster, the store serves more people. That's phase one. Phase two, you're going to start seeing the McDonald's of the world that have big kitchens and don't need extra production help, they're going to start putting ordering in kiosks, and that is going to take their head count down. They're doing that all across Europe and Canada. So, whereas there might be four or six cashiers, there might be 12 kiosks with one or two employees who are helping you through that, and maybe there's an extra customer service person facilitating the process. And then, eventually, you're going to start to see, at the wealthier fast food chains, maybe fries at McDonald's won't be made by human being. Maybe your Big Mac still will be because it's customizable and there's a lot to go into it. But, you're going to see less labor. I don't see any way around that.
Shen: Sure. You bring up a really good point. It'll be very much a gradual transition. Some of the examples you brought up in a McDonald's with some of the self ordering kiosks, very popular, the Panera Bread we have across the street from Fool HQ here, also a similar situation, I think there's five or six tablets ready to go. It helps them turn down the staff.
Kline: And this has been happening for 20 years. I'm a slight bit older than you, and when I was a kid and you went to McDonald's and you ordered a Coke, someone poured a Coke. Now, most McDonald's have Coca-Cola Freestyle machines, where not only do I have an enormous amount of choice -- I can get diet vanilla root beer and mix it with Fanta orange if I want -- all the person at the counter has to do is hand me a cup. So, this labor has been coming out of the fast food process in little ways for a long time. And you will start to see service being a premium, meaning Starbucks' willingness to have a person make your drink exactly the way you want it, where is Panera Bread just hands you a coffee cup, that's going to be a differentiator for some of these brands. So you may see fast casual concepts double down on people and actually charge more for the experience of getting your pizza not made by a robot pizza machine.
Shen: Looking a little bit further ahead, we have some pretty big names in Silicon Valley working to develop better AI, better automation. Obviously, it seems like a very natural next step for that technology to be integrated more and more into this industry, as we've discussed here. I guess I want to talk a little bit about some examples of some of the more high-tech stuff, still very much in the testing stages. One, I found that, for a company we talked about just a few minutes ago with Domino's, this made me chuckle, they have their DRU, the Domino's Robotic Unit, which is essentially an automated vehicle -- but not a full size car. It has the capacity to hold as many as 10 pizzas in a heated compartment. It can handle deliveries within a 20 mile radius on a single charge. They're already testing stuff like this. I think it's limited to New Zealand and Australia right now. They've also handled some issues with theft, with security cameras, with the locked compartment. But it is, to me, a glimpse of the possibilities.
Kline: I thought you were going five years after that in the future, where pizza robots are overlords. [laughs] Domino's has been very good about what I'll call the concept-car concept. When you go to an auto show and Ford is showing an amphibious car that can fly and make you a latte, some of this Domino's technology, even as goofy as when they were delivering you pizzas via reindeer, it's just to get attention, but aspects of it are going to come out. I don't see a world in the near future where autonomous pizza delivery cars are going to make a lot of sense in most markets. But, automating more of that process. There's no reason a man needs to take the glob of dough and put it into the pizza thing. That could absolutely be a machine that does that. So, you're going to see more and more of that. And that will make the process more efficient. And yeah, maybe in Manhattan, there's going to be drones and robots. In very densely populated places, you'll see that. But I think a lot of that now is attention-getting gimmicks. Domino's does not really intent -- it's not cost effective to have a drone deliver me a small Coke and a medium pizza.
Shen: So, last point here, you mentioned on the service side, having that human element be a differentiator, and how the next steps, it seems like right now, the ordering process is becoming automated. But with the food prep, it's still a challenge. I do want to bring up one example that shows that we are there, and it's just a matter of reaching that mass scale. There's a company I found called Momentum Machines, based in the West Coast, they garnered some buzz last year in advance of opening a restaurant with a robot that could flip 400 burgers an hour, cut your vegetables, and do quite a bit of that process, in terms of the burger prep. So, it really seems like so many things right now are in the concept stage, and you'll get all these elements of it kind of like how you described, but for these trends we talked about today, in terms of the competition, some of the discounting issues that the industry faces, but also on the flip side, how they're trying to tackle increasing costs and things like that. It's really funny, how all this comes together.
Kline: It's a question of cost. If you look at how McDonald's makes a McCafe beverage versus how Starbucks does it versus how a local place does it, Starbucks is a little automated, McDonald's is basically push button, there's no barista, it's the same guy who makes your fries, makes your latte or espresso or whatever it is. But there's very few restaurant chains that can get to this quickly. So, if you are a McDonald's franchisee, and McDonald's comes to you and says, "Good news, you can eliminate 50% of your staff. Bad news, there's a $4 million investment to put in the automated burger machine and all of the other technology." So, this is going to be gradual. You're going to see, like I said before, maybe McDonald's, one of the more successful franchise models, might say to its franchisees "In 2018, you are going to automate making french fries and chicken McNuggets, and that's a $200,000 machine," or whatever the number is. That's not going to fly at Wendy's or Arby's or any of the less successful, or a Subway, where the average franchise owner is making a nice salary, or if they're paying a manager, they're making $40,000 to $50,000 in profit. I'm sure some make more. They're not going to be able to invest. So, this is going to happen, and I'm sure you're going to see some start-up money where it's a pizza place where there's no human, you put your money in and boop boop a robot makes you a pizza. But it's not like, three years from now, you're going to go to the mall food court and there won't be people there.
Shen: Yep, definitely looking farther out, for sure. Anything else that you would like to end on, in terms of, maybe, other trends that you're watching, things that aren't as prominent now but might be coming up down the line?
Kline: Yeah. I think there's going to be a lot of shake out. We talked about fast casual pizza, and I've written about fast casual burgers. There are going to be winners and losers in these spaces. There is absolutely room for a Chipotle of pizza and a Chipotle of burgers, and probably a number two and maybe even a number three company, but there's not room for 17. And just like we've seen some of the wannabe Chipotle knock-offs suffer, some of these companies are going to go away, or they're going to consolidate. You're also seeing, in the step above that, in your Chili's and Ruby Tuesday, they're struggling to find a business model. So, I think you're going to see a lot of restaurant closures. You saw a lot last year, whole chains going out of business. I think that's going to continue, and maybe get worse.
Daniel Kline has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Ford, Panera Bread, and Starbucks. The Motley Fool is short Domino's Pizza and has the following options: short June 2017 $140 puts on Domino's Pizza. The Motley Fool recommends Coca-Cola. The Motley Fool has a disclosure policy.