In this episode of Industry Focus: Consumer Goods, Vincent Shen and Fool.com contributor Daniel Kline talk about some of the most interesting intersections between technology and the restaurant industry, and how they might shake out in the coming decade. Find out how kiosk and tablet ordering can increase sales, where employees fit into the automation question, and how different companies are approaching mobile orders and more.
A full transcript follows the video.
This video was recorded on May 16, 2017.
Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Vincent Shen, now making my second visit to the studio for today, this time joined by Dan Kline. We're pre-recording this episode, which will air Tuesday, May 23rd. Thanks for stopping by, Dan.
Daniel Kline: We're coming to you from the past, but talking about the future, so it's very confusing.
Shen: You had some issues getting to Fool HQ this time around.
Kline: I was three miles from the airport, about 45 minutes from my house, when my low-pressure light comes on. Being the responsible fellow I am, I decide I'll pull over to the righthand lane. Boom, my right front tire blows up. I have no idea what happened. Fortunately, AAA said they would be there in 45 minutes. Two hours and 45 minutes later, they showed up. I missed my flight, I had to fly to a different airport, but I did eventually get here, all for you.
Shen: Dan, I was giving you an opportunity to say that you rolled up your sleeves yourself, jacked the car up, changed the tire.
Kline: Here's the sad thing. One, I couldn't have done that, because I was on a highway with absolutely no room. But I could have been in a parking lot, and I still couldn't have done that. The guy from AAA asked me, "Do you have a spare?" I was like, "I don't know?" I said, "I have a trunk? There's a possibility."
Shen: Regardless, I'm glad that you can make it. It's always really nice to have you in studio. Fools, our focus for this episode will be technology in the restaurant sector. Before we get into that, Dan, you cover a ton of wireless companies and cable companies, too. You cover them quite extensively. Last week, I spoke with Asit a little bit about the partnership that Comcast (NASDAQ:CMCSA) entered with Charter (NASDAQ:CHTR) to unite their very significant resources, as they get into the wireless business. Xfinity Mobile from Comcast is expected to hit the market soon. What are your thoughts?
Kline: I think it's a major uphill battle. On paper, it makes sense. Just like when any of those companies, any of the cable companies, decide to sell home alarms, there's a logic of, they have the customer base, they already have an install force. But it never works that well, because the reality is, all Americans that want mobile phones have mobile phones. And while there is some churn, the four major wireless carriers are really well setup to bring your number over, to bribe you to make the change. So just because you're going to pay a little less, you're going to get $5 or $10 back in credit, whatever it works out being with the bundling, I just don't see too many people. And while not all the details are out, these systems tend to be limited, where it's just the iPhone. I think in this case, it is just the iPhone so far. And consumers are used to choices. So I don't think it's necessarily going to be a failure in terms of, will it add some bottom line for these companies for relatively little effort on their part. But I don't think this becomes the fifth wireless carrier that gets up to, T-Mobile is in 70-something million homes, I'm guessing at that number, but T-Mobile plus Sprint is right around where AT&T and Verizon are. I don't think it becomes even a blip on that. It'll be a few million people if they're lucky.
Shen: Sure. As far as I know, from what I could find out about the offering, iPhone is definitely the focus, but they mentioned a few other flagship devices will be available from competing handset makers like Samsung. But, don't you feel like, in terms of sheer resources, if there's any company that's going to try and get into the very competitive wireless space, Comcast is in a position where they can throw their weight around.
Kline: I think they should buy Sprint. If you want to get into this space and you're Comcast, just get into this space. Then make a Sprint movie and have a Sprint ride at Universal Studios, have the can you hear me now guy, where he says now I'm talking, or whatever it is, have him in a TV series on NBC. I don't really get this playing around the edges. Cablevision did this. When Cablevision did it, it was much more based on wifi and being as cheap as possible in terms of using the airwaves, which is part of what Comcast and Charter are doing but only part of it. And it was very incremental. It was for parents who wanted a third phone for their child but didn't necessarily want to spend the real money. It's very hard to make people switch from something that works. I have T-Mobile, I'm not sure what you have.
Shen: I have Straight Talk, which is essentially AT&T, similar service to this, in a way, piggybacking off of a major carrier.
Kline: Right. I know that I get better offers. Sprint and T-Mobile are perpetually battling each other. If I'm happy, I'm not going to change. You have to mail your phones back and go to a store and fill out paperwork, it's not simple, and I'm not going to deal with it just to give Charter more money. Charter is still one of the least liked companies out there. I don't think people are clamoring to do more business --
Shen: Along with Comcast, no less.
Kline: Yeah, I don't think people are going, "Oh, I really want to give these guys a bigger chunk of my business!"
Shen: OK. Well, I wanted to get your first impressions on this. Once it launches and we have more information, maybe some first-hand experience from subscribers, we'll talk about it more, see if it's having any impact for the business --
Kline: Yeah, we'll test it. My mom lives in a Comcast van at home, so we'll try to get a phone and see what it looks like.
Shen: There you go. Moving on to our main topic, we have restaurants. Specifically within this space, the role of technology. For any Fools who have been following this sector, you've seen in headlines recently that restaurants have struggled with some low traffic, declining same-store sales from a period of overexpansion, but I was thinking about this in relation to these other industries that I've talked about today, with you and earlier in the studio with Adam, the fact that department stores, on the one hand, and cable companies, they face some existential threats. You have e-commerce on one hand, you have various streaming internet alternatives on the other for cable companies.
I think the restaurant industry is interesting because fast-casual might take share from quick service, the broad industry might see weakness due to excessive expansion, like in this case. But in the end, people have to eat, they love eating out. And as a result, I think execution becomes a really clear differentiator between different chains, and there's not as much of an industry boogeyman that you can pin your problems to. But on the flip side, you have the success stories, and some of the big trends I get excited for the restaurant industry include loyalty programs, restaurants trying to source ingredients locally, and also, there's technology. That's where we will focus. I think previously, we spoke about how robots, for example, eliminate the need for human employees all together. But a lot of the technology initiatives that we'll talk about today seem to be previews of how that might work.
Kline: I think if you look at some of the technology we're talking about, what you're really focusing on is, restaurant sales overall are down a little bit, 1% or 2%. It's not anywhere near the retail drop. So you're looking here and saying, I'm Chipotle (NYSE:CMG), or McDonald's (NYSE:MCD), or whatever the chain is -- how do I maximize my business? What's worked, and it's worked for Starbucks (NASDAQ:SBUX) and Panera, and we've talked about this before, is mobile ordering. I think mobile ordering at Chipotle makes a ton of sense and will be a game changer. When I say game changer, I mean a 2% to 3% net sales gain. It's not suddenly going to explode their business. But if you walk into a Chipotle -- and we've both done this -- and there's 10 people in line ahead of you, you might leave, because it's slow. So what a lot of Chipotles have done is set up a second production line in the store, and if you order from the app, your food will be ready when you get there. And they're having all the same execution problems Starbucks had. The people at the front don't know where the order is, have you paid, how do you handle it, do you pick it up. But all that will get sorted out, that's just growing pains and retail training, which is not an easy thing to do. So I think at your higher-end places like Chipotle that have lines, that's actually going to allow them to serve more customers during peak hours.
At a place like McDonald's, I think ultimately, there's a gain in taking workers out of the equation. But in the short-term, maybe there's some drive-thru benefit to being able to order and pick up, not going through the line. But in a McDonald's, I don't see as big a benefit when most things are not made to order, and it's sort of a production line, of even if you want a pretty special order, it's coming out quickly. So there's not really a major need to cut that. So McDonald's will gain eventually from technology, but in the short-term, I think you're going to see some of your higher-volume fast casual places like Chipotle, as you've seen with Panera, really benefit from this technology.
Shen: Yeah. And we're definitely still, I think, in the early stages of the launch and the testing phases for a lot of the companies that are dipping toes into this. There are companies like Domino's (NYSE:DPZ), which are turning this into an art for themselves, and really juicing their quarterly results, seeing tons of growth with the technology and how they implemented it really well. With Chipotle, you mentioned the second make line, I think they call it, they're calling it "smarter pickup times". They've been able to quantify some of the benefits in that this better management of their digital orders, they give them more accurate estimates of when orders will be ready. In some of their testing, they mentioned that digital order wait times decreased as much as 50%. Restaurant staff have better tools to essentially manage this channel, like you mentioned, during peak business times. If they have a bottleneck, in terms of those peak hours and how many people they can serve, this can alleviate some of that, then that does flow through to their top and bottom line.
Kline: And there's a major customer service benefit. If you call Domino's -- back in the old days when you called Domino's. I'm sure your generation now is Snapchatting Domino's and then paying via Venmo.
Kline: But back when you used to call Domino's, if they told you your pizza was going to be an hour, you went, "OK, my pizza will be an hour." If in an hour, your pizza showed up, you were satisfied. So I was talking with you earlier. I use the Pei Wei app. The Pei Wei app is pretty innovative in that you can completely customize any order. If you want sweet and sour chicken with no sweet and sour sauce, hold the chicken, you can do that. And you can put in what time you want to pick it up. I was picking up, it was maybe 5:20, so I put in 5:40, that was the distance from my house. And the app came back and said, "Your time has been adjusted to 5:50." And I went, OK, no problem, I'll leave 10 minutes later versus if I had been at the store, waited in line, placed my order, I would have been there for 30 minutes. So it was an absolute benefit of my time, better customer service, and it will make me much more likely to go back. And I think that's where you're starting to see some of the value in these. Pei Wei is a higher end fast casual concept that can take quite a while in a line.
Shen: So we've talked so far about Chipotle, Pei Wei, in your experience. I think those are places where the food quality may be up a tier, they're bringing in plenty of customers in that regard. Going to the more fast casual side, where a company like McDonald's --
Kline: The more fast food side.
Shen: Yeah, the fast food side. Bringing out their "Experience of the Future", they're dubbing it, testing with kiosks for ordering, technology that allows their employees to bring food to your tableside. McDonald's management has cited that 500 million orders were lost to their direct fast food competitors in the past few years, due to their issues they faced. The thing with McDonald's is, they saw quite a nice bump, at least relative to their more stable industry in their business, due to all day breakfast. That has essentially dissipated. Do you think that technology in this regard can help them overcome some concerns that there always are, in terms of food quality?
Kline: It's eventually going to help them overcome some costs. That, we've covered. In the short term, we've talked about this personally but I'm not sure if we've talked about it on the show, if I walk into McDonald's and I want a Big Mac with no special sauce, with an extra slice of cheese, with four pickles, not three, and I try to tell that to the human being behind the counter, who may be a college kid, may be a go-getter, super smart, they've been working at McDonald's for seven hours at that point, they don't care that I want four pickles. So if that goes into a kiosk, not only is there a much easier ability for the person -- eventually robot -- making that hamburger to get it right, and a record for if they don't get it right, for me to hand them a receipt, to say, "This wasn't supposed to have ketchup." So I think you're going to see a subtle but important improvement, especially on drive-thru where there is nothing worse than, you order your 10-piece McNuggets, your large fries, and you get home with your drive-thru back and open it up and it's someone else's Big Mac that you don't want. So I think this is going to eliminate a lot of that pain point, and that will absolutely have an impact on the bottom line, but it's not as direct as, "Boy, the line is long, now I can serve twice as many people."
Shen: Yeah. I will add, in addition to McDonald's, Wendy's announced earlier this year that they would install kiosks at about 1,000 of their locations by the end of this year. They've cited similar things that we've talked about, reducing labor costs, for example. But on the Panera side, Panera 2.0, some things management has said that I think make it really interesting, in terms of the lift in ticket size that you can get from these kiosks, there is a quote from, I don't know if it was somebody in their management, but I found this quote that basically said, "People who order at a kiosk will generally spend about twice as long ordering with that kiosk than they do if they're speaking directly to a cashier." What that ultimately means or leads to is more opportunities for upselling -- every time you place an order for a salad, do you want to pair that with a soup? You order a coffee, do you want to pair that with a donut? Then, they're able to customize their orders, and ultimately get larger tickets. Domino's has spoken to this as well with their apps. People upsell themselves. When they're ordering a pizza, they add things to it that they wouldn't otherwise if ordering by the phone.
Kline: And it takes away shame. If I'm at Starbucks, and there's a person, I'm going to buy black coffee, room for cream. If I'm ordering on my own, I'm like, "I'll have a Unicorn Frappuccino with extra chocolate chips, could you grind up a pie in that?" So, I think there's a level where, if I'm ordering Domino's and I'm a person talking to a person, I might be like, "I'll have a medium pizza with pepperoni, please." If I'm on my own, bacon, pepperoni, sausage, and put another pizza on top of it. So you get into some impulse control issues. And I think there might be some technology ability going forward to manage calories and things like that, in a way that you'll still spend, but maybe not make the stupid decisions I just described. But, yeah, absolutely, if you don't have to interact with another human being, you're going to order more. You might get that soda you'd be embarrassed to buy from a person, or the dessert, or whatever it is.
Shen: I think trying to quantify some of these things, some of the benefits we see, beyond the labor cost, the large ticket sizes, the fact that people order more, and the fact that if you order exactly what you want and you're not worried about it because you're on a kiosk, you're not worried about telling the cashier about all the different customizations that you want to make, you'll enjoy the food more. And maybe that leads to better loyalty to that chain, or whatever it is.
Kline: It's also about removing uncomfortableness. We've talked a lot about this, we both like all sorts of different ethnic food. If I'm an American and I've never had Thai or Korean or Japanese or whatever, and I walk in and it says, whatever the local name is, it says Pad See Ew, and I'm like, "I don't know what that is. Is that chicken? Is that noodles?" If it says Pad See Ew, they're noodles with this and that and that. Or, an empanada, here's what an empanada is, and it lays it out.
Shen: Or, if it's spicy, and you worried about that --
Kline: Right, where you want to remove the spice, or allergen concerns, or whatever it is, the more of that you can make not embarrassing -- as someone who has a food allergy, I hate walking into a restaurant, and I have cousins who have very serious peanut allergies, so you have to make a big deal out of it. If that could just be something that I could automate and still know they were going to be safe and things were going to be done, it would make times I cook at home times I go out to restaurants.
Shen: Sure. So we have these kiosks, and we have, even beyond the mobile ordering, which obviously, hopefully, can help some of these restaurants during the peak hours speed customers through, increase their volume. The idea of some of these tablets that restaurants are also outfitting some of their tables with. This is more of a sit-down experience.
Kline: I love this. They've been doing this at Chili's for quite a while. We went to Smokey Bones, a BBQ chain, this weekend. The waitress was clearly harried. She had too many tables, she was very stressed out. And the fact that I could order a drink and it would show up and it wouldn't be the waitress, it would be someone else bringing it, and that at the end of the night, I could pay and not have to request a check -- it's little things like that that make the experience. And you don't want that at a nice steak house. You're not going to drop $200 on dinner and check out on a tablet that you could play Space Invaders on. That was a bizarre game to pick, nobody plays Space Invaders anymore. But my expectations at Chili's are not for fine dining, they're give me my baby back ribs and fries and get me out of there pretty quickly, bring me another drink. So it really eases the experience.
Shen: And a lot of restaurants that have outfitted their tables with these tablets have found that people are more likely to order the ancillary items, higher instances of customers ordering dessert, coffee, other drinks. Those are all nice margin boosters for those businesses.
Kline: There's a window. If you're a restaurant, there's a period between the end of dinner and the feeling of fullness when people will buy dessert. They often regret desert by the time it shows up. That's why most restaurants have a to-go container for desserts you shouldn't have ordered. But if the waitress is too busy or misses that window, or I would have had another beer if she got to me 10 minutes into my meal, but at 20 minutes into the meal I'm like, "Oh, I'm driving too soon," or, "Maybe I don't need to spend this money." So there's an amazing ability to give me every impulse if I'm sitting there and finish my gin and tonic and want another one, I just hit the button and there it comes whereas if I had that extra five minutes of reflection, maybe I would go, this is a bad idea.
Shen: An overarching theme, in terms of some of the technology we've had, eliminating the need for an employee, or someone to actually be the cashier, to be the server, also maybe minimizing some of the inconsistency that you can get in terms of the service experience. I want to end the show, though, on a bit of irony. You brought this up before we filmed, and I thought it was really interesting. Some reports that we have from insiders in the fast food industry, various recruiters for these companies who are running into a lot of problems, actually, staffing restaurants, and reducing some of the turnover that we see, which is at record levels right now, and keeping well-trained employees there. The management team at Chipotle, for example, has spoken about how they lost sight of that service side, about keeping restaurants clean, keeping the beverage and fountain machine clean, napkins off tables, trash off tables. I just thought it was interesting that, on the one hand, if you look out 10 to 20 years, you have this idea that you're going to eliminate the need for these employees entirely. But right now, even as they're testing things like these kiosks and tablets, which help eliminate the need, they're also running into issues keeping the restaurant staffed. The median wage for fast-food work in this country is $8 to $9 per hour. But Wal-Mart, just two years ago --
Kline: Went to $10.
Shen: -- went to $10 across the country. Across their entire network of stores, at the minimum. They're running into this competition across all of retail.
Kline: And I think you're seeing a justification for the companies that invested in employees. If you look at a Starbucks, which has healthcare and the college benefits, their turnover is less. I worked in retail, I ran a store. Just teaching someone all the procedures to run the register took months before they were good at it. If you're integrating someone onto the line at Chipotle, or working the fry later and knowing the procedural manual to clean the shake machine at McDonald's, which is horrifying, my wife having worked there in college -- that's not ice cream. But there's a huge opportunity cost. If you have been paying better all along, you might have actually been able to do it with less workers. Now, you're seeing a bit of a hierarchy. If I'm a worker at Dunkin' Donuts, I might be able to get hired at Starbucks, which will treat me better. If I'm a Taco Bell worker, maybe I can go to Chipotle or Starbucks.
And you're going to start seeing the bottom of the chain -- during the last time we had a boom economy, my wife and I used to joke that you would go to the Dunkin' Donuts and the people working there would just point, and you wouldn't get what you wanted, but eventually they would get to something you like, and you would just take that anyway. And you're going to start to see real differences in service. As a country, you can argue what full employment means. But on a technical basis, we're at full employment, or right close to it, meaning there's not a huge pool of people -- there might be lots of people looking for better jobs, but there's not a huge pool of people looking for entry-level jobs. So you're going to start to see more teenagers. Starbucks doesn't hire a lot of 16 year olds in most markets. But you're probably going to see people like that, younger people, get some of these jobs, which can be good, but it's also a training issue, it's a scheduling issue because they can only work so many hours, they can't work during school, they can't work late at night. This is going to be a major factor, and for successful chains, it's going to force automation.
Shen: Yeah. And we've talked before about how, ultimately, labor costs for a lot of these major chains, as much as 25% to 30% of their cost structure is there. It's interesting, trying to see them commit to this balancing act that they have, of making sure that right now, where they're not at the point where they can automate everything, having their employees be trained well, making sure the service experience is positive, and keeping customers coming back.
Kline: I think if you're a worker -- I'm not 15 anymore, but I have a 13 year old child, and if he told me he wanted to be a manager someday of a restaurant chain, I would tell him to look at the ones that have a commitment to people. Starbucks has endlessly said and proven that with automation, they're not looking to replace workers, they're looking to shift the labor flow into production, meaning that there's always going to be an art to building a latte. Yes, you can go to Wawa and get a latte made by a machine, but that's not the same as one built by a person. If Starbucks is saying, "Yeah, we may not have order takers who are people, but we're absolutely going to have customer service and baristas and product experts, and we're going to put in these upscale bars, and you'll be incentivized to learn more about coffee," well, those are the chains that are going to attract whatever worker pool there is. And I think McDonald's is going to automate, because it's a difficult job, there's some upward mobility but it's still a hot, sweaty, unpleasant place to work, for the most part. It's all going to sort itself out, as long as the economy stays strong.
Shen: OK. Any final points, Dan, before we roll up here?
Kline: I'm kind of hungry. Where are we going? We're thinking Shake Shack later. [laughs]
Shen: I would love that. Thanks again for joining us. Thank you, Fools, for tuning in. Remember, you can always reach out to Dan, me, the entire Industry Focus crew via Twitter @MFIndustryFocus, or send any questions to firstname.lastname@example.org. Don't forget to check out our other podcasts at podcasts.fool.com. People on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Thank you!
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, Starbucks, and Verizon Communications. The Motley Fool owns shares of Panera Bread. The Motley Fool is short Shake Shack. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.