Technology has become a major competitive advantage for some of the companies winning in the restaurant industry. In this segment from Industry Focus: Consumer Goods, the team discusses where the employment of things like mobile ordering and automated kiosks makes the most sense. Chipotle (NYSE:CMG) and Starbucks (NASDAQ:SBUX) aim to serve more customers, while a chain like McDonald's (NYSE:MCD) gives us a glimpse of the future.
A full transcript follows the video.
This video was recorded on May 16, 2017.
Vincent Shen: 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.
Dan 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, or McDonald's, or whatever the chain is -- how do I maximize my business? What's worked, and it's worked for Starbucks 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, 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.
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 and Starbucks. The Motley Fool owns shares of Panera Bread. The Motley Fool has a disclosure policy.