McDonald's management believes it has lost 500 million customer orders to the competition in recent years. The fast food giant hopes its "Experience of the Future", featuring ordering kiosks and other services, might help to eventually restore its edge.
In this segment from Industry Focus: Consumer Goods, the cast talks about exactly how restaurants can benefit from similar initiatives, including larger ticket sizes and better service.
A full transcript follows the video.
This video was recorded on May 16, 2017.
Vincent 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 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.
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.