Fast food is on the move! Yes, the industry home to greasy burgers, cheesy pizza, and an assortment of other delicious, artery-clogging foods finds itself on the cutting edge of digital and mobile payments. This year, mobile payments grew an estimated 75% in the fast-food industry; in just a few short years, they could reach 10% of all orders, according to First Data executive Glenn Fodor. "What made 2017 so impressive was that it felt more like a tipping point as mobile payments options raced across the fast food industry," Fodor added.
First Data is far from the only one recognizing this growing trend in the quick service restaurant (QSR) sector. Advance mobile ordering at QSRs could be a $38 billion segment by 2020. And 63% of American smartphone owners -- and 94% of millennials -- have used their phones to place fast-food orders, according to new figures from PYMNTS.com.
By now, most restaurants seem to have grasped that this is truly the trend of the future. Shake Shack (NYSE:SHAK) decided to roll out its app slowly, only testing it in handpicked locations, before releasing mobile order-ahead capabilities across all of its locations. Despite the slow rollout, the burger joint's iOS app was downloaded more than 200,000 times in the first four months, before it released an Android version.
Chipotle Mexican Grill's (NYSE:CMG) app not only allows users to place and pay for orders, but also to access restaurant locations and menu nutritional facts. The fast-casual restaurant's online sales grew by more than 50% this year, and the company is planning to release a completely redone mobile app in the coming months.
The list of restaurants investing in and enhancing their digital and mobile offerings could go on and on, but three companies, in particular, seem to stand out in this space. If you're looking to capitalize on this growing trend, Starbucks Corporation (NASDAQ:SBUX), Domino's Pizza, Inc. (NYSE:DPZ), and Square Inc. (NYSE:SQ) all offer good ways to do it. Let's take a closer look to see how they're leading the way in the restaurant industry's digital and mobile revolution.
Caffeinated mobile offerings
Starbucks' digital and mobile efforts are well-known in the restaurant industry. In PYMNTS.com's latest Mobile Order-Ahead Tracker (PDF available to download) the giant coffee-shop chain tallied a perfect overall score, based on the number of ordering channels available to customers, loyalty programs integrated with its digital efforts, and number of app users. It's easy to see why. In the company's fourth quarter, mobile orders accounted for 10% of all domestic sales, while customer experience scores for the company's Mobile Order and Pay reached record levels.
CEO Kevin Johnson insists the digital relationship Starbucks has cultivated with its customers is driving demand; as proof, he highlighted the integration of the company's rewards program with its digital offerings:
Our priority to accelerate the power and momentum of our digital flywheel reflects the fact that digital relationships are among our most powerful demand-generation levers. In fiscal 2017, Starbucks Rewards membership in the U.S. rose 11% year over year. Per-member spend increased 8% in Q4 alone. The cumulative effect is that today 36% of tender comes from Starbucks Rewards, the vast majority via our mobile app.
Having made measurable progress increasing throughput and customer experience at peak, we can soon begin offering Mobile Order and Pay capabilities and features to all customers, Starbucks Rewards member or not. In quarters ahead, all customers will be able to download our app, set up a digital relationship with Starbucks, select a payment vehicle of their choice, and use Mobile Order and Pay.
Starbucks continues to push its digital offerings on a global scale. The Starbucks Rewards program was recently launched on digital channels in Japan, and already has more than two million members. Management also said in November that new capabilities were being tested in Japan that could soon be rolled out to additional markets across the globe, including North America.
Delivering digital dominance (and hot pizzas)
Domino's Pizza continues to dominate. In the company's third quarter, revenue reached $643.6 million, a 14% increase year over year, while diluted earnings per share rose to $1.18, a 23% rise from last year's third quarter. One of the primary drivers behind this growth is the company's all-encompassing digital strategy, which makes ordering and paying for pizza easier than ever before.
Domino's digital dominance rests on the principle that the easier it is to order and pay for dinner, the more customers will follow. With that in mind, customers can now order pizzas in a variety of ways, from using their preferred social media platform to just texting "pizza" to the company's order number. They can use their smartwatch, smart TV, or connected car. Domino's apps are higher-rated on iTunes and Google Play than their large pizza-chain competitors, and feature far more reviews.
More than 60% of the company's domestic sales originated through digital channels last quarter; as the company continues to push digital innovation, that number should only rise. For instance, the company recently announced a U.K. launch of voice-activated smart-home devices, and a new GPS tracking feature.
Thinking outside the Square box
Another way for investors to gain exposure to this huge industry trend doesn't come from a restaurant at all, but from a payment-processing company that recently filed an application to open a commercial banking division. Square is included on this short list because of its 2014 acquisition of the food-delivery service Caviar. Since that time, however, Square has leveraged its expertise in payment technology to broaden Caviar's services into a much more robust food-ordering platform, allowing smaller restaurants to offer the same digital and mobile offerings that previously only large restaurant chains could offer. This includes things like mobile apps and order-ahead abilities.
In the company's first-quarter conference call, CEO Jack Dorsey noted Caviar's evolution since the platform launched a mobile order-ahead pickup service that mom-and-pop restaurants could utilize:
[W]e acquired Caviar in order to drive more sales to a type of seller we weren't able to reach, which was a ... full-service restaurant. Along the way, we learned that not only was delivery important, but offering more types of fulfillment of food was critical as well, and it would continue to open us up to new types of restaurants ... including QSRs. So we have ... an opportunity to go beyond just delivery and to really be a food platform anytime you're hungry ...
So the pickup launch represents an extension of the fulfillment type, which has been asked by us from our sellers because they do have people coming by and picking up food, and gives us a more complete and cohesive view for the restaurant, so they can use us for more and more things.
In the company's third quarter, subscription and services-based revenue, where Caviar is accounted for, rose to $65 million, an 84% increase year over year. Even better, the service helps Square attract more restaurants to its payment-processing services.
Staying on the cutting edge
Starbucks, Domino's, and Square have demonstrated the ability to stay on top of the latest payment trends. Far from being cutting-edge just for the sake of being cool, these innovations have delivered convenience, speed, and cost savings to customers in meaningful ways.
The proof that these efforts are working is evident. All three of these companies command premium valuations because of their track records of delivering top- and bottom-line growth. Furthermore, all three have a history of beating the market. As long as these companies don't let up on the pedal of innovation, I see no signs that their track records of growth and market-beating returns will end anytime soon.
Matthew Cochrane owns shares of Square. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool owns shares of Square. The Motley Fool is short shares of Shake Shack. The Motley Fool has a disclosure policy.