Fast-Food Innovation

In this podcast, Motley Fool host Mary Long chats with David Henkes, senior principal at Technomic and an expert on the food and beverage industry.

They discuss:

• What it takes to bring a new fast-food product to market.
• How social media changed the restaurant industry.
• The challenge of automating a kitchen.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on August 06, 2023.

David Henkes: What tends to get talked about a lot are robotics, artificial intelligence, and there's no question all of these things are happening. You look at Chipotle or Sweetgreen and how they're automating the process for building their bowls and their products, that's all coming down the pipe. But the challenge, I think, for a lot of restaurants, and McDonald's CEO acknowledged this last year, is that none of it is necessarily reducing labor. 

Mary Long: I'm Mary Long, and that's David Henkes, Senior Principal at Technomic and an expert on the food and beverage industry. I caught up with Henkes to talk about innovation and fast-food kitchens, the publicity game that more food companies are playing, and the tech that is and isn't working for restaurants.

When most people hear the term research and development, R&D, they probably think of tech companies. But there's a lot of, shall we say hidden innovation that goes into making a fast-food product. Could you take us behind the curtain of a fast-food test kitchen? What does it take to bring a fast-food product from concept to market?

David Henkes: Sure. Now it's a fairly complex process, and I should know that it's typically a fairly long process as well. A lot of it depends on the chain and what they're doing. But they tend to look at platforms. When we talk about innovation, typically, it doesn't happen in a vacuum, and the R&D team is always looking at inspiration. A lot of times, they're looking for inspiration from their suppliers, whether it's a beverage supplier or proteins supplier or sauce supplier, and so there's a lot of symbiotic relationships that go on between a chain restaurant and the suppliers, particularly, nowadays where the labor situation is challenging, and chains are tending to try to do a lot with fairly shoestring budgets, even the larger chains. Chains run the gamut, from McDonald's all the way down to $30 million or $40 million chains, and so it's a little bit hard to generalize. But I would say, in general, there's an approach that they take, where it's not all crazy mad scientists in a test kitchen trying to develop all these crazy things. It's a very systematic and systemic process that chains will use, where they, first, need to ideate and look at what's happening, and so there's a lot of trend research that happens. There's a lot of consumer research, understanding what consumers and, particularly, their consumers are asking for. So a lot of times they'll start with hundreds of ideas. The idea generation piece is probably where I think we look at for the big creativity piece. Then a lot of times, they'll bring it down to, maybe, 15 or 20 concepts to test. They'll organize those ideas by platform and maybe develop pipelines. In some cases, it might be a longer-term pipeline. In some cases, it might be a limited time offer, and so it's something that gets escalated or elevated and accelerated.

Then they go through the development process, and that's where you start to iterate around flavors and where a lot of the food scientists come in in terms of just developing flavors and products. The important piece that you've got to remember is this has to be commercialized. For chains, it's got to be commercialized, and it's got to be easy to reproduce in hundreds or thousands of kitchens across the country, and so it's also got to be done fairly easily, and so there's this whole process of iterating around, developing an idea, testing it out operationally. Once they have something that they think is going to work, they typically roll it out to maybe five or 10 or 15 locations to test it, and gauge consumer response, and then go back and update it, based on consumer feedback, and so the process itself sometimes can last 12 or even 18 months. It's hard to get an average, and particularly, post-COVID, I think it's a little bit shorter because a lot of chain restaurants are really trying to jump a little bit quicker on some trends, but it's not always a fast process. Sometimes you see these things, especially, if they're really trying to get it right, where it takes a long time to go from that ideation period all the way to when it actually gets rolled out, and it's actually on the consumers' tray at a fast-food restaurant. It's an interesting process, but it involves a lot of research, a lot of testing, a lot of back-and-forth. At the end of the day, they end up scrapping, probably, more concepts than they bring out just because it doesn't work for whatever reason, either the consumer doesn't like it, or it's not operational, it doesn't fit their operation, it's hard to commercialize, it's hard to operationalize, so they tend to test a very short handful, but there's a lot of things that get left on the cutting room floor, for sure.

Mary Long: The interesting thing about this to me is that fast-food isn't just about taste. It's also an engineering problem. You hinted at this when you were talking about commercialization and reproduction. I have read that Taco Bell's innovation kitchen, for instance, features a 40,000-dollar machine that mimics the way that a human mouth bites into something.

David Henkes: [laughs]

Mary Long: So they can determine the perfect crunchability of a product. What's the return on investment of developing a successful new flagship product, something like the Crunchwrap Supreme from Taco Bell or even something with more of a cult following like McDonald's McRib.

David Henkes: First of all, the challenge is actually hitting on that cult favor because those are few and far between, and every restaurant wants to hit on it. New menu items are really the lifeblood of restaurants. In many ways to your point, restaurants are mini factories. They are mini food factories that are essentially manufacturing a food item. So you almost look at these test kitchens, and even the kitchen in the back of the house at a restaurant, as a mini factory in a way. They are creating foods through a formula and doing it over and over again. In terms of the ROI that happens on this, it's hard because you look at menu items, I'd looked up something like a Big Mac as an example. It's probably, from what I've seen, from what McDonald's has issued, maybe 20% of their sales. That's been out for a long time. When you start to roll out a new item, what you're really looking for is, is it driving new traffic? Particularly in today's environment where traffic is flat to declining, if you can get a bump in traffic and show positive results for people that are coming in, because as they come in, they're not just buying that menu item.

They're buying a drink, or they're buying fries, or they're maybe buying a dessert, and so the ROI on a menu item is not necessarily just how much it sells but how much it creates incremental traffic. There's other non-financial measures. Is it Instagramable? Is there a buzz that comes with it? Does it create a social media firestorm? There's a lot of other things that are hard to quantify from a financial standpoint that are still incredibly important to chain restaurants, particularly, as they're trying to break through the clutter of all of these chain restaurants that are also innovating at the same time. What we see is there has been a lot of activity, and I'd say a lot more, since we've come out of the pandemic, of these limited time offers, where it's maybe a four, a six, or an eight-week menu item that, if it does well, maybe it sticks. But I think a lot of the innovation happens around shorter-term items that are meant to generate a buzz, generate a short-term return, and then they move on to the next thing. If you think about the pressure that that puts on your R&D team to create and to constantly be coming up with these buzz-worthy and Instagramable, new, limited-time offers and menu items, the pressure is really there. I don't even remember what your initial question was, but the ROI is sometimes a little bit harder to define, but certainly driving traffic and incremental sales is going to be a huge part of it.

Mary Long: Now I feel like we've seen so much recently of that short-term offer type stuff. I've seen it be called stunt food too, where the line between marketing and food gets blurred because you get this wild product. Over the 4th of July, Pepsi I think launched a condiment called Pepsi Colachup, which was cola-flavored ketchup, only available that day at only four ballparks around the country. But I see that and the short-term stuff makes me wonder if Instagramability is the main goal here, is there such thing as a flop, if it's just to generate buzz?

David Henkes: There is, and you think about the cost that goes into developing a cola-flavored ketchup. That's not something that just happens overnight, and so there was a lot of work that went into that, and I presume, at some point, that that'll make a repeat appearance. But I think the flop tends to happen if consumers don't embrace it, and it almost takes on a life of its own when it comes out because everyone picks up on it. Even if consumers aren't necessarily buying it, the media loves a great story about this crazy product that got developed that's available for a limited time only. But the cost to do a lot of that is, I think, a lot of times a lot more than the actual financial return that you're getting on that. Then the question is, why are you really doing it? I think it is going back to what I said earlier about cutting through the clutter and standing out. Even if consumers are, like, I don't know that I really want to try that, but now that I've got a ball game on my mind, or I've got McDonald's on my mind or Pizza Hut, and they're going to be talking about it, and hopefully then that's driving them to, maybe, a visit that they wouldn't have otherwise had. I think that's where it comes in, where a lot of these items are not necessarily menu items per se, but they're more marketing events, and they're big promotional events to drive awareness, to drive buzz, to drive some type of consumer action toward that chain that otherwise wouldn't have happened, and I think that's where the ROI happens. Again I'm not necessarily sure how you always put a financial return around that, but that's really what a lot of them are trying to do. If you start to get known as a chain or as a concept that does this a lot, then consumers start to expect it, and maybe there's a longer term impact on your image, on what consumers think of you, and so a lot of it becomes more of a long-term play about changing the consumers' mindset toward your particular restaurant and what they think of you.

Mary Long: Changing the consumers' mindset and also being aware of what your mindset is. Wendy's has waited until taking up a certain tone on Twitter I've seen, and that's almost backfired a little bit sometimes. But Taco Bell, on the other hand, has leaned into making a 12-minute TikTok musical about the Mexican pizza. You have to know who you're catering to, no pun intended, and what they'll think of what you're putting out there.

David Henkes: That's really what's different today than 10 years ago. It's so much of the activities for restaurants are geared around social media and are geared around creating that buzz. Ten,15 years ago, or even going back to when I was a crew trainer at McDonald's in my teens, it didn't matter, and so the menu innovation process was completely different. They've got different standards and different gauges for success today than they would have even 10 years ago, and a lot of that is number of clicks, number of views, the viral moment that gets created. I just read something just earlier this week from the McDonald's marketing chief about the Grimace Shake and how that became viral. They really didn't have anything to do with that because it was the users, and they questioned about how much they should lean into that and how much they wanted that to be viral from their customer base versus something that seemed like it was coming from them. I think anytime you, as a menu developer, can create that kind of buzz that emerges almost naturally from your customer base, that's the win, because now everybody is talking about you. It seems authentic because it's not something that you planted the seed for. It just sprung from your customers.

Mary Long: Sometimes the innovation is on the menu in the food. Sometimes it's how the restaurant gets the consumer the food. What are some tech innovations, to switch gears a little bit, that you're seeing at the intersection of fast-food and technology that have you excited?

David Henkes: I just did a whole research project on tech within restaurants and food service. What tends to get talked about a lot are robotics, artificial intelligence, and there's no question all of these things are happening. You look at Chipotle or Sweetgreen and how they're automating the process for building their bowls and their products. That's all coming down the pipe. But the challenge, I think for a lot of restaurants, and the McDonald's CEO acknowledged this last year, is that none of it is necessarily reducing labor, and so the big bugaboo for most restaurants right now is there's just not enough workers, and so tech is always positioned as the savior, and we're going to take out labor and create all of these automated processes. It doesn't seem like that's happening, and so where the technology really impacts now is more in the experience, and it happens much more on the fast-food side than it would in a sit-down restaurant. You think about the drive-through and how there's geofencing around the drive-through. They can recognize your license plate and have your orders called up through the loyalty program or through recognizing your car driving up.

Then your order can be taken by an artificial intelligence order taker and then connected directly to the point of sale and into the kitchen prep. A lot of that automation is already there and is possible. I think the main challenge with these restaurant operators, and you see it all the time when you go to order on a kiosk is, half the time, this technology is down, and so there's always got to be backup and redundancies in place for restaurants when the technology fails. Hopefully the technology gets better, but most restaurants, if one of these big tech platform fails, and that's all they're relying on, it's going to be a huge negative impact on their sales, and so most restaurants haven't eliminated a whole lot of labor because of tech. What I'm excited about though is just the continued automation. I was heading an equipment show for the restaurant industry earlier this year and even at the restaurant show in May, and it's just amazing the automation that's out there. A lot of it is happening around the delivery and takeout order, and so building loyalty programs and, again, all of the things that go into just ordering on your phone and all of the back-office technology that's there. I think the robotics piece is really cool and exciting. I think it's going to continue to grow, and there's a lot of experimentation with it. We'll see where that goes. I've sometimes been accused of being Technomic's, I like to call us, our skeptic.

Mary Long: [laughs]

David Henkes: I'm a little more skeptical about technology. There's no question though that it's dramatically impacting, and I think where the impact is is on the experience, and whether it's enabling faster or easier ordering or payment or pick up on orders, that's where the technology wins. It creates a better experience and, hopefully, drives consumers again to come back and engage with the restaurant brand again. It doesn't necessarily happen, at least at this point from actually reducing cost. It's more on an experiential side, and I think there's a lot of really cool things that are happening and will continue to happen that enhance that experience on the fast-food side, primarily.

Mary Long: You may be a skeptic, but you bring up a really good point, simple but true, that technology, cool though it is, it doesn't always work. That's something to keep an eye out for.

David Henkes: To almost contradict what I just said, restaurants are different than factories in one simple way. It's that we're hospitality business, and whether you're a fast-food restaurant or a fine-dining restaurant, there is still a human element to restaurants' dining and ordering that consumers don't always want to eliminate completely. Whereas the Amazon warehouses and factories, in general, are much more robotics-driven, it's got to be a very simple process to automate. For a lot of restaurants, it's not always a simple process. Building a pizza is complicated and creating customized burgers, and certainly robotics and the technology can increasingly handle that, but it's always going to be a human-first industry. Technology is going to continue to help drive some of the growth, and so I don't want to downplay the role of technology, but I do think that we get a little ahead of ourselves when we talk about completely automated restaurants and totally discount the human factor. If we go back over 100 years ago, there was the Automat, which I think was rolled out first in Philadelphia, and that was a completely automated restaurant 100 years ago. It hasn't stuck, and so we're starting to do a lot of the same things that the industry was doing 100 years ago with better technology. But I'm not sure that consumers, maybe they're a little bit more ready because they've got technology throughout their life, but I still think the human element is probably more important than we think for the future of restaurants.

Mary Long: Yeah, for sure. Thanks so much for your time, David. It's been really fun to talk about the two different sides of innovation that we see in the fast-food space.

David Henkes: Absolutely, and thanks for having me. I appreciate it.

Mary Long: As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy yourself stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow, Fools.