In this segment from the MarketFoolery podcast, host Chris Hill and David Kretzmann of Supernova and Rule Breakers try to assess what McDonald's(NYSE: MCD) delivery option means for the fast-food giant. It's not everywhere yet, but the test run is expanding to a swath of large cities, and further growth appears inevitable. A lot of pundits see delivery as a vital service for all chains in the future, but the question is how that should be managed: Build an in-house service or hire it out to a third party?
A full transcript follows the video.
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This video was recorded on May 17, 2017.
Chris Hill: I'm glad you mentioned McDonald's,becausethey're in the newsnot because ofearnings but because of the delivery thatthey have been testing in a few locations in Florida. They are nowrolling out delivery in Los Angeles, Chicago,Phoenix, and Columbus, Ohio. They'redoing it through Uber's UberEATS service. I'm curious how you view delivery, and I think to the point you made about Selim Bassoul at Middleby and his comments -- for those unfamiliar with Middleby, they aremainly in the oven business, so chances are,if you've gone out to eat in the United States in 2017, chances are your food was prepared in a Middleby oven. I think he's definitely onto something. I mean,this is an industry he knows very well, soI'm not going to disagree with him abouthow crucial delivery is going to be. From yourstandpoint,David, I'm curiousif you have a thought on what the betterstrategy is? In the case of McDonald's, they'repartnering with UberEATS. You see some places that are opting to build out thisdelivery network on their own.GrubHubis essentially a business built on going torestaurants and saying, "Don'tworry about delivery, we'll do it for you." Andcertainly, that stock is having a monster 2017. So do you see any particular strategy, onebeing better than any other? Ordo you just look at it and say, lookdelivery is important, how you execute is up to you but you'dbetter have a strategy?
David Kretzmann:There was someinteresting discussion on this in Red Robin's conference call. Up to this point,Red Robin has used three of those third-party delivery providers. So they'renot doing it on their own.
Kretzmann:Threeseparate ones and about 138 locations. The CEO said, seamless isnot exactly how I would describe ourexperience with those third-party providers,because integrating those third-partyproviders with their payment system, their ordering system,it's a little clunky. They said the delivery times have often beennot as promised, whichdisappoints the customers, andobviously that's not great for Red Robin's brand. So it seems like right now at Red Robin,they basically said, "We'reopen to other alternatives, becauseclearly what we're doing now with these third-party providers isn'tworking as effectively as we would like." AndI contrast that with Panera,which I think is a great example of a company that went from zero delivery and now they're going all in on their own in-house delivery. I really think that's the model that will reward these companies over the long-term the most. You look at howDomino's, which is crushing it quarter afterquarterdespite the restaurant slowdown,I think a huge part of that is because theydeveloped their own point of sale system,essentially their own internal system, to manage payments and orders, their ownproprietary system. Panera has started to do the same thing.
And that just makes it a seamless experience for customers, wherever you arein the country or the city. You don't have to order through a separate delivery company, youdon't have to change your payment information,especially, have a loyalty program likePanera, which has 25 million members, itmakes it so much easier as a consumer whenyou have that consistent experience wherever you are,and I think it makes it a much stickier experience, too, wheneverything is done through the company. And that raises repeat orders, which is,at the end of the day, what these restaurants need to bump up their margins and volumes. So I think most companies probably won't go that route initially, because that's the tougher route,because you do have to reinvent yourself,especially if you're a casual dinerlike Red Robin or more of the fast-casualcompany like Panera. So I think, initially, you're seeing a lot of companies going with these third-party providers. But at the end of the day, to maintain full control over the brand, the experience, and ideally building a loyalty program, which,as we've seen withStarbucksand Paneraand Domino's that's beena huge factor in theirongoing success, despite the restaurant slow down. I think keeping it in house isinitially the harder move, but it's the one that makes the most sense. But it will be interesting to see how it shakes out. I'll leave it at that.
Hill:As you said,it's definitely the harder move. It also seems like if you do it right, it's the much more rewarding move.
Kretzmann:Yeah. Ifyou can pull it off. And it really doesrequire a reinvention. It can't just be a tack-on item to the business. That is one concern I have withChipotle and some of the other companies that are justrelying on these third-party providers.I just don't see that being a consistent experience. Theeconomics of it don't really make a whole lot of sense for the company. Unlessyou have it going through your own internal system, whereyou can really promote additional offers or something, you don't want the third-partydelivery orders to just be replacing peoplegoing into the store. Wheredelivery gets very profitable is if people say, "I'llbuy the salad and the breadsticks inaddition to the pizza." That's where you really get additional volume and your margins bump up. But ifsomeone is just buying the same thing they would have gottenif they walked into the store, that's going to cost,because these companies have to pay the third-party providers, who need a cut of that transaction. That'ssome of the headwinds thatRed Robin has run into. They mentioned, theeconomics of delivery are not that great,on top of everything elsewith the consistency of the experience, whichhave not been very consistent. So I likecompanies like Panera,even though they're few and far between that aredeciding to go all in and keep it in house.
Chris Hill owns shares of CMG and SBUX. David Kretzmann owns shares of CMG, DPZ, MIDD, RRGB, and SBUX. The Motley Fool owns shares of and recommends CMG, MIDD, and SBUX. The Motley Fool has a disclosure policy.