In this episode ofIndustry Focus: Consumer Goods, Vincent Shen and Fool.com contributor Daniel Kline talk about some of the most interesting intersections between technology and the restaurant industry, and how they might shake out in the coming decade. Find out how kiosk and tablet ordering can increase sales, where employees fit into the automation question, and how different companies are approaching mobile orders and more.
A full transcript follows the video.
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This video was recorded on May 16, 2017.
Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Vincent Shen, nowmaking my second visit to the studio for today, this timejoined by Dan Kline. We'repre-recording this episode, which will air Tuesday, May 23rd. Thanks for stopping by, Dan.
Daniel Kline: We'recoming to you from the past, buttalking about the future, so it's very confusing.
Shen: You had some issues getting to Fool HQ this time around.
Kline: I was three miles from the airport, about 45 minutes from my house, when my low-pressure light comes on. Being the responsible fellow I am, I decide I'll pull over to the righthand lane. Boom, my right front tire blows up.I have no idea what happened. Fortunately,AAAsaidthey would be there in 45 minutes. Two hours and 45 minutes later, they showed up.I missed my flight, I had to fly to a different airport,but I did eventually get here,all for you.
Shen: Dan,I was giving you an opportunity to say thatyou rolled up your sleeves yourself,jacked the car up, changed the tire.
Kline: Here's the sad thing. One,I couldn't have done that, because I was on ahighway with absolutely no room. ButI could have been in a parking lot, andI still couldn't have done that. The guy from AAA asked me, "Do you have a spare?" I was like, "I don't know?" I said, "I have a trunk? There's a possibility."
Shen: Regardless,I'm glad that you can make it. It's always really nice to have you in studio. Fools, our focus for this episode will be technology in the restaurant sector. Before we get into that, Dan, you cover a ton of wireless companies and cable companies, too. You cover themquite extensively. Last week, I spoke with Asit a little bit about thepartnership thatComcast(NASDAQ: CMCSA)entered withCharter (NASDAQ: CHTR)to unite their very significant resources, as they get into the wirelessbusiness. Xfinity Mobile from Comcast is expected to hit the market soon. What are your thoughts?
Kline: I think it's a majoruphill battle. On paper, it makes sense. Just like when any of those companies,any of the cable companies, decide to sell home alarms, there's a logic of, they have the customer base, they already have an install force. But it never works that well, because the reality is, all Americans that want mobile phones have mobile phones. And while there is some churn, the four major wireless carriers are really well setup to bring your number over, to bribe you to make the change. So just because you'regoing to pay a little less, you'regoing to get $5 or $10 back in credit, whatever it works out being with the bundling, I just don't see too many people. And whilenot all the details are out, these systems tend to be limited, where it's just the iPhone. I think in this case, it is just the iPhone so far. Andconsumers are used to choices. So I don't think it's necessarily going to be a failure in terms of, will it add some bottom line for these companies for relatively little effort on their part. ButI don't think this becomes the fifthwireless carrier that gets up to, T-Mobileis in 70-something million homes,I'm guessing at that number, butT-Mobile plusSprintis right around whereAT&TandVerizonare. I don't think itbecomes even a blip on that. It'll be a few millionpeople if they're lucky.
Shen: Sure. Asfar as I know,from what I could find out about the offering,iPhone is definitely the focus, butthey mentioned a few other flagship devices will be available fromcompetinghandset makers likeSamsung. But,don't you feel like,in terms of sheer resources,if there's any company that's going to try andget into the very competitive wireless space,Comcast is in a position where they can throw their weight around.
Kline: I think they should buy Sprint. If youwant to get into this space and you'reComcast, just get into this space. Thenmake a Sprint movie andhave a Sprint ride at Universal Studios, have thecan you hear me now guy, where he saysnow I'm talking, or whatever it is,have him in a TV series on NBC.I don't really get this playing around the edges.Cablevisiondid this.When Cablevision did it,it was much more based on wifi and beingas cheap as possible in terms of using the airwaves,which is part of what Comcast and Charter are doing but only part of it. Andit was very incremental. It was for parents who wanted athird phone for their child butdidn't necessarily want to spend the real money. It's very hard to make people switch fromsomething that works. I haveT-Mobile, I'm not sure what you have.
Shen: I have Straight Talk,which is essentially AT&T, similar service to this, in a way,piggybacking off of a major carrier.
Kline: Right. I know that I get better offers.Sprint and T-Mobile are perpetually battling each other. If I'm happy, I'mnot going to change. You have to mail your phones back andgo to a store and fill out paperwork, it's not simple,and I'm not going to deal with it just to give Charter more money.Charteris still one of the least likedcompanies out there. I don't think people are clamoring to do more business --
Shen: Alongwith Comcast, no less.
Kline: Yeah,I don't think people are going, "Oh,I really want to give these guys a bigger chunk of my business!"
Shen: OK. Well,I wanted to get your first impressions on this. Once itlaunches and we have more information, maybe somefirst-hand experience fromsubscribers, we'll talk about it more, seeif it's having any impact for the business --
Kline: Yeah, we'lltest it. My mom livesin a Comcast van at home, so we'lltry to get a phone and see what it looks like.
Shen: There you go. 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 headlinesrecently that restaurants have struggled with some lowtraffic, declining same-store sales from a period ofoverexpansion, but I wasthinking about this in relation to theseother industries that I've talked about today, with you andearlier in the studio with Adam,the fact that department stores,on the one hand, and cable companies, they face someexistential 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 interestingbecause fast-casual might take share from quick service, thebroad industry might see weakness due toexcessive expansion, like in this case. But in the end, people have to eat, they love eating out. Andas a result, I thinkexecution becomes a really cleardifferentiator betweendifferent chains, and there's not as much of anindustry boogeyman that you can pin your problems to. But on the flip side, you have thesuccess stories, and some of the big trendsI get excited for the restaurant industry includeloyalty programs, restaurants trying to sourceingredients locally, andalso, there's technology. That'swhere we will focus. I think previously, we spoke about how robots, for example, eliminate the need forhuman employees all together. But a lot of the technology initiatives that we'lltalk about today seem to bepreviews of how that might work.
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'relooking here and saying,I'mChipotle(NYSE: CMG), orMcDonald's(NYSE: MCD), or whatever the chain is --how do I maximize my business? What's worked, andit's worked forStarbucks(NASDAQ: SBUX)andPanera, andwe'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. WhenI say game changer, I mean a 2% to 3% net sales gain. It's notsuddenly going to explode their business. Butif you walk into a Chipotle -- andwe've both done this -- and there's10 people in line ahead of you, you might leave, because it's slow. So what a lot of Chipotles have done is set up asecond production line in the store, andif you order from the app, yourfood will be ready when you get there. And they're havingall the same execution problemsStarbucks had. The people at the front don't knowwhere the order is,have you paid, how do you handle it,do you pick it up. Butall that will get sorted out, that'sjust growing pains and retail training,which is not an easy thing to do. So I think at your higher-end places likeChipotle thathave lines, that'sactually going to allow them to serve more customers during peak hours.
At aplace like McDonald's,I think ultimately, there's a gain intaking workers out of the equation. But in the short-term, maybethere'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 likeDomino's(NYSE: DPZ), 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'recalling it "smarter pickup times". They've beenable to quantify some of the benefits in that thisbetter management of their digital orders,they give them more accurate estimates ofwhen orders will be ready. Insome of their testing, they mentioned thatdigital order wait times decreasedas much as 50%. Restaurant staffhave better tools to essentially manage this channel,like you mentioned, during peak business times. Ifthey have a bottleneck,in terms of those peak hours andhow many people they can serve,this can alleviate some of that, then that does flow through to their top and bottom line.
Kline: Andthere's a major customer servicebenefit. If you call Domino's --back in the old days when you called Domino's.I'm sure your generation now isSnapchatting Domino's and then paying viaVenmo.
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. ThePei Wei app is pretty innovative in that you cancompletely 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 beenadjusted to 5:50." AndI went, OK, no problem, I'll leave10 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. AndI think that's where you're starting to seesome of the value in these. Pei Wei is a higher endfast casual concept that can take quite a while in a line.
Shen: So we've talked so far aboutChipotle, Pei Wei,in your experience. I think those are places where the food quality may be up a tier, they'rebringing in plenty of customersin that regard. Going to the more fast casual side, where acompany 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 that500 million orders were lost to theirdirect fast food competitors in the past few years, due to theirissues they faced. The thing with McDonald's is, they sawquite a nice bump,at least relative to theirmore stable industry in their business,due to all day breakfast. That hasessentially dissipated. Do you think thattechnology in this regard can help themovercome some concerns that there always are, in terms of food quality?
Kline: It'seventually going to help them overcome some costs. That,we've covered. In the short term, we'vetalked about this personally butI'm not sure if we've talked about it on the show,if I walk into McDonald's andI want a Big Mac with no special sauce, withan extra slice of cheese, with four pickles, not three, andI 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 amuch easier ability for the person --eventually robot -- making thathamburger to get it right,and a record for if they don't get it right,for me to hand them a receipt, to say, "Thiswasn't supposed to have ketchup." So I think you're going to see a subtle but important improvement,especially on drive-thruwherethere is nothing worse than, youorder your 10-piece McNuggets, yourlarge fries, and you get home with your drive-thru back andopen it up and it's someone else'sBig Mac that you don't want. So I think this is going to eliminate a lot of that pain point, and that willabsolutely have an impact onthe 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'sannounced earlier this year that they would install kiosks at about 1,000 of theirlocationsby 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 thingsmanagement has said that I thinkmake it really interesting, in terms of the lift inticket size that you can get from thesekiosks, there is a quote from,I don't know if it was somebody in their management, but I found this quote thatbasically said, "People who order at a kiosk will generally spendabout twice as longordering with that kiosk than they doif they're speaking directly to a cashier." What thatultimately means or leads to is moreopportunities for upselling --every time you place an order for a salad,do you want to pair that with a soup? Youorder 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. Peopleupsell themselves. When they're ordering a pizza, they add things to it that they wouldn'totherwise if ordering by the phone.
Kline: Andit takes away shame. IfI'm at Starbucks, andthere's a person, I'm going to buy black coffee,room for cream. If I'm ordering on my own, I'm like, "I'llhave 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 andI'm a person talking to a person,I might be like, "I'll have amedium pizza with pepperoni, please." IfI'm on my own, bacon, pepperoni,sausage, and put another pizza on top of it. So you get into some impulse control issues. AndI think there might be some technologyability going forward to managecalories 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 interactwith another human being, you'regoing to order more. You might get that soda you'd beembarrassed to buy from a person, or the dessert, orwhatever it is.
Shen: I think trying to quantify some of these things,some of the benefits we see,beyond the labor cost, thelarge ticket sizes, the fact that people order more, and the fact thatif you order exactly what you want and you're not worried about itbecause you're on a kiosk, you'renot worried about telling the cashier aboutall the different customizations thatyou want to make, you'll enjoy the food more. Andmaybe that leads to better loyalty to that chain,or whatever it is.
Kline: It'salso about removinguncomfortableness. We've talked a lot about this,we both like all sorts of different ethnic food. IfI'm an American and I've never had Thai orKorean 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, "Idon'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 anempanada 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, orallergen concerns, or whatever it is, the more of thatyou can make not embarrassing --as someone who has a food allergy,I hate walking into a restaurant, andI have cousins who have very serious peanut allergies, soyou have to make a big deal out of it. Ifthat could just be something that I could automate andstill 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, whichobviously, hopefully, can help some of theserestaurants during the peak hoursspeed customers through, increase theirvolume. The idea ofsome of these tablets thatrestaurants are also outfitting some of theirtables with. This is more of a sit-down experience.
Kline: I love this. They've been doing this atChili'sforquite a while. We went toSmokey Bones, aBBQ chain, this weekend. The waitress was clearly harried. She had too many tables,she was very stressed out. Andthe fact that I could order a drink andit would show up and it wouldn't be the waitress,it would be someone else bringing it, and thatat 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. Andyou don't want that at a nice steak house. You're not going to drop $200 on dinner andcheck out on a tablet thatyou could play Space Invaders on. That was abizarre game to pick,nobody plays Space Invaders anymore. But my expectations at Chili's are not for fine dining, they'regive me my baby back ribs and fries and get me out of therepretty quickly, bring me another drink. So it really eases theexperience.
Shen: And a lot of restaurants that haveoutfitted their tables with thesetablets have found that people aremore likely to order the ancillary items,higher instances of customers ordering dessert,coffee, other drinks. Those are all nice marginboosters for those businesses.
Kline: There's a window. If you're arestaurant, there's a periodbetween the end of dinner and the feeling of fullness whenpeople will buy dessert. They often regret desertby the time it shows up. That's why most restaurants have a to-gocontainer for desserts you shouldn't have ordered. But if the waitress is too busy ormisses that window, orI would have had another beer if she got to me 10 minutesinto my meal, but at 20 minutesinto the meal I'm like, "Oh,I'm driving too soon," or, "MaybeI don't need to spend this money." So there's an amazing ability to give meevery impulse if I'm sitting there andfinish 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 ofreflection, maybe I would go, this is a bad idea.
Shen: Anoverarching theme,in terms of some of the technology we've had,eliminating the need for anemployee, or someone to actually be the cashier, to be theserver, also maybe minimizingsome of the inconsistency that you can getin terms of the service experience.I want to end the show, though, ona bit of irony. Youbrought this upbefore we filmed, andI thought it was really interesting. Some reports that we have frominsiders in the fast food industry, variousrecruiters for these companies who are running into a lot of problems,actually,staffing restaurants, andreducing some of the turnover that we see,which is at record levels right now, and keeping well-trainedemployees there. Themanagement team at Chipotle,for example, has spoken about how they lost sight of that service side,about keeping restaurants clean,keeping the beverage andfountain machine clean,napkins off tables,trash off tables.I just thought it was interesting that,on the one hand, if you look out 10 to 20 years,you have this idea that you're going to eliminate the need for theseemployees entirely. But right now, evenas they're testing thingslike these kiosks and tablets, which helpeliminate the need, they'realso running into issueskeeping the restaurant staffed. The median wage for fast-food work in this country is $8 to $9 per hour. ButWal-Mart, just two years ago --
Kline: Went to $10.
Shen: -- went to$10 across the country. Acrosstheir entire network of stores,at the minimum. They're runninginto this competitionacross all of retail.
Kline: AndI think you're seeing ajustification for the companies thatinvested in employees. If you look at a Starbucks, which hashealthcare and the college benefits, theirturnover is less.I worked in retail, I ran a store. Justteaching someone all the procedures to run the register took months before they were good at it. If you'reintegrating someone onto the line atChipotle, orworking the fry later and knowing theprocedural manual to clean theshake machine at McDonald's, which is horrifying,my wife having worked there in college -- that's not ice cream. But there's a hugeopportunity cost. If you have been paying better all along, youmight have actually been able to do it with less workers. Now, you're seeinga bit of ahierarchy. IfI'm a worker atDunkin' Donuts,I might be able to get hired at Starbucks, which willtreat me better. IfI'm aTaco Bellworker,maybe I can go to Chipotle or Starbucks.
Andyou're going to start seeing the bottom of the chain --during the last time we had a boom economy, my wife and Iused to joke that you would go to the Dunkin' Donuts andthe people working there would just point, and youwouldn't get what you wanted, buteventually they would get to something you like, andyou would just take that anyway. And you'regoing to start to see realdifferences in service. As acountry, you can argue what fullemployment means. But on a technical basis, we're at full employment, or right close to it, meaning there's not a huge pool of people --there might be lots of people looking for better jobs, butthere's not a huge pool of peoplelooking for entry-level jobs. So you're going to start to see more teenagers.Starbucks doesn't hire a lot of 16 year olds in most markets. But you're probably going to see people like that, younger people, getsome of these jobs, which can be good, but it's also a training issue,it's a scheduling issuebecause they can only work so many hours, theycan't work during school, theycan't work late at night. This is goingto be a major factor, andfor successful chains, it's going to forceautomation.
Shen: Yeah. Andwe've talked before about how,ultimately, labor costs fora lot of these major chains, as much as 25% to 30% of their coststructure is there. It'sinteresting, trying to see them commit to this balancing act that they have, ofmaking sure that right now, where they'renot at the point where they can automate everything, having theiremployees be trained well,making sure the serviceexperience is positive, andkeeping customers coming back.
Kline: I think if you're a worker --I'm not 15 anymore, butI have a 13 year old child, andif he told me he wanted to be amanager someday of a restaurant chain,I would tell him to look at the ones thathave a commitment to people.Starbucks has endlessly said andproven that withautomation, they'renot looking to replace workers, they'relooking to shift the labor flow into production, meaning that there's always going to be an art to building a latte. Yes,you can go to Wawa and get a lattemade by a machine, butthat's not the same as one built by a person. IfStarbucks is saying, "Yeah,we may not haveorder takers who are people, but we'reabsolutely going to have customer service and baristas and product experts, and we're going to put in theseupscale bars, andyou'll be incentivized to learn more about coffee," well,those are the chains thatare going to attract whatever worker pool there is. AndI think McDonald's is going to automate,because it's a difficult job, there's someupward mobility but it's still a hot,sweaty, unpleasant place to work, for the most part. It's allgoing to sort itself out, aslong as the economy stays strong.
Shen: OK. Any final points,Dan, before we roll up here?
Kline: I'm kind of hungry. Where are we going? We'rethinkingShake Shacklater.[laughs]
Shen: I would love that. Thanks again for joining us. Thank you, Fools, fortuning in. Remember, you can always reach out to Dan, me,the entire Industry Focus crew viaTwitter @MFIndustryFocus, orsend any questions to firstname.lastname@example.org. Don't forget to check out ourother podcasts at podcasts.fool.com. Peopleon the program may own companiesdiscussed on the show, andThe Motley Fool may haveformal recommendationsfor or against stocks mentioned, sodon't buy or sell anything basedsolely on what you hearduring the program. Thank you!
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, Starbucks, and Verizon Communications. The Motley Fool owns shares of Panera Bread. The Motley Fool is short Shake Shack. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.