We’re living in the Fourth Industrial Revolution — an exciting time, to be sure, but a pretty frightening one for restaurant CEOs. Restaurants already have so much to deal with on the day-to-day, from labor and food costs to staying relevant in the age of new competitors. Even those who include trend forecasting in their business models (as all should) likely weren’t even projecting the recent announcement that Amazon would acquire Whole Foods in a $13.7 billion deal.
The pace of change is moving faster than ever before. Today, restaurant chains aren’t just competing with their direct competitors, but with a new slew of delivery bots, meal kit companies, and tech-friendly pizzerias, all jockeying for their share of consumers’ stomachs.
Competing in this new age isn’t easy, and, moving forward, the biggest advantage will go to the most well-run organizations, those who have the foresight to plan ahead and, if they can’t, the wherewithal to hire outside help. Those who can’t compete in terms of price, convenience, service, and technology, will fight an uphill battle against an undefeated competitor.
In some cases, restaurant tech initiatives are paying dividends, and there’s likely no chain that provides as solid a case study as Domino’s. The emphasis on tech has proven to be a differentiator for Domino’s, which competes in the highly-competitive pizza sector. There are 23 pizza brands among the top 250 restaurant chains in the US, according to Restaurant Business Rank’s Top 500 Chain Restaurant Report. Still, sales are highly concentrated. Pizza Hut and Domino’s — both of which have implemented a number of tech initiatives — hold almost half of the market share (48.1% of 2016 sales). Including Little Caesars and Papa John’s, the top four pizza chains comprised a 77% slice of all pizza sales.
Since Patrick Doyle took over as Domino’s CEO in March 2010, the pizza chain has implemented a slew of tech-friendly initiatives. The company began turning to technology to streamline the delivery process, seeing a nearly 17% year-on-year growth in revenues as a result. Over the past five years, it has unveiled ordering via Twitter, Slackbot, Facebook, Amazon Echo, and Apple Watch — and the chain’s delivery market share increased 24% (and its stock prices soared 880%) in the same time period.
Doyle once famously said his chain was “as much a tech company as we are a pizza company.” In fact, its stock performance rivals that of some of even the largest tech companies, including Amazon, Google, and Apple.
What sets it apart from its competitors, however, isn’t merely tech for tech’s safe. Instead, the chain has been relentless in its pursuit of technological projects that will resonate with consumers and make sense for the brand, which Doyle has deemed “relentless, meaningful innovation.”
The QSR chains that have seen the highest growth in Average Unit Volume (AUV) have a couple things in common: 1. Simple menus (as menu complexity increases, the growth in AUV generally seems to decrease) and 2. An emphasis on tech and digital ordering. Those chains at the top of the list also get top marks for speed and efficiency in drive-thru (which, of course, comes via investments into technology).
No longer is “high tech innovation” relegated to tech companies. Chick-fil-A, for one, has placed much emphasis into its tech strategy, having rolled out a digital-ordering app in 2016. The fast-food chain also has a partnership in place with Georgia Tech, with which it shares a 6,000-square foot satellite center, in addition to its three internal innovation centers. The company’s senior manager of digital experience, Michael Lage, came to Chick-fil-A after stints at both Google and Facebook. Lage led the team that launched Chick-fil-A’s One App, which lets customers use their phones to place an order, customize their meals, and pay in advance to skip the line — similar to the Starbucks app and rewards program.
The restaurant chains that have made technology investments in a strategic fashion can measure its effectiveness in more ways than one. Not only are customers spending more, and visiting more often, but the chains themselves are expanding rapidly as a result. Starbucks launched its mobile ordering technology in 2015 (part of its customer loyalty program), and the technology has become a feather in the coffee chain’s cap in the years since. Today, US customers pay for more than one in four Starbucks orders using a mobile device — a number that’s been steadily growing right alongside the number of the chain’s locations.
Between 2003 and 2016, the number of Starbucks units grew at a 10.0% CAGR, while other big players in the foodservice sector — like Yum! and McDonalds grew — in the low single digits. (McDonald’s is currently testing a mobile-ordering app, but hasn’t launched anything nationwide just yet). The coffee giant, meanwhile, expects to continue its performance in the foreseeable future.
At the end of 2016, Starbucks announced a five-year plan to open 12,000 new stores worldwide, increasing store count by 48%. As impressive as the announcement seemed, the company was already on track to expand at that rate. Maintaining the average growth of the last thirteen years would result in the chain opening 15,400 stores by 2021.
In a recent earnings call, Starbucks executives pinned much of the company’s expansion plans on its laser-focus on technology. CEO Kevin Johnson, a Microsoft veteran who recently took over from founder Howard Schultz, told investors that,
“looking to the future, this is all about how our digital relationships with customers intersect with experiential retail in our stores.” The chain is currently working on a new Digital Order Manager, that will allow for better tracking and real-time order management, and re-thinking its store layout to coordinate with the new technology.
Johnson told investors on the April call that Starbucks’ digital efforts will be key to addressing “the seismic shift in consumer behavior underway and the devastating impact that this sea change in behavior is having on many traditional brick and mortar retailers.”
Investor sentiment for certain fast-casual concepts seems to be waning. Eight fast-casual chains are among the most-shorted restaurant stocks, with Shake Shack and Zoe’s Kitchen at the top of the list. There’s been at least one standout that bucked the trend, however — and it’s one of the most tech-friendly chains in foodservice. Panera, with less than 3% short interest, has made a massive investment into tech.
In April 2012, the fast-casual chain unveiled Panera 2.0: a series of integrated technologies for digital orders, payment, and operations. The chain invested some $42 million but, by doubling down on digital, Panera increased sales, improved ordering times, and less friction throughout the process. Investors saw a 10% return on the investment.
Blue Apron made headlines when it went public with an expected valuation of $2 billion in June — the first meal kit company to do so. There’s no question that meal kits, a $1.5 billion- and-growing industry, have taken share from restaurants. According to a company filing, Blue Apron’s net revenue grew from $78 million in 2014 to $795 million in 2016. Still, we’re only on the cusp of the marriage of food and tech.
And though the meal kit industry shows no signs of slowing (despite sprouting up seemingly overnight), it’s already been dealt a big blow. In what could be single most impactful recent acquisition for the industry at large — Amazon has announced it will acquire Whole Foods for $13.7 billion. When Amazon applied for a trademark for its own line of meal kits, in mid-July, shares of Blue Apron’s stock fell — and a whole slew of grocery chains were likely none too pleased. Sure, this is bad news for meal kit companies and grocery stores but for many mature and incumbent U.S. restaurant brands, the danger of Whole Foods + Amazon may be, as yet, unimaginable.
The pace of change is certainly accelerating — and, as evidenced by recent announcements, will only continue to do so. The unfortunate victim inside many organizations is the planning process. When management teams seek to microwave their corporate plans, skipping steps in the diagnostic work requisite for solid strategy, they often later regret the failed and avoidable consequence.
The measure of success moving forward will be how restaurant chains and foodservice companies respond as new disruptive technologies emerge. Simply throwing around words like “innovation,” or quickly rolling out a mobile-ordering app, will not suffice. Instead, success will hinge on strategic, long-term thinking, with an eye toward the future.
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Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketing, branding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We work alongside senior executives of some of the world’s most successful foodservice and hospitality companies to visualize, plan and implement innovative ideas for leapfrogging the competition. Collectively, our clients post more than $100 billion, span all 6 inhabited continents and 100+ countries, with locations totaling tens of thousands.