Will restaurant traffic ever grow again?

Can technology enhance your dining experience, or is it slowly eroding the personal touch that makes dining special? Join us as we dissect Pete Wells' provocative retirement essay and engage in a lively debate between Meredith and Carl on whether technological innovations like kiosks and mobile ordering are a blessing or a curse for the hospitality and restaurant industry. While Wells laments the loss of personal interaction, Meredith counters with compelling arguments on the efficiency and satisfaction that technology brings to fast food and casual dining. Drawing insights from our book "Delivering the Digital Restaurant," we delve into the generational shift towards digital preferences and how modern diners are redefining the dining landscape.

Beyond the dining room, we delve into the financial dynamics between restaurants and delivery platforms like DoorDash and Uber. Learn how restaurants might be inadvertently funding these platforms through merchant-funded promotions and the broader implications of this trend. We also explore the groundbreaking potential of reinforcement learning in AI, revealing how it can elevate customer experiences, streamline operations, and drive future growth. Amidst mixed economic forecasts, there's a tech-driven transformation underway in the restaurant sector—tune in to discover how these advancements are reshaping your dining experience and the industry as a whole.

Chapters

• 0:00 Tech's Impact on Hospitality & Restaurants
• 11:31 Impact of Restaurant Marketplace Promotions
• 17:58 AI Impact on Restaurant Industry

Transcript

Speaker 1: 0:00

Is technology really affecting hospitality and restaurants? How is reinforcement learning the centerpiece for AI in restaurants? And the number one question out there what has happened to all the restaurant traffic? That's all ahead on this week's Digital Restaurant. The Digital Restaurant works like this we're gonna ask each other five questions about headlines that affect the worlds of restaurants, off-premise and technology, but in some way tie back to our book series Delivering the Digital Restaurant. Are you ready? Let's go? Good morning, meredith. How are you today? Very good, carl. How are you today?

Speaker 2: 0:47

Very good, Carl. How are you? I'm a little worried. You're stuck in a dark box, it seems. What's going on? I'm in a very dark box this week. These things happen. Sometimes I'm traveling and I just have to record the podcast wherever I happen to be, and this week it's in a dark box.

Speaker 1: 1:02

Hopefully we're not going to have a completely dark theme through the course of today, but one question that I think we have to start off with is one that has got lots of people's attention, a number of different articles. I think Kristen Hawley over at Expedite News brought this one to my attention, but I've seen Joe Koskowski talk about it as well. A certain journalist is retiring from reviewing restaurants over in New York and he has suggested his technology hurting hospitality. I bet you've got some reason for this one, meredith. Tell us.

Speaker 2: 1:31

That's right. Pete Wells is a restaurant critic. It says in his last essay as a restaurant critic, so I surmise from that that he is retiring, I hope going off to do something wonderful. He says I've reviewed restaurants for 12 years. They've changed and not for the better. And you're right. This did cause quite a stir in reaction from Joe Gaskowski over at Restaurant Business Online, as well as Kristen Hawley, who collected input from all of us restaurant tech folks asking what we thought of this, and I would say we all disagree, maybe in different ways, but certainly disagree.

Speaker 1: 2:07

Are you saying that when restaurant technology executives are asked that technology isn't hurting hospitality, the technology executive suggested no, how dare you.

Speaker 2: 2:17

It was pretty predictable, but nevertheless I side with the restaurant tech executives. One of the most fascinating things about the original article from Pete Wells is that he says in it that he spent 12 years as a critic and ate and reviewed restaurants constantly. He says, of those years, I probably spent two solid months just waiting for the check. Amazing, so he says. I ought to be in favor of anything that speeds up the end of the meal. However, he's not.

Speaker 2: 2:45

I think the thing that really got me in this article was then when he brought up Shake Shack and ordering on a screen. Because I kind of understand, okay, in fine dining, like it is the people who make the restaurant right, that relationship with your server having them recommend something to you, maybe the chef coming out to your table, like these are real people making real food and you want to connect with them and talk to them and learn from them. You're not going to that restaurant all the time and so you appreciate the information that they have about that day's specials. I get that. But when you say ordering a hamburger at a kiosk at Shake Shack is just too much, I feel like you've gone too far, because in my opinion and remember I was a QSR executive. In my opinion, for me personally, walking into a fast food or fast casual restaurant ordering something from a human being who probably is paid minimum wage, maybe slightly above, who probably doesn't really want to be there and who has a high probability of hearing what I said and entering it into the screen wrong, I would rather enter it into the screen myself. This is what is brilliant about mobile order ahead. This is what's brilliant about kiosks. I know when I enter it that I'm going to get it right and I'm going to be able to check it. And if I don't get it right, guess what it's on me. I have only one person to blame because I'm the person who did it. So that felt like he went too far.

Speaker 2: 4:13

And then, when I read through the entire article, it fundamentally misses the point of where we're going as a culture toward greater convenience, toward wanting to be able to be self-actualized. Through our technology, we get to do things and have an effect on the world without having to rely on another human being, which I guess is the exact thing that he misses and doesn't like. But for kids these days, for everyone who's younger than you and I, carl, they would much rather talk to their computer than talk to a human being. We talk about this in chapter six of Delivering the Digital Restaurant the Path to Digital Maturity. That's the second book where we have the example of Luis going with his grandmother to the Starbucks drive-thru for the first time and not wanting to talk to the box and really preferring to just be able to type it in on his phone and being totally confused why he has to talk to a box and wanting his grandmother to do it for him. That's the kids these days.

Speaker 2: 5:08

To me, the article maybe is written from the perspective of someone who's used to doing it the old way and who would prefer doing it the old way. He complains about the reservation bots which we spoke about on the last podcast, and I understand that, but then he goes so far as to say that he would actually prefer to call someone and talk to them about a reservation and have them say oh, we're looking forward to see. I would rather be able to look on a platform and see these are the eight restaurants that have room at the time that you want to go. Which of these eight sound good to you, rather than call it 50 to find the eight that have room. I think maybe it's a generational thing. What do you think?

Speaker 1: 5:47

I think it probably is a generational thing. I think we've got to be mindful that he has probably had a specific type of role going to specific types of restaurants. So I think the fine dining angle that you portrayed is an important one. I think there's also something here that, ultimately, if technology is truly deployed in the way that you and I, when we're wearing our futurist hats, if it's truly deployed in a way that you can grasp data and truly understand every single customer and create that experience that only the top 1% of waiters and waitresses around the world can create because of just their capabilities of remembering people and their preferences, if you can do that for the majority of your customers, which will come through harnessing technology and the data that comes with it, then ultimately you're creating a more hospitable experience. So I think there's actually a future whereby, hopefully, it'll have a different experience and a better experience once restaurants have really got their hands around the technology challenge that exists right now.

Speaker 2: 6:45

Yeah, that's probably true. As a restaurant critic, he probably goes to the very best of restaurants and is served by the very best of servers and has the very best human experience that one could possibly have. Most of us don't get that in our day-to-day lives. Carl, where has all the restaurant traffic gone?

Speaker 1: 7:01

Yes, good question, meredith. I think that is the question on the lips of pretty much every restaurant executive out there right now. Is it fair to say? I think it's probably the number one thing Everyone is struggling.

Speaker 1: 7:12

Jonathan Mays this week put a line or two out there saying that the word challenging appeared 71 times in earnings season. So challenging basically means traffic rising costs. But I think when we really dig into the article that I highlight for this particular question, I'm actually referring to Peter Romeo's words around it where he touches on Applebee's, where they said they analyzed where their customers were going, where they didn't drop in for a burger, and they found a clear answer. And their answer was nowhere, in the sense that they were losing their patrons to home cooking. And he referenced back to that social dynamic since the rise of the two-wage owner households in the 70s and 80s and perhaps this inflationary environment, the fact that now it's just so expensive to eat out that people are now actually getting to a point where they say you know what? I know it was convenient, I love the fact that actually I could order in or could pop out for a meal, but now, given the expenditure that I have to incur as a result of eating out to the same frequency. I can't do it anymore and so therefore we're just going to eat at home or eat smaller portions. So I don't know, meredith, this one is one where I think everyone in the industry right now is trying to address it. We know that the big fast food joints like McDonald's are trying the $5 meal deals. Of course they're probably hoping that it can increase the visit frequency and therefore maybe at the same time tempt someone through additional basket building. I suspect a lot of the casual dining sector are redoing their menus, building value-orientated menu sections, like we're seeing at the likes of Outback with their $15 three-course meal. It was probably this time last year, wasn't it, when we were talking about the way in which the incentives were being driven by the likes of Domino's to pick up versus having food delivered. I think all of these things are understandable efforts by restaurants of different types and categories to try and address the value concern that is very real out there.

Speaker 1: 9:08

But I was intrigued by the First Watch response in the article where Chris Tommaso, who's the CEO over at First Watch, was saying what they're doing is not necessarily triggering more of a value messaging, but actually turning back to their 7 million first party ordering customers.

Speaker 1: 9:27

And in the article he says it all comes down to the messaging how can we target our own audience better?

Speaker 1: 9:33

And I think that's a really interesting one just to dwell on a little bit, because he talks about increasing the frequency of communications, which I'm not completely sure whether that's true, because if you drown people in incessant messaging it's only going to turn them off and you're going to hit the unsubscribe button. But I do think it comes back to what we were just talking to a moment ago, in the sense of if you understand who your customer is and you've already got them as a loyal customer, or at least a customer that knows who you and your brand are, then maybe you've got some opportunity there to be able to figure out how exactly to message to them, to remind them of you and your brand and also to encourage them back in, and for some that might be value, for others it might be the latest LTO, others might just appreciate that word hospitality treating them like you know them, and that could be a reason why they'll come back into you the next time they choose to dine out. What are your thoughts?

Speaker 2: 10:24

I think that's so true. I think customized messaging back to people who already know you. You've already acquired that customer once, right. How can you make the most of that relationship, being able to talk with them, whether it's via email or text, having the systems in place to know them, to know their behavioral data over time, and then to be able to talk to them about the things that unique person cares about? Those are the things that are going to bring at least the right people into your restaurant. Now, if the whole industry is having a transaction problem, we can't all drive frequency at our brands. At some point we actually have to deal with the underlying value issue as an industry.

Speaker 1: 11:06

Hi Carl here. Just as a quick reminder, please remember to subscribe and give us five star for the Digital Restaurant Podcast. Your reviews matter. They really help us make sure that we're providing the right content that's relevant for you. Thanks for listening. Keep on watching and, as always, leave your comments below with questions, thoughts and recommendations on what we can cover next time. Okay, third question I know you love this time of year earnings calls. I'm sure you've been spending your nights going through all the different restaurant earnings reports, but this question actually relates to the marketplaces DoorDash and Uber, of course. And here's an interesting one for you Do you think restaurants are financing what DoorDash are saying is an increased take rate?

Speaker 2: 11:51

I do and, as ever, it's extremely difficult to understand what's going on in DoorDash and Uber's earnings reports. They do not break out US restaurant delivery. They certainly do not break out US what I'll call same store restaurant delivery. So you have no idea to what extent they're adding merchants versus existing merchants. Are getting more orders? Impossible to say. They conflate so many different things together in terms of geographies and categories that it's really hard to tell what's going on. But both of them had great earnings reports. Both of them are talking about getting at least adjusted EBITDA positive. They are experiencing ongoing growth in the number of orders, ongoing growth in marketplace geo relatively good news news and is, in fact, a little bit confusing versus what we just talked about with inflation and the lack of transactions in the restaurant industry. You would think and I think Joe Koskowski says this as well you would think, if consumers are displaying some resistance to overall price increases and inflation and they're starting to pull back on transactions and trade down in terms of number of items or types of things that they're buying, you would think the first thing that would feel that would be delivery. Because of all the things out there that are totally discretionary and really expensive. Delivery is absolutely one of them. Doordash actually went as far as to say in their earnings that their business was not feeling any of the effects of inflation, which is a surprise. So what gives? How is this happening? How are the delivery platforms continuing to see ongoing growth when the rest of the industry is?

Speaker 2: 13:42

I think the answer lies in two facts that you can see. Inside of their earnings reports For DoorDash, they say their net revenue margin is growing. We also call this a take rate. What this is? Basically their own revenue as a percentage of marketplace GOV. So of all the orders consumers place, it's total GOV gross order volume. How much of that is turning into revenue for DoorDash itself? And that number a year ago was 13%. It has been climbing and is now at 13.3% right, so of every single order that goes through, they are getting 0.3 points more of that order.

Speaker 2: 14:23

When you couple that together with a statement that Uber made in their earnings report that merchant funded promotions are up 70% that's 7-0% year on year you start to see maybe what's going on, which is restaurants are spending money on advertising on platform under the theory that these consumers are going to be on platform anyway. I might as well, get my fair share. The way to get my fair share is to do sponsored listings and promotions that they're paying for both in their ad spend but also on their P&L right. When they run a promotion, that shows up in their cost of sales, in their cost of labor, and I believe that what's happening is that DoorDash and Uber are then using that money to increase their own take rate as well as convince consumers to keep ordering on platform. So we've now got a situation where restaurants, instead of advertising to draw consumers into their own restaurant or onto their own first party channels, are spending advertising dollars basically to convince consumers to go to third party. That's what I take away from reading these earnings reports.

Speaker 1: 15:32

When you think about the amount of restaurants marketing budget these days, I wonder what proportion of that budget goes towards third parties and that question you asked there as to what would the impact be if some of it was reapportioned to other areas like first party awareness, for example, and is the win from doing that worth it? And I think that's a really tough question to answer. It'd be interesting to hear from anyone else out there who's currently trying to tackle that challenge.

Speaker 2: 15:59

Yeah, I would love to know that. I think Also like these promotions right? If you spent those promo dollars on actually making your own menu prices more palatable whether it's through a value meal or, frankly, just having reasonable prices and not increasing prices as much your first party is going to become more attractive and instead you've got all these promotions on third party. Consumers are not dumb. They go where the deals are right.

Speaker 1: 16:25

So if they know that they can rotate through brands and get a deal every day somewhere on platform, they're going to do that, whereas if they know that they can get a reasonable value going first party, they're probably going to do that there's a good point you're raising about the prices on marketplaces and the impressions that you can actually get from it as well, because remember when we were talking about that last year, saying be careful, because this could be the place where customers get an impression of what your value equation is as a brand and therefore equate that to every channel right. So that's coming through too.

Speaker 2: 17:03

Does reinforcement learning form the centerpiece for ai utilization? Carl, first of all explain what is reinforcement learning yes, I will do that.

Speaker 1: 17:12

I don't think we've ever have explained what it is. It was referenced. I was looking at my own little earnings call reports this week because young brands had their q2 earnings call and they talked about reinforcement learning as part of their expansion into AI initiatives. Of course, they're doing a lot of stuff in the drive-through, as many of the big QSRs are, but this reinforcement learning, it's not exactly new. It's nothing particularly revolutionary, but it's a powerful branch of AI that trains models to make optimal decisions through continuous feedback. It's a machine learning technique. It's training software to make decisions to achieve the most optimal results. It mimics the trial and error learning process that humans use to achieve their goals. Reinforcement learning allows these systems to learn and adapt in real time, improving with every interaction. What does this mean in a practical sense? It means that as an AI systems engage with customers, whether it be through a drive-through or a mobile, they become increasingly effective at personalizing recommendations or streamlining operations or ultimately, just enhancing the overall customer experience. And, of course, it can go way beyond just the drive-through.

Speaker 1: 18:24

We talk about AI these days largely through the concepts like voice AI at the drive-thru, but it could help with kitchen operations as well. Right, it could think about the monitoring of cooking times, being able to automatically adjust to ensure consistency and quality depending on the delivery channel. It could also help with inventory management, reducing waste, ensuring that popular items are always available. As such, it could help with staff scheduling, because, if you can have that reinforcement learning happening, you can predict customer traffic patterns and therefore allows you to optimize your staffing levels. We've talked already today about personalized marketing as another area. Of course, if you can analyze customer data, then you can use this technique to create highly targeted promotions. Maybe that's the thing that first, what you're going to do with regards to those 7 million customers that we were just mentioning.

Speaker 1: 19:12

It can also help with menu design. Think about how, if you could use very clear analytics associated to different menus and testing different menus, of placement, of where different items are on the menus, that perhaps could help you think about the way in which you design your menus and then also, ultimately, what you even put on those menus, by evaluating the sales data and customer feedback. And, of course, all of this will then play into the loyalty space as well, and also your old world, right, meredith? New market entry how can we use data to determine where we open up our next location. So this reinforcement learning piece is, as I say, a term that perhaps many folks haven't heard about, but this really, I think, is going to be the hallmark of how AI comes to life in the restaurant industry being able to use dynamic data to influence and improve decision making. So very exciting.

Speaker 1: 20:02

Yum Brands, of course, were talking about their 40 or so AI initiatives, which they're trying to deploy across various different functions. It's going to be really interesting to monitor that. They're working with a startup that wasn't named to help them in this area, and I suspect they've got a few different parties helping them in the predictive modeling space. What are your thoughts? Are you excited about your prior employees in this area?

Speaker 2: 20:23

It just dramatically speeds up the cycle time. We used to have in the old days what we call giant multivariable regression models. You essentially would have an algorithm, as you said, for something like where you're going to put a restaurant, but you would have to update those models. You couldn't do it more than say, I don't know, annually you'd go update the model. You couldn't do it every time you had new data points. But now computing power has gotten to such a place where you can update it all the time. I think that's basically what you're talking about, right?

Speaker 1: 20:50

Yeah, exactly, it's not just updated but actually it can work real time. So let's go back to the drive-through, for example. Imagine a data point says that when it's raining you actually see a different type of response from how customers order. That real-time data can be utilized and learned over time to then perhaps suggest different types of promotions or different types of items to the customer in the drive-thru at the moment. So pretty exciting stuff Very early days, but this gives, hopefully, folks an indication as to where things might head. Okay, last question this week we had a bit of dark news, didn't we Talking about technology hurting hospitality and DoorDash and restaurants financing things. The good news that we saw from this last one is that at least the forecast is positive for restaurant growth. Meredith, are you feeling positive about the future?

Speaker 2: 21:37

I'm not feeling super positive reading this, but nevertheless I'll give it a shot. We've had an updated forecast come out from IFMA, which is the International Food Service Manufacturers Association, and they say that the restaurant industry is going to grow a half a point in 2024. So I guess that's good news that we'll see a half a point growth. But you'll remember that only a few podcasts ago we talked about the forecast coming out from Technomic said that they were taking their forecast down from 5.3 to 3.8. And I'm pretty sure that 0.5 is less than 3.8. So while it's still growing, it is not growing as much as the last forecast we talked about, so that's a bit concerning.

Speaker 2: 22:25

Now I do want to put this in perspective. I believe we are on a long, slow, steady march towards greater convenience. We've been doing that for a long time. I think it was 2014 that restaurant spend first was larger than food at home or grocery spend, and I think that will continue.

Speaker 2: 22:41

I believe that in my son's lifetime, cooking will be a hobby, the way that sewing has become a hobby. My grandmother made my mother's clothes. My mother sometimes made clothes for me. I have never made anything for Lincoln, ever, nor will I, and I think that is probably emblematic of where we're headed with food Now. Will it happen as quickly?

Speaker 2: 23:03

That was three generations from my grandmother to my mother to myself? Maybe it'll take a little bit longer and certainly it will require us fixing this value issue, and this maybe goes back to the question I asked you. On question two, I thought this really interesting post from Heather Haddon about a week ago on LinkedIn that said food companies are working on fixes for consumers fed up with high prices, while trying to protect some of the biggest profits earned in years. Last fiscal year, each of the 10 largest restaurant chains by market value posted a profit that met or surpassed 2019 levels. That's a truly astounding statement, because I think restaurants have bemoaned, as you would say, the challenging environment and they would talk about oh, inflation, it's so terrible, it's been so hard.

Speaker 2: 23:51

Little known secret inflation is great for restaurants, and why is that? Because they're a high fixed cost business with a lot of debt, so they have a lease in yesterday's dollars. They have debt in yesterday's dollars, and if there's a lot of inflation, yesterday's dollars are not worth as much, so they now get to pay off their lease and their debt with today's dollars that are worth more, so that's going to cause them to actually enjoy an inflationary environment.

Speaker 2: 24:20

If anything, a deflationary environment is terrible for restaurants. We know this to be true because the top 10 restaurants are actually doing pretty well. Until they figure out how to right-size their model to reflect what the American consumer can actually afford, we might be on a little bit of a hiccup of our long, slow, steady march towards greater convenience.

Speaker 1: 24:41

Well, I think that was a pretty noble attempt, but I've just received a text from Lincoln and he says yeah, I absolutely do not want my mom to be making clothes for me. So that's good news for you, meredith. I think it's fair to say.

Speaker 2: 24:57

Lincoln doesn't text you, he only texts Alicia.

Speaker 1: 25:00

All right, alicia texted me. All right, look, that is it for this week. Uh, lots of lots that we've covered. Love to get your opinions as to what you think about, uh, the future for the industry. Uh, do you think technology is helping or hurting the? Uh, the theme of hospitality. And what about, uh, those third-party marketplaces? Should we continue advertising on them or should we re-divert those funds into other areas? We'd love to hear from you and, as always, if you have any thoughts as to what you'd like us to cover on our next podcast, please get in touch. But until next time, thanks for listening. The Digital Restaurant Podcast is available for you to follow and subscribe. Wherever you listen to your podcasts, watch us, rate us and subscribe to the Digital Restaurant on youtube, and follow along on all our social media digital restaurant channels. Thanks for listening.