The Smart Menu 

The “Smart Menu” is a description for how the holistic approach to technology will change the landscape for the restaurant industry. Put simply, technology today is much more than the old 1990 POS system (see “Smart menu,” below).   

Success or failure will be defined by the implementation of technology, which may be why Howard Shultz is confident that Kevin Johnson was the right person to replace him as CEO of Starbucks. Johnson was the former CEO of Juniper Networks (JNPR) who also spent 16 years in various Microsoft (MSFT) senior executive positions. 

However, in this latest quarter Johnson had to acknowledge that service problems with delivering on mobile app sales created delays in store purchases, which led to impatient customers leaving without their java. Of course, while admitting this failure, investors should note that the success of the digital program has led to more than $1.5 billion in deposits in the Starbuck bank from its loyalty program. 

Yum China (YUMC) has had a similar success with digital and delivery and reported in its Q4 earnings report that their loyalty programs have more than 80 million members between KFC and Pizza Hut, the highest number of members in the restaurant industry worldwide. The report also noted that total delivery sales reached approximately $700 million, and that they were #1 in online sales in China for restaurant operators in 2016. Cashless payment accounted for about 30% of company sales. 

The effective use of technology in the restaurant industry could not be complete without mentioning restaurant leaders Dominos (DPZ) and Panera Bread (PNRA). Today 60% of Domino’s orders are placed online and delivery is a critical point of differentiation and a big draw for the younger generation. “Speed, ordering simplicity and reliability are elements to the customer experience that make the system work, but the secret sauce is the franchise network that can execute on the promise of speed and low cost that makes Domino’s successful,” Weiskopf says.

The irony of concerns about Amazon moving into the delivery space through the acquisition of Whole Foods (WFM) has a twist. Amazon has a specialized niche in its business strategy and ability to execute, but now they are moving into Dominos’ territory and few know that Dominos stock has slightly outperformed Amazon’s blistering pace over the last decade (see “Dominos keeping pace,” below). 

Panera Bread’s 2:0 technology strategy, much like Dominos, is about the ordering system and arguably a reason why JAB Holdings (JAB) is willing to pay 19X earnings. Current digital sales, which include online, mobile and kiosk, account for about 26% of the company’s sales. Most remarkable is that Panera’s President Blaine Hurst expects that digital sales sometime between 2019 and 2021 could make up more than half their revenues. 

In anticipation of such growth, Panera expects to hire more than 7,500 people for delivery in 2017. By the end of 2017, Panera expects delivery to be available in 35% to 40% of their system-wide network,” according to Weiskopf. 

Of course, the 500-pound gorilla in the room is McDonald's (MCD), which now offers McDelivery through a partnership with UberEats. McDonalds CEO Steve Easterbook addressed the war for the delivery market in the firm’s 2016 Shareholder Report, noting, “We’re also well-positioned to take advantage of the significant opportunities that exist with delivery. One of our greatest competitive advantages is that we’re closer to more customers than any other restaurant company in the world, with nearly 75% of the population in our five largest markets living within three miles of a McDonald’s.” 

Execution, of course, remains the challenge, but it is clear that these companies are aggressively embracing the needs of their customers because they know the pie is getting bigger.

Quick Serve vs. Full Service 

What all this means is that the battlefield is constantly changing, and there is a lot at stake. “The outlook for the restaurant industry is positive for those who are prepared to strategically fight with the right tools,” Weiskopf says. “Technology will be the driver of success, which QSR leadership has clearly embraced.”

“The full-service subsector has also embraced technology – the tablet is an example of how the ordering process at Applebee’s is changing,” he adds. “The full-service category provides some balance in a portfolio and activism in this category could pick up because of its valuation discount. And demographic trends don’t always play out exactly as predicted. “

However, it is clear that the 100 million people who make up generation Y, Millennials and Z need to eat and want something different than their parents. Getting this menu right may present challenges, but given the lead that the QSR has over other services, it would be logical to expect the industry to capture more market share from an expanding pie.