Restaurants platforms - are chains going to follow the hotel model?

Explore the pulsating heart of the restaurant industry with us as we dissect DoorDash's latest earnings and the seismic shifts in food prices that have reached a 30-year summit. As we navigate through the financial intricacies, we shine a spotlight on the subtle strategies at play in this fiercely competitive market. From Focus Brands' pivot to a platform-centric approach to the ways in which soaring costs shape the dining landscape, we're serving up a full course of analysis that promises to satisfy your appetite for industry knowledge.

Venture into the future with us as we stir up the conversation on dining and retail's evolving symbiosis. With insights into Walmart's intriguing partnership with Wanda and the innovative models that Cluster Truck and Kitchen United bring to the table, we question the traditional boundaries between shopping aisles and restaurant tables. And as we chew over Chipotle's sustained financial success, we ponder the potential market disruption ushered in by alternative delivery services and semi-prepared meal kits, all while food prices continue to climb.

Cap off your experience with a taste of tomorrow, as we examine Wanda's acquisition of Blue Apron and mull over the savory prospects of drone delivery. Not to be outdone, we delve into Cartgen robots' dance with Uber Eats in Tokyo, a city that may well become the proving ground for automated delivery in urban jungles worldwide. Join us for a rich blend of strategy, technology, and culinary evolution that's tailored to satiate your curiosity and whet your appetite for what's next in the digital dining domain.

Transcript

Speaker 1: 0:00

The price of food at its highest point in 30 years. What's confusing about DoorDash's latest earnings reports? And are restaurants becoming more like hotels? That's all ahead on this week's Digital Restaurant MUSIC. Happy Monday, meredith. How are you doing today?

Speaker 2: 0:21

I'm doing very well. Happy Monday to you, carl, and how was your trip last week?

Speaker 1: 0:26

Well, I did 17,500 miles in about 72 hours, which I calculate at me running at an average pace of about 240 miles an hour. So suffice to say, even a few days later, I'm still feeling the repercussions of that. I'm a little bit nasally, so apologies to those of you listening to me through a podcast of your choice, but I'm feeling OK. How about you? You're in Carbo, have a nice little break.

Speaker 2: 0:48

I did not go nearly as fast. Mostly my average speed was zero. I sat completely still for a week by the pool.

Speaker 1: 0:55

It was lovely, but it was Lincoln's birthday and it was Lincoln's birthday, and so every year we go celebrate in a place like Mexico, you're set in a standard that he's going to expect to continue into adulthood, so you're going to calm him down as he gets into his teens. I'd suggest.

Speaker 2: 1:13

But there's two Lincoln's, so I feel like celebrating his birthday in style and also the president's birthday in style is a great thing to do there you go, there you go.

Speaker 1: 1:21

Well, talking of presents, I was actually talking to a prince in Saudi Arabia. So we now have displayed our book in front of royalty, so that's, that's a good sign for us. But look, we can't keep talking about our travels. Let's talk about lots of news articles that were happening over the last couple of weeks, and I know, as ever, you love to dig in to results, and DoorDash reported their earnings better than expected. I think it's fair to say.

Speaker 2: 1:44

Yeah, they sure did. So DoorDash's earnings have come out and three key points that made me feel pretty good about DoorDash and how they're doing. The first was that their monthly active users and order frequency are both up and unlike over. Their take rate is actually up as well while those things are happening. So a healthy business performance not being funded, it seems, by reducing their price. However, a couple of things to note here.

Speaker 2: 2:11

Number one DoorDash is certainly running a lot of promotions right now. I don't know if you've received any yourself. There's been a lot of people posting on LinkedIn about some of the promotions that they've seen and, of course, their ad business is growing. This is the same thing I said about Uber two weeks ago. I think. They're basically taking money from the restaurants who are advertising on their platform and then reinvesting that money to spend on consumers, to get them to order more frequently, to keep ordering and to acquire new customers. So in this way, the restaurants are really subsidizing DoorDash and Uber Reads to grow themselves and to keep themselves stable and to keep people ordering. Not sure it's a great decision by all the restaurants, but they would have to decide all at the exact same time that they're not going to advertise anymore in order to reverse this trend. So one other thing we've heard about DoorDash is that they are paying money to get high volume delivery restaurants to go exclusive on their platform. Now heard this from two restaurants that they've been offered $30,000 in upfront cash to go exclusive with DoorDash for a year. So that tells you that DoorDash is also not just trying to get the consumers to buy more, but trying to get the restaurants who are doing a lot of deliveries to go on their platform.

Speaker 2: 3:27

A lot of things happening behind the scenes that they don't necessarily talk about in their numbers or in their earnings report. The other thing that I thought was interesting is that they referred to growth this year at a similar rate as 2022 for restaurants specifically, and this has always been a challenge in both Uber and DoorDash earnings that they don't make clear what's going on in US restaurant growth specifically. They hide it in a bunch of verticals, maybe in a bunch of geographies. It's really difficult to tell. But growing at a similar pace as 2022, which last year they called stable, feels very much like an ongoing low single digits growth rate that they're just not telling us about. I feel like if it were higher than that they would shut it from the rooftops, so hard to say what's happening there, and it doesn't feel too great if it's coming from a lot of subsidies to both restaurants and consumers to get them to behave in this way.

Speaker 2: 4:23

The final thing that was really interesting is that at the same time, a story came out saying DoorDash earnings are up but meanwhile drivers suffer. The average DoorDash driver and UberEats driver has seen their earnings decline, according to a new study out by GridWise. Now, for those people who don't know it, GridWise is an app that drivers can use to help them figure out should I be on Lyft right now? Should I be on Grevhub? Should I be on DoorDash? Should I be on UberEats? Should I be on Uber? As a result, they have tons and tons of data on the gig economy and what these drivers are doing, where they're going, how much they're earning all kinds of fascinating stuff that they put out in this report, which we'll put a link to in the notes. So, while DoorDash is apparently doing pretty well, the drivers are not benefiting from the growth that DoorDash is seeing. That's a lot in one earnings report, considering how little they said about restaurant.

Speaker 1: 5:17

Yes, it's all blown together with the non-restaurant versicles which we know they've been putting a lot of attention into.

Speaker 2: 5:22

no doubt, Okay, next question for you. Carl Focus has rebranded itself and is now a platform company. Platforms are very trendy in technology. Apparently, they're now very trendy in restaurant.

Speaker 1: 5:33

Yes, focus Brands. Of course they're the parent company of Auntie Ann's McCannis' Deli Jamberjuice. They've rebranded themselves to go to foods and, more personally, they're shaping their future direction by describing themselves, as you say, as a platform business. Now, having sold to groups like this in my past, they're typically structured by their brands and each brand has a brand president and a structure beneath that person and therefore the organization, the data, the technology and the marketing are shaped in such a way that's most appropriate for that specific brand. So by changing to a platform, it's actually taking advantage of the economies of scale that can be utilized across, in Focus's case, 5,000 stores. So it makes sense right, and there's an analog here which the article that we refer to is actually saying that this is very similar to what happened with hotels.

Speaker 1: 6:21

You think of the, the Marriots of this world, of the Hilton's and as they've expanded numerous brands or acquired them, they've got all these different types of offerings for different occasions at different price points, but still channeling them to their customers through one single voice. So one might make a case to say how can it make sense to have such radically different customer value propositions under one banner and operate under a single platform? But when you wrap them together under a transactional data banner, a digital marketing banner and a loyalty banner, it starts to make a bit more sense. And for me, I think it's the opportunity to service a customer through different occasions with different offers that really matters most. There are times when a jabber juice might be appropriate for someone and a time when a Cinnabon makes more sense. If you can acknowledge that collectively, understanding the customer through a platform setup, you can then recognize the cumulative view of using customer level data and with that you can then improve your marketing to that specific customer, providing more value to that customer. If you can perfect your marketing associated to that customer, then you theoretically can improve the return to the total group.

Speaker 1: 7:25

Similarly, through loyalty, if you can earn rewards and be given a more personalized experience through loyalty, then you can ensure your guests are receiving the right type of program that fits their needs, whilst also giving them opportunities to perhaps discover new brands that they might otherwise have not known about.

Speaker 1: 7:40

Internally, this enables more synchrony in systems, enabling all of this to happen, from the POS to the customer data platforms. Technology integration becomes clearer, cleaner, albeit probably a bit complex to get them to that point, but it then really drives a bit more of a robust, efficient means, I think, of driving towards what we talk about all the time, and that's becoming a stronger digital restaurant. I think it's a shift not just in operational strategy, but a broader adoption of how a proven blueprint for success in the service sector is now playing out in our sector. You know, the approach enables restaurant platforms to achieve the same level of custom loyalty, brand recognition, operational efficiency that allows hotel chains like Mary Ann Hilton to dominate their markets. And so you know, the future of dining, I think, as we know, is increasingly digital, data-driven. It's centered on delivering exceptional personalized experiences, and I think when we see what's happened in hotels, it makes sense that it's going to come to restaurants too.

Speaker 2: 8:35

I feel like in hotels. The primary reason they did it was to capture the consumer first party or direct, and to take power away from the big platforms like Expedia and booking, and I wonder if that is a little bit what's at play here too. You know you referred to it with the Loasley programs combined customer data, the ability to market. Do you think that, ultimately, anyone who's got a platform, whether it's Yum or Focus or Inspire, is attempting to create a system where they can keep the consumer coming back direct, regardless of what their specific needs are for any given meal?

Speaker 1: 9:10

I think so. I think that's exactly it and we're seeing it with some of the smaller groups out there right, savory, craveworthy they're all starting to establish this idea of saying how many trips a year can we realistically achieve for one particular brand. But if we have this appreciation of having a catalog of different brands and being able to use this collective data to be able to drive repeat purchases across the entire brand family, then actually that's a better place to be than having to operate them individually. Hi, carl, here, just as a quick reminder, please remember to subscribe, like 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, let's go to our third question. Food cost has the highest share of the American Wallet since the movie Terminator 2 came out 30 years ago. My goodness, tell us more about this one.

Speaker 2: 10:11

Well, that was a long time ago. Way back in 1991, food was eating up about 11.4% of the average Americans. That number fell to sub 10% for many, many years and then kind of hovered in between 10 and 11. And now is back up to 11.3%. And this is of course due to all the food inflation that we've seen, both in food at home or grocery and food away from home or restaurant. The cumulative effects of those price increases over time, most notably since COVID occurred and there were all kinds of shortages, massive inflation in the actual input cost and now, of course, everyone dealing with increases in labor costs. And then the major disruption that delivery and technology have brought to the restaurant industry, where you see restaurants saying things like well, I've got to give up a whole bunch of my margin to these third parties, so I'm going to increase my prices even further to make the whole thing work.

Speaker 2: 11:13

So here we are with very high food costs. And, of course, two interesting things about restaurant. One, when you compare it to grocery, grocery is very volatile. Sometimes it's positive inflation like five. Sometimes it's negative deflation, it's going like negative 2%. Prices actually go down at grocery. In restaurant you never see that. It's just two to 3%. Of course, it's been higher than that in the last few years, which leads to the second interesting thing, which is that restaurant margins are at an all time high. If you look across restaurants over the last four years since COVID, you'll see that average Eva Dow margins are up for restaurants. Now, not every single restaurant has benefited, but on average they have.

Speaker 2: 11:58

Let's pick on one, shall we? This is Chipotle, and you can see they're growing revenue. Of course, they've been absolutely on fire One of the very few concepts who've reported both an increase in prices as well as an increase in traffic comps. They've been growing their store base and between all of those things, that's causing their revenue to increase. But look at their Eva Dow margin. If you go back to March of 2020, when COVID began, their Eva Dow margin as a collective was around 10% and that number is now up by 20%. Their margins have nearly doubled in the time that they've been saying, gosh, we're really experiencing a lot of commodity inflation ourselves, labor cost inflation, we have to increase prices. Well, a lot of that is falling through to the bottom line. For them, it feels a little unfair to pick on Chipotle. The reason that I'm showing them specifically is because they own all their store base so we don't have any of the complexities of franchisees. Certainly, this is a corporate level Eva Dow margin. So part of this reflects greater leverage on the corporate level of the G&A as they increase the size of the store base and grow their AUVs.

Speaker 2: 13:08

But it does beg the question If restaurant industry margins are up, do they really need to be increasing prices as much as they are doing? And what is going to happen as grocery prices start declining? I think that what we're going to see is that restaurants might actually price themselves in such a way that opens them up to a massive, massive disruption. Whether that is grocery and semi-prepared food in the grocery, new forms of restaurant like a vertically integrated delivery kitchen, there are a lot of things that could happen that could really disrupt and bring in prepared food or restaurant quality food that at a fundamentally different price. As restaurants increase their prices increase their margins. They're creating that umbrella for that disruption to occur. Speaking of delivery kitchens, and here we go, also Grocerance in one question wonder coming into Walmart, what's happening here?

Speaker 1: 14:09

It's almost as if we planned it, wasn't it? Yes, wanda has developed a strategic partnership with Walmart to launch its operations within their retail environment, marking another step in the evolution of the industry, I think. But it's also closely mirroring the same approaches that we've seen from Ghost Kitchen, brands Kitchen United Cluster Truck. We mentioned last year that Ghost Kitchens generally would get a lot of heat, but these new models would arise and build on what worked and what didn't work from the past. Well, in many ways, some of these models have been tried already. It's going to be interesting to see what is specifically different about what Wanda are doing with Walmart than what these other folks have done in the past. This model offers customers what Wanda calls fast, fine dining, which is fine dining quality, at a fast, casual pace. That's obviously within the familiar setting of a Walmart store. Wanda benefit from a commissary prep kitchen. Their approach also embodies the essence of that we talk about regularly the vertically integrated operation and we've seen that in Cluster Truck's model and the entire supply chain from preparation to delivery is controlled and that helps optimize efficiency and ultimately, better customer satisfaction. And this integration ensures more of a seamless operation, right reducing overhead costs and providing greater food at a better pace. So they're open in their 11th location in a Quaker Town Pennsylvania Walmart, and they're going to leverage, obviously, the high foot traffic from that retail giant, ensuring better visibility and accessibility to a broader customer base and the movement.

Speaker 1: 15:41

I don't think just about expansion. For me it's about a deeper integration of food services within retail spaces. Now Kitchin United were working with Kroger inside their grocery stores and they opened their first location. I think it was back in January of 2022. So a couple of years ago now. And in spite of all those locations now being closed, wanda still thinks their model is going to make it work. So, like with KU and Kroger, I think there's probably some supply chain efficiencies that Wanda can achieve here too, if the Wanda team can tap in to the Walmart supply chain machine.

Speaker 1: 16:11

But Mark Loray's background, who's the CEO of Wanda? He was also the former president of Walmart's Ecommerce division, so I'm sure he knows a person or two over there. Now, don't forget. They've also acquired the Nillkit company in recent months, blue Apron, which I guess may also start to provide a few pickup opportunities in Walmart's as well in the future. And given Nestle led their last investment round, I think it's fair to say, the food industry is watching what they're doing here with quite a lot of intrigue.

Speaker 1: 16:37

Now, in the investor video, and put the link below, wanda says they offer six minute delivery windows, 95% on time rate, 27 minutes ordered to eat and a 9.5 out of 10 customer satisfaction score, and they have a 50% reorder rate in 14 days.

Speaker 1: 16:52

And their AUVs for their first couple of locations were between four and five million dollars, with projections to more than double that.

Speaker 1: 16:58

So that's all good, but the challenges I think you and I particularly can attest to in our experience at KU is then finding a suitable number of locations to hit those levels at a cost that makes the economics work, because they utilize a commissary model where the prep is done in advance and away from the final prep and fulfillment area.

Speaker 1: 17:15

That for sure does enable more efficiencies in these units at Walmart, and that's largely because they don't have to worry about the expense and complexity of extraction hoods, for example. But if they can build a web of commissary to outlet locations, potentially find efficiencies through deploying in grocery stores and other outlets where incremental customers are thinking about food but they're not necessarily thinking about Wanda, then they can support their revenue growth and they can acquire new customers, and they can hopefully drive those customers into their own ordering platform without having to go through the marketplaces. So I don't know. It's clear to me, meredith, that the future of dining and retail has gotten increasingly intertwined. Technology and strategic partnerships like this have certainly paved in the way for more novel approaches, but the implications of such partnerships could set new standards for the industry if they can overcome these challenges that precluded those that before them to really make it work.

Speaker 2: 18:05

Yeah, I don't know. I think it's very interesting. When I first saw this article and maybe this says more about me than anything I thought well, are they a premium brand? Walmart seems like a strange place for them. Now it turns out that the average Walmart shopper is a suburbanite baby boomer woman who does quite well.

Speaker 2: 18:23

Thank you very much. So it's actually a perfect fit from a brand perspective. I think when we look at what happened with Cluster Truck and then Kitchen United and Ghost Kitchen Brands in Walmart and Kroger, we can draw a couple of lessons from that. You know, chris Baggett of Cluster Truck has said that being inside of Kroger just didn't make sense for a delivery brand because the drivers would have to park way out in a center-most park and walk all the way in and get the product and then walk all the way out. There are just two very, very different channels that pick up customer and that delivery customer. But maybe, as you say, if they're using these Walmart locations primarily to acquire customers who are doing pickup and then move them over to delivery and they're not trying to fulfill out of these locations, that could work. I think the other thing that we've seen from attempts like this in the past from people like KU and Ghost Kitchen Brands is that it's just really, really hard to get enough sales out of those locations to pay for the labor.

Speaker 2: 19:19

Now, as you said, mark Lurie in his investor video said oh, when we get the scale, we're going to be $10 to $12 million AUVs at 15%, even down versions. Anybody who's in restaurants should be shocked by those numbers, right? Mark Lurie does nothing small. He does nothing small, right? Like he goes out, he gets a bunch of venture capital money, he spends it acquiring eyeballs and then he sells those eyeballs to the highest bidder. He did that with Cypresscom on Amazon. He did that with Jetcom and Walmart. That's his playbook, right? The problem here is that it is much more expensive there's a lot more CapEx involved to acquire restaurant customers than there is to acquire any commerce customer. You're not just acquiring eyeballs and to say I'm going to get to a $10 to $12 million AUV and then I'm going to have 15% margins. Well, that means that his system is scaled to do $10 to $12 million AUVs and kind of middling, honestly, margins at that level. Until then he's at four to five.

Speaker 2: 20:20

Now he's going to be losing money before you even account for two things Number one is a massive amount of marketing dollars that need to be spent to get those eyeballs to get up to $10 to $12 million AUVs and number two, an incredibly sub-scale commissary. So that, commissary, over 100,000 square feet is going to be $10 million AUVs enormous set up to handle hundreds, maybe thousand of these stores all throughout the Northeast. They've got 11 of them. It's going to be sub-scale for quite a while, so that means that they're losing money in two places. It's like a moonshot right.

Speaker 2: 20:52

It really only makes sense if he gets all the way to the giant, giant scale. They bought Blue Apron to try to accelerate that path to scale, but when they bought it, blue Apron was still losing money. So they got $100 million worth of revenue and a bunch of customers who were used to using Blue Apron. But they also had to reformat how Blue Apron was working if they weren't going to lose money on that as well. I'm so curious to see how it turns out. Can he get to the scale that he has built the engine for? Because if he can, this is pretty cool, but it's so hard to get there and he's going to have the patience and the VC capital to go acquire the eyeballs that he needs.

Speaker 1: 21:32

It's a fascinating one, isn't it? I mean, don't forget how much money has already been lost, pivoting from previous ventures as well. But don't forget, it was only a few weeks ago when we were talking about Walmart and drone delivery, so maybe he's thinking you know what we're going to get to that 15% a bit by using drones instead. Who knows? Who knows, when you're a billionaire, I guess you can dream big. So good luck to the team at Wanda, and we'll be watching avidly in the months and years ahead. Okay, talking of drones and robotics, let's head to Tokyo, where Cartgen robots and Uber Eats are pairing together to help the future of automation come to those shores over there in Japan, which, of course, makes sense. I mean, if anywhere you're going to see this type of thing, japan has to be here, right?

Speaker 2: 22:12

A hundred percent. I think what we've said about robot or drone delivery in the past, but in particular the sidewalk robots, is that you want to be places that have incredibly high labor costs Check. You want to be places that are incredibly dense Check. And you want to have places that have relatively low regulation. I don't know about that for Japan, but they're in such desperate need for labor that maybe they're willing to make some exceptions, and Japan has a long history of using robots in place of low wage labor, so I think this is a perfect fit.

Speaker 2: 22:46

I think it's a great place to test it. It'll be so awesome to see how it plays out. If it works here, I think it's much easier to then go make it work in other places. It is very hard to do a test in suburban USA might go okay and then conclude our robots are good idea or bad idea, who knows right, suburban America is not ideal for them. Japan is ideal. So if it doesn't work, we know, okay, it's not time for robots, we're not there yet. But if it does work now, we can figure out what about it works, where it can be replicated, etc. So I think we will see a lot more of this. It's only our last conversation that we were talking about starship technologies and their fundraise, so it seems like maybe robots are getting some traction.

Speaker 1: 23:29

We said 2024 will be the year of the robot, and here it is right. I mean, it's going to be interesting to see how fast we see traction in the area, but I think ultimately this will come down to is different markets with different features are going to require different forms of logistical solutions. In some areas, the driver will still remain the most optimal solution, but in others, like Tokyo, you might see things like robotics and automation in that regard actually play a much bigger role. Okay, we are out of time. Meredith, I told you we had a lot to talk about.

Speaker 1: 24:01

As ever, we got other articles that we'll share on our LinkedIn newsletter. If you've yet to subscribe to that, do so. If you have yet to subscribe to us on our YouTube channel or wherever you listen to your podcast, please do that as well. Give us a five star review, if you wouldn't mind too. That's always nice. It gives us warm feelings in our belly. Thank you, as always, for listening. We'll look forward to hearing your comments, thoughts and questions and perhaps what we should cover next time when we come back to you on the digital restaurant. But until then, thanks for listening.