Use this list to guide your tech investments this year.
Carl Orsbourn & Meredith Sandland | JANUARY 06, 2023
It’s a new year and technology continues to drive restaurant innovation in myriad ways. Here are five trends you should be paying special attention to.
1. Leading digital restaurant brands will look increasingly like e-commerce companies
As restaurant-guest engagement digitizes and anonymous transactions become known guests, restaurants will kick into a new gear using the data these transactions generate. Restaurants are turning into e-commerce companies. Even though fulfillment is not coming out of a DC somewhere, but rather out of your local restaurant, the digital interfaces and interactions with restaurants are looking very, very similar to what we see in e-commerce.
Already in the restaurant digitization journey, every new innovation echoes something from five or 10 years ago in e-commerce. We have long been fans of Larry Ingrassia’s book Billion Dollar Brand Club. In the book, Ingrassia goes through the development of direct-to-consumer brands in the CPG and apparel space. Reading it, if one were to replace the various consumer goods he’s discussing with the word restaurant, it’s easy to see where we are heading.
As an example, Carl’s company, Juicer, is applying dynamic pricing to the restaurant industry. That exists today in e-commerce. Amazon's been doing it for years. A consumer goes to their cart and Amazon says, “this item has changed 27 cents.” Dynamic pricing happens constantly in other verticals, and in many ways restaurants are lucky because the industry is digitizing last. So restaurants just get to lift all these winning ideas and bring them over to the food industry.
To accommodate all these innovative ideas, what we've seen in other verticals is the creation of platforms. A platform is the dominant place that the restaurant goes to get most of their technology. Then other companies, with killer features, plug into the platform. Sometimes that's in the form of an app store where you can go choose the things you want to add in. Sometimes that's happening invisibly in the background where the big company gets an API license with a smaller company and brings their functionality in.
The great news for restaurant brands is that they will be able to bring the functionality that consumers expect from other verticals without having a million different technology partners. It doesn't necessarily have to be what it's been for the last few years in the restaurant industry: you need this subscription and this subscription, and this one and this one.
2. E-commerce metrics will become critical to managing a great restaurant brand
If we assume that restaurants are going to become closer to e-commerce companies, then clearly we need to have some e-commerce metrics also. Words like Customer Life-Time Value (LTV), Customer Acquisition Costs (CAC), Search Engine Optimization (SEC), and Conversion Rate Optimization (CRO) are words that are going to become part of the restaurant vernacular.
The delivery marketplaces are going to help restaurants get there. They are already starting to make the reporting on their backends better so that restaurants can do things like measure their return on advertising spend (ROAS). Restaurants can also see how their customers are going down through the e-commerce funnel, right from viewing their restaurant in the third-party menu to getting on to your restaurant’s menu, to selecting items and putting them in the cart. Then cart abandonment. (That's another metric that we'll see!) So these e-commerce funnel measurements are going to be much more common in the restaurant industry as more and more of the transactions become digital. Even transactions that are not on the marketplaces, if they're first party direct or if they are on kiosk in store or on a tablet at the table, they are digital enough to create data.
Restaurants are also going to start demanding more and more of these types of metrics from the technology companies. It only takes a quick look at the back end of the biggest marketplaces over here and compare them to what you might get from a Google dashboard, for example, and you could see straight away that you don't necessarily get the same level of digital marketing information as what you would with a big established player like Google.
3. Restaurants will start to talk about the percent of sales they spend on technology
Restaurant brands have a fairly convoluted tech stack today. They’ve combined legacy systems with new channels and innovative features residing in one-off technology. Most sophisticated restaurants run 15-20 different pieces of software to make all of this omnichannel digital sales work. In an inflationary environment — or worse, in a recessionary environment — perhaps we're going to find that things will start to get cut.
When you look across the average digitally sophisticated restaurant chain today, they are spending 2-4% of sales on technology. It’s very hard traditionally for restaurants to measure how much they spend; some of it's happening in store, some is happening above store, some of it is CAPEX, some of it is OPEX. Some of it is actual technology subscriptions. Some of it is perhaps utility-based fees or even people working in technology. It resides in so many different parts of the P&L that it's very hard to keep track of and therefore very hard to measure as a percentage of sales. But restaurants are going to get much more focused on technology spend, and they will figure it out. Then they will ask, “Is it driving the return that we want?”
4. Restaurants’ demand for technology ROI will combine with the interest rate environment to cause consolidation among technology providers
Once restaurants start looking at what they are spending, and they start to compare that to the value delivered from technology investments, they will start to ask if they can do this in a better way.
Many tech stacks, especially the ones that have been pieced together, are somewhat complex in the sense that they don't always talk to each other, and when they don't talk to each other, you either have to create clunky interfaces to help them talk to each other or you just do without, and that obviously isn't great for the efficacy of the operation and ultimately the guest experience.
This means that the natural result of looking at ROI of each individual tool is likely to lead to more consolidation. In 2022, we saw acquisitions from DoorDash, Olo and Toast. These leading players are likely to do more of the same as they look to become one central place that a restaurant can get all of the various things it needs to digitize. As innovation continues, we may start to see headless APIs add bits of functionality into other companies’ big platforms.
Ultimately the industry has to deal with the root cause of the complexity issue, which was that we innovated rapidly and Frankensteined all of these bits and pieces together. That's what's led to the clunky tech stack. The only way to get around that is to step back and go back to first principles. Now that we know what a digital restaurant needs, how would you build it if you were building it from the beginning instead of kluging all these things together? We might actually see something start totally from scratch and re-create the tech stack in its entirety. Meredith’s company, Empower Delivery, does exactly that. Built for delivery from the ground up.
5. 2023 will be a year of normalization for restaurant delivery
We remain bullish that delivery is still a big part of our industry. Last year might have felt like a leveling out or pullback of delivery compared to the pace of 2021, when the industry was still dealing with the pandemic. In 2023, restaurant delivery will reach equilibrium, with a more steady-state growth rate rather than ultra-high growth driven by consumer adoption.
While it feels like delivery is a luxury that many cannot afford in the face of inflation, it is important to remember the total cost of use with delivery. A lot of consumers who order delivery do so because it means they don't have to get a babysitter, or maybe they are consuming a bottle of wine at home instead of buying one at a markup at the restaurant. Many younger generation consumers don't have cars. Delivery enables them to live a great lifestyle that does not need a car. Think of the savings if someone will bring it to you rather than buying a car. Especially for those people who have Dash Pass and Uber One and GrubHub Plus, I think they will continue to order delivery in large numbers.
Having said that, consumers are likely to be much more promo-sensitive. Restaurants and delivery marketplaces alike will increase promotional activity. As a result, check growth will slow, but transactions will continue.
Meredith Sandland and Carl Orsbourn are co-authors of “Delivering the Digital Restaurant: Your Roadmap to the Future of Food.” After each spent 20-plus years in corporate strategy and retail food, Meredith and Carl each concluded that food in America was changing. They left their corporate jobs in search of innovation that would transform the restaurant industry. Ghost kitchens, virtual brands, digital marketing, the gig economy and lean operations are at the heart of the future they envision. Their next book “Delivering the Digital Restaurant: The Path to Digital Maturity” is due out this winter. Subscribe to their newsletter and podcast at deliveringthedigitalrestaurant.com.
This article was originally published in Nation's Restaurant News.