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THE DIGITAL RESTAURANT: August 14, 2023

Dine in is out at McDonalds, The Losers of the Mr Beast Fight and GoTab adds $18M to the check.

All these headlines and more represent our thoughts and views on the world of restaurants, technology and off premise food in our round up of last week’s hot news stories - subscribe today to The Digital Restaurant and register at www.deliveringthedigitalrestaurant.com for more bonus content.



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TRANSCRIPT

Carl: The losers in Mr. Beast, the marketplace earnings reports and why Dine-in is out for McDonald's - 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 have caught our attention around the worlds of restaurants, off-premise and technology that 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?


Meredith: I'm very good, Carl. How are you?


Carl: I'm very impressed with our dress code. We're kind of in, in keeping with our colors. It's very on brand this week.


Meredith: I know. Wow. I did call you this morning and ask you to put on a green shirt.

Carl: Well, given the fact I'm nowhere near my home. Aren't we lucky that I just have one.

All right, well, look, first question is for you this week, I know you've been digging deep into the earnings reports that came out from DoorDash and Uber. What did you learn?


Meredith: Well, I know everyone saw Joe Guszcowski's article that said it's very mysterious how Uber and DoorDash keeps saying that they're growing, but restaurants are reporting that delivery is starting to decline.


I think, their reports purposely obfuscate exactly what is going on, and it's a little hard to tell. We've talked before about how DoorDash combines in their results both US and international. They combine restaurants and other verticals and it just makes it very hard to tell what's going on.


When I peel it apart, it appears that they've grown US restaurant orders slightly year over year, possibly down quarter sequentially. But it's impossible to say from the numbers. I think what I found very telling was this paragraph I'm going to quote "on a pro forma basis, including results from Wolt for both periods, year over year growth in total orders accelerated slightly in Q2 2023 compared to Q1 2023, driven by stable year over year growth in our US restaurant marketplace, accelerated year over year growth in our US non-restaurant categories and international markets."


So there's a couple really interesting things in that quote. The first is they use the word stable growth for US restaurants. And I feel like if growth were anything higher than stable, which is to say, I don't know, probably between zero and 3%, they would be letting us know.


So that's a very interesting word choice right there. Second is that it includes the results from Wolt which I believe they bought in June of 2022, so partway through the quarter. So that's a little bit unfair to include them this year, but only include them part of the quarter last year. And then of course, they say that they're having a ton of growth in all the other non-restaurant categories. So, By the time you break all of those things apart, that kind of leaves you feeling that yeah, restaurants are probably flat, maybe even down

For Uber equally challenging to see exactly what's going on. A lit a little bit easier because they do break out delivery from rides, but they still don't break out US restaurants specifically.


But it would seem delivery gross bookings, they said grew 14% year over year and on a sequential basis, up 4% versus prior quarter. Now, again, because that includes a lot of different things, it's not entirely clear what's happening in there, but I'm guessing the orders are flat to down again.


And one of my clues is looking at what is happening in grocery e-commerce, where it's a little bit cleaner. Mercatus, the Brick Meets Click report said that sales fell 7% year over year in grocery e-commerce. There's been a sharp decline in order frequency and the average basket size is going down.


So I think when we look at that happening in grocery and the consumer really reacting to all of the inflation that's going on and prioritizing saving money over convenience. I think that has to hit restaurants eventually, and you're certainly starting to see it in all the reports coming out about traffic being down across restaurants and questions about have they taken too much price? Is the consumer finally capitulating there? I think all of that eventually bleeds into delivery, and it's just hard to tell in the numbers. So that is my takeaway, looking through those those press releases. And I'm very curious what everyone else is seeing as well.


Okay. Second question for you, Carl. So dine-in at McDonald's is down to 12% of sales.

Carl: Hmm. Interesting news from Heather Haddon, in the, the Wall Street Journal, this one Meredith stating that McDonald's have only 12% of their transactions for dine-in customers now. You with your development background, Meredith, you are often telling me about sales per square foot and we both know that the average McDonald's has, you know, quite a lot of square feet out there, but I'm not really sure if there's ever a channel sales per square foot.


You'll have to tell me if that's the, the case or not, because if that was ever done relative to the amount of space dedicated to 12% of the transactions, I'm not sure the math would add up. You were telling me also about the new go Mobile Taco Bell prototype that's just recently been released, which is focused of course, on, on digital delivery, like many of the prototypes that the big fast food and QSRs are releasing out there.

And that's a 1600 square foot unit, which incorporates multiple drive-thru's and a vestibule, which, is quite different from those units that were being developed 30 years ago at a 2,500 square foot unit. Right. So when we look at dine-in for fast food , there's cost savings beyond just the capital.


Operationally fast food, dine-in space needs regular cleaning. That equals more labor. Labor is also up, of course, as we know. Operationally, fast food dine-in space requires more upkeep in terms of lighting, heating, maintenance.


In fact, on one of the articles I read about this subject McDonald's franchisees often have to spend somewhere between 300 and $500,000 a decade just on internal refreshing their in-store feel. So there's a lot of factors here, which say, well, - does McDonald's need to keep building towards this particular type of profile?


According to data firm, Cicena, , fast food firms in general have seen dine-in traffic drop from 21% before the pandemic to now 14%. So this isn't just a McDonald's thing, that, that's quite significant. That's like a third drop, isn't it? Just in, in a few years. And for McDonald's it's been even more pronounced because before the pandemic they were at 25% dine-in.

And as I say now, down to 12%. So no wonder that we're seeing all these prototypes out there. Chick-fil-A as well testing outside kiosk, smaller footprint locations with multiple thru lanes, and I think we're gonna see more of it. I'm not sure we're gonna see necessarily everything come to life in these prototypes that we're seeing out there with multiple levels.


Taco Bell also had one, I think before across multiple levels, right? So there was an elevator, I think for a Chick-fil-A. There might have been an elevator for a taco bell prototype as well. Now those things don't necessarily reduce the cost of building those units. But in terms of the amount of square foot dedicated to dine-in, I think it's gonna go down based on this.


And maybe maybe it will level off at around 10, 12% or maybe we're gonna see more and more fast food customers choose to eat away from the premises. What are your thoughts?


Meredith: It will be interesting to see if it ever comes back, if this is just a cyclical thing caused by Covid that eventually consumers return to their old behavior.


But I have a feeling they won't, and I think what we're starting to see is consumers picking a lane, so to speak. They're saying, this is what I use for convenience. This is what I use for experience. If I want to dine in, I'm going to go to this kind of restaurant, and if I want to get something quick, I'm going to go to this kind of restaurant.


And I think we'll start to see that really across restaurants in not just dine-in and drive-through, but also in delivery.


Carl: Okay. Third question. This has been a subject hot on many restauranteurs' minds through the summer -fee fatigue and how it's affecting restaurants and restaurant tech. What did you take from this?


Meredith: Fee fatigue! I think that's such a great way to say it. So, we talk in our second book about how a really advanced digital restaurant is likely using 15 to 20 different pieces of software all stitched together to try to make a great digital experience for the guest.

For the restaurant, it's probably not a great digital experience, right? Keeping track of 15 to 20 different pieces of software. All of the logins associated with that, all of the API connections associated with that, making sure that everything is working and up to date, that's a lot to keep track of.

And they each come with their own fee. What this article is really pointing out- aside from the whole TOAST debacle that we've talked about to death - is just the more general topic of when you're paying 15 to 20 different pieces of software, that probably adds up quite a bit, and restaurants are starting to get more focused on reducing complexity and the cost associated with all the technology that we're using and really demanding ROI. We've talked about this before. I think as we move into this phase of restaurant innovation, we're going to start to see a lot of consolidation bringing functionality together into one place. And hopefully making things not only less complex, but more cost effective for the restaurants using that technology.


Carl: Yeah, I, I think it's a really interesting one. I think 2023 in particular has been the year of consolidation where many restaurant leaders, not just the CTOs, are actually assessing, do we really need this particular technology right now? And how can we make better use of the technology that we have got and truly making the right decisions around where they need to invest .


It'll be an interesting year or two ahead as we start to see the roadmap of technology really start to develop. In many ways, it will ensure that restaurant technology companies are building great business cases that have a very valid case for restaurants to invest in.


Meredith: Yeah, it's part of the phase of innovation that we were in, right?

We were at the front end of restaurant digitization and there were a lot of really cool ideas and all of these companies are really, really neat and do help restaurants. They're really cool functions.


But the problem is they're probably more features and functions than they are companies. And so you're going to start to see consolidation on the tech side where it just doesn't make sense to have them all independent. But I think what this article is really pointing out is it's not just the supply side, the tech companies consolidating that will drive that.


It's the demand side as well. The restaurants want to deal with less complexity and less cost.


All right. We have good news this week. GoTab raised $18 million in their series A. So tell us about GoTab. Who are they? What do they do, and why did someone give them money?

Carl: Yeah, you're, you're right. This is a, a very happy news story. Congrats to Go tab. And their CEO Tim McLaughlin .


$ 18 million in 2023 for a Series A round. We don't talk about those types of news stories as much as perhaps we did a year or two ago, do we, Meredith?

It's not a startup as such in many ways, because they've been around since 2016, so they've been running for quite a while and they've been approaching this business and the product that they've been building at Go Tab with a very kind of focused fashion in the sense that they've been doing it very deliberately.


This hasn't been something that's been backed by a huge amount of VCs. A lot of it's been self-funded up to this point. And when Tim and you and I met last year he showed us the product and I think you and I were particularly excited about what it was really trying to do. Now they're rolling out this new hardware of their POS and their kitchen display system, as well as something called a pocket POS, which for all intents and purposes means a server can use their smartphone as the POS.


And what I'm excited about here is this translates into a better experience for the customer. But also for the back of house team as well. And it does go back a bit to those QR codes that we've talked about in the past, but this is more of the kind that we've espoused to, that we like and promotes as best as we possibly can because it allows the customer to order, pay, split tabs, add to checks halfway through without ever having to speak to someone at the restaurant or to get back in line again.


And I think that's perhaps why their focus in particular has been on high volume food halls and breweries, and that's been very much core to their audience that they try and target. And I think that's great for restaurants too, right? Actually having a provider, a technology provider that has a clear focus that can help them know whether this particular provider is a fit for them or not. There are so many folks out there that say, oh yeah, we work with everyone, and that doesn't really help a restaurant really figure out whether they are the right system for them. So I also wanna mention the fact that the system has been built with the back of house in mind.


'cause it really helps direct the kitchen team and the fulfillment team to exactly know where they need to be, what items need to go to, which table, using the R F I D technology that they incorporate too. So the fact that this is a win for guests, it allows them to transact with the restaurant on their terms as well as help the efficiency of the restaurant teams deliver to that, I think is a win-win.


Now they're currently working with 1500 locations. They're hoping to double their revenues this year, which is huge of course. And largely their revenue comes from those fees that you were just talking about, processing fees. But the difference is that they allow the restaurant to choose who pays either themselves or the customer.


And where a physical card isn't used, the fee is typically about 1% plus 25 cents. The last thing I'll mention on this one, Meredith, is, Tim and his family's background is from the brewery space, and so it's great to see how an operator has turned into technologist and how he's basically building that technology with that operation in mind and improving it so that the guest and the restaurant teams are getting a great experience.

So good luck to Tim. Tim, we're excited to see what happens from this.


Meredith: I think if I remember his story correctly, he was a technologist who became a brewery operator. Yes. Who became a technologist. I love these stories 'cause it's, you know, I was in software and I left, had some success, went into restaurants and thought I have a personal problem that I can solve with software and, fixed his own brewery and experimented in his own brewery until he made something that was perfect for breweries and now has a company.


So yeah. Congratulations. That's a fun story.


Carl: All right. Well, onto a less fun story. We obviously broke the news when Mr. Beast put a tweet out there a few weeks back suggesting that perhaps he wouldn't have got involved with Mr. Beast Burger in retrospect, and of course this has now got into a much bigger fight -suing and counter suing going on.


Oh boy. Everyone it seems is gonna lose. Tell us why.


Meredith: Yeah, it's not good. It it is very bad look for the restaurant industry, I would say with suits and countersuits and virtual brands, I think are the biggest loser here because a lot of people are pointing at them saying, see, I told you they don't work.


And of course you and I don't think that's the case. I think virtual brands do work. There are many ways in which they can work. I think it is important to remember. It is a whole lot like franchising. And when a brand, whether they're virtual or real in the brick and mortar world, when they give that brand to someone else to operate, they have to tell them how to do it, what the expectations are, and then periodically check on them.


That is how you franchise, right? There are all kinds of franchise business coaches out in America running around, checking on franchise restaurants. Did they do their remodel? Does it look nice? Are they serving the food the way they're supposed to serve it? Do they use the welcome words? Do they use the thank you words?


All these things as you go through a transaction. And it would appear that wasn't really happening with Mr. Burger. It wasn't happening enough, even if it was happening because the food wasn't great. And so Virtual Brand's the biggest loser here because everyone looks at that and says there's no way they can work.


Where I think what we need to be concluding is we probably need to treat it more like franchising and maybe use technology to do that training, do those checks figure out how to support all the different restaurants that are executing the brand so that it's consistent across the fleet.


When you hear, oh, it was terrible, we don't know if every single one was terrible. What we know is that there was a consistency problem. And that speaks to the power of franchising.


Certainly VDC loses in this. It's not a good look for them because they were the ones who should have been custodian the brand and taking care of it and doing the franchise support, the locational support.


And definitely the consumer loses. I think a lot of people tried this product and were disappointed in it. And that's a bummer for consumers, regardless of what kind of brand it is.


I'm going to put a question mark around Mr. Beast. And the reason is, of course, getting sued. No one likes to get sued. That doesn't seem fun. But he is giving voice to his followers.


And I think this is what YouTube celebrities do so well, is they not only put things out there, but they listen to their audience and they give a voice to what they're hearing. And Mr. Beast was listening to his audience. Hearing that the results of the product were inconsistent.


And maybe he didn't go about fixing that in the right way. I don't know what the whole process was that led up to all the lawsuits.


But he gave voice back to his customers and said, this isn't reflective of who I am and what I want to put out in the world. I want to put out excellence. And what I'm hearing from you is that this is not excellent.


So I think he may actually end up reinforcing his own brand through this move. Because consumers will hear. Yeah, he's looking out for us.


Carl: Yeah, it's certainly going to be a very public fight. I think this has got a lot of interest out there and I was almost tempted to put the Daily Mail article into this, which if it's in the Daily Mail, it tells you it's gonna be something which gets a lot of focus from folks.


Meredith: Well, I'll put that one in the newsletter so people could see it. 'cause the pictures were, Fantastic.


Carl: Yeah. Well, in all the wrong ways. Thanks for that, Meredith. Let's see what happens with Mr. Beast and hopefully virtual brands don't get tarnished through the halo effect of this one, because, as you say, it's it's one that I, I think is is gonna rumble on for a while yet.

And there's plenty of very good virtual restaurant companies out there that are helping the industry find extra ways to find incremental business.


Well, that's it for this week's digital restaurant. We'd love to hear your thoughts. What do you think about the future for virtual brands?


What do you think about the way in which fast food dine-in is going to move forward? We'd love to get your comments and also any thoughts around what you'd like us to cover on a future edition. 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.

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