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THE DIGITAL RESTAURANT: July 31, 2023

How inflation is impacting loyalty, Is big-tech stifling innovation and how is automation helping Sweetgreen see a 5 point hike in margins.

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.



Articles mentioned in the video:






TRANSCRIPT:

Carl: How is inflation impacting loyalty? Is big tech stifling innovation? And what is automation doing to help Sweetgreen improve their margins by 5%? That's all ahead on this week's Digital Restaurant.

Carl: The Digital Restaurant works like this. We're going to ask each other five questions about headlines that have caught our attention around the worlds of restaurants and technology that in some way tie back to our book series Delivering the Digital Restaurant. Are you ready? Let's go.


Meredith: Well, Good morning, Carl. I hope you're doing well.


Carl: Good morning, Meredith. I'm very well, thank you. the kind of summery rain of England right now looking out at a beautiful green golf course where there are plenty of golfers going out in the rain and enjoying it as anyone would.

But, uh, there we go. When times like this, I remember why summers in California are so lovely.


Meredith: The first question's for you this week amidst all of the news of virtual brands, maybe having a little bit of struggle, Dine Brands came out with some new news about a new virtual branding partnership they're doing with Franklin Junction.

So tell us about that.


Carl: Yeah, so this is a really interesting one, Meredith. As you know, Dine Brands have been involved in the virtual brand space for quite a while. They've been really certainly seeing the benefits of virtual brands for sure, but this is a slightly different approach to their international brand expansion strategy, should I say? 'cause they're looking to utilize Franklin Junction's approach to ensuring the brand gets allocated to operators that have the capacity, that have the right capability and the proclivity to execute their brand to the best of their ability.


Meredith: So rather than, taking a different brand and adding it to their existing IHOP and Applebee's, they're taking the IHOP and Applebee's brand and adding them to someone else's restaurant.


Carl: Correct. . It's it's a pretty interesting way, but I, think what's, super powerful about what Franklin Junction brings to the table here is that piece about making sure the brand doesn't go into the wrong operator.


It's making sure that, that there's some form of brand protection, if you will, to make sure there's the right fit. And similarly, because of the international expansion piece, I think this is a really capital light way, to be able to see where a brand gets resonance with, different markets and different clientele in different parts of the world.


So, very interesting one this. Now at the same time, and I know this wasn't part of your question, but at the same time we saw Red Robin announce the end of virtual brands hosted out of their locations - This includes things like Mr. Beast Burger Chicken Sammy's, the Wing Department. Now, don't forget , this is a 511 unit brand and they haven't exactly been having the best of times.


And I think when you see what came about with virtual brands some time ago, anything to top up sales has probably seen as quite enticing. But in our new book, Meredith, the Path to Digital Maturity, there's a reason why we put virtual brands, I think, what was it, chapter six. It's certainly towards the end of the book, and they're there for good reason, because you've gotta be great at off-prem, you've gotta be good and solid in the way in which you execute operationally, and you've gotta have a handle on your data, and you've gotta figure out how you're gonna market effectively to really succeed with them. So they're not an entry point and they're not a kind of savior, I think, for the people that are perhaps struggling with their base business.


So if Red Robin was struggling before virtual brands, and now this decision to perhaps move away from that, at least to focus on their core business and get that to a place where things perhaps turn around. Then maybe they'll come back to virtual brands in the future.


It's like really, really make sure if you're gonna go in the virtual brand direction that you're ready for it, and that you really make sure that if you are going to take your brand out to others, that it's gonna be the right fit for those operators.


Okay. Next question is for you. We haven't talked about loyalty much recently.


We were piqued with our interest in this particular one about how inflation has impacted loyalty. Tell us what your thoughts were about this article.


Meredith: Paytronix put out, very kindly, a report talking about what they're seeing across all of their different brands who are on their platform.


And they were talking about the impact of inflation on loyalty redemption, and it totally makes sense when I back up and think about it, that you know, points I earned in yesterday's dollars are worth more in today's dollars, right? If I spent $10 on something before and earned a bunch of points, $10 at a time, but now that thing costs $12, when I go to redeem it, I'm getting more value, right?


And they talked about how brands are seeing this just across the board and it's causing their redemption value to go up. And so you see a lot of brands in reaction to that, devaluing points, kind of giving inflation to the points, if you will, so that it matches the underlying dollars. And I think the big takeaway for me here was really this shift from a punch card mentality to a more complex loyalty program makes it much easier to play around with what the redemption values are and not have it be quite so shocking to the consumer. Certainly we saw this in airlines, for those of us who are old enough to remember the old loyalty schemes. I mean, it was 25,000 miles to go somewhere no matter what.


It's just, that was what it was. You want a free ticket 25,000 miles. And now: sometimes I can get a free ticket for 12,000 miles and sometimes it costs me 60,000 miles to go the exact same route, just depending on how busy the plane is and what's going on in the environment, and how expensive the tickets are.


All kinds of things that I don't even know what goes into their algorithm. You and Aswin probably do, but I don't. And as those loyalty programs got more complex, Then the airlines could change the point values more rapidly without having the consumer react to it as much. And I think we're starting to see that in restaurants as well, where there's a little bit more flexibility around those points.


The other thing that Paytronix dropped in this article was that the typical value that a loyalty program member is getting should equate to about 7- 8% of check, which is a huge discount for loyalty, members, right, to be able to get nearly 10% discount. Wow, that's incredible.


Now, obviously not everyone's a loyalty member, and so the net effect on the P&L is probably more like 3-4%, but it's still lot. The software cost is the least of it. It's the redemption expense that really the true cost here. And trying to figure out how to play with can only benefit restaurants as they think about how to increase their margins.


Carl: Okay. Well before you ask me the next question, Meredith, I would love to ask people to do us a favor because we've been asking for a few weeks now for folks to give us a five star review if they like the digital restaurant. Hopefully they're subscribing to us and listening, and thank you to those of you that do.


But we always love to be able to get your comments and we really appreciate you being able to tell the world about why you like listening in. So if you wouldn't mind. Please give us a five star review. And I've got some other news, We have got our new audio book out of The Path to Digital Maturity.


That's right, you get me reading to you for about four and a half hours, of the, the latest book. And so if you'd like to get a copy of that, please head to Amazon or Audible and you'll be able to get a copy and hopefully that will be useful for you to listen to wherever you are.


Meredith: We heard from so many restaurant operators in the first book that it really made it easier for them to consume the book you know, they're busy with their hands a lot of the day. All right. Next question is for you Carl. There was an article in FSR about Juicer enlightening guests on third party versus first party or direct pricing. Now, I feel like you probably know something about this one.


Carl: We were questioning ourselves, weren't we about whether to include this, but this is the type of thing that we would've included regardless of whether I was part of JUICER or not.


And so let me tell you a little about Enlighten. You know, We're all guilty I think of sometimes assuming that the consumer thinks and believes that they get the most value when they purchase delivered food through an aggregator. You know, at Food on Demand yadavan, the head of merchant operations at Uber said that Uber one, which is the Uber Eats free delivery subscription service, resulted in customers seeing a 4 x return trip count than the standard Uber Eats user. And so the customer, I think over the last few years has become sticky towards that particular mechanism, and therefore perhaps have the perception that there is a level of value that they're getting when they're using an aggregator.


But I wonder whether the guest sometimes doesn't really realize that they're perhaps paying 20 to 30% more on the ticket price when ordering on a marketplace, as per one of the articles we referenced back in in April. And so I think there's some really exciting opportunities with what we're doing here at JUICER. In fact, it was that Food on Demand where Ashwin and I were speaking to a huge chain who said to us, I really wish we could just tell our customers how much they're saving when they order direct from us, you know, put a little leaflet in the bag or something. And that triggered an idea in Ashwin's mind of how he had seen something back in his hotel e-commerce times where when visiting a hotel's website, the price of the room was displayed against what was listed on Expedia and Kayak and the like.


So JUICER is doing just that. This is a mock up, just to give you an idea of what it looks like. We're trying to enlighten the customer when they order direct to really know that they should continue with that behavior by showing on the basket the difference to what they may have paid if they had chosen to purchase via marketplace.


You know, So there's a lot of big companies we're we're speaking to right now that are really interested in it, and the reception, I think when we announced it this week has been pretty viral. And so we're, we're excited about seeing how this is gonna land across the industry. We're launching it in, Q4 and it's gonna be available at a very low price, quite honestly, because we think this is what the industry needs and we hope that everyone wins from it as well, because certainly in these kind of times when people are watching their pennies, every bit counts.


Meredith: Yeah. It's better for the brand and for the consumer. My prediction, you heard it here first, is that consumers are going to see that, they're going to take screenshots of it and they're going to share it on social media.


Carl: Okay, well question four, we saw an article on the Food on Demand website, in reference to Sterling Douglass, the CEO of Chowly, and some comments he was making about Is Big tech stifling innovation? What did you make of this?


Meredith: Yeah, it was a fascinating article and separate from the stifling Sterling talked a lot about the ability for his company, Which is Chowly and Koala together, to really bring e-commerce funnel data to the restaurant industry and particularly to SMBs in the restaurant industry, to smaller restaurant groups.


And we talk a lot about that in the second book We have a whole chapter on the value of data and how to think like an e-commerce company and use the e-commerce funnel. And so I just love that part of his article and the attention to that. I agree there is a huge opportunity in the restaurant industry to apply that thinking.


But separately he talked about where we are in innovation in the restaurant industry, and how we had so much tech and so much innovation just exploding throughout the industry as we went through this massive disruption. And what he sees now is all that rapid innovation leading to a bit of skepticism on the part of the restaurants.


And, you know, you've talked about this a lot before. The restaurants really need to see the ROI of the tech that they put into place and not just hear about how great it is. And as the ROI of different tech has been greater or lesser, Easier to prove, more difficult prove. There's developed some skepticism on the part of operators about what all of this technology does, which is leading to an attitude of bundling and trying to get to fewer providers across their platform.


But Sterling argues that the vendors are also pushing toward an era of bundling, and I think we can certainly see this. If we step back and say, forget the restaurant industry a minute, what is the point of vertical SaaS? And for those of you who don't know what vertical SaaS is, it is a industry specific software as a service.


And the whole point of that game is to own what they call the chokepoints in the industry. So in our industry, that's the POS on the front end and the accounting and Back-of-House system on the back end, And if you can own that choke point, then you become the platform that everyone else is trying to plug into.


And so Sterling says, look, these big companies are Incredibly stifling to innovation because they're not necessarily opening their APIs to everyone. And if they don't open up to everyone, but they own the choke point, then these smaller, more innovative companies can't come into the industry now, I would argue that was the whole point of what they were doing.


A race to get as many restaurants as you possibly can, own that choke point, and then freeze everyone else out. And in that way, the disruptor becomes the disrupted is my prediction what will happen here because someone like toast as an example, comes in, has massively open APIs, lets everyone on, drives a whole bunch of innovation, restaurants pile onto it, and then they start buying up functionality so they can have a complete system, which we've seen them do.


And then step two is they start saying, oh, well, here's all the criteria. If you want to be plugged into our system, you have to have X, Y, Z. Start freezing people out. And then step three, what do they do? They raise prices, right? Because they have this huge installed base who's now very dependent on them.


And of course, that's what they tried to do two weeks ago, with the price increase. Now, what I love most about the price rollback that Toast did when they said, just kidding, we're not going to do the 99 cents, is why they did it. And they did it because the restaurant industry was up in arms. Why? Not about their own P&L, but about protecting their guest.

And that to me just spoke volumes about the hospitality of this industry.


Thank you for rolling it back. But their press release did leave open the door for future price increases of a different kind. So I think we will, we'll certainly see that

Carl: Restaurants are gonna pay one way or another, that's for sure.


Meredith: They will pay one way or another. We have gone through this massive phase of innovation in restaurants and how we are likely to end up, kind of retrenching, I think, and going through a phase of less innovation.


And I think potentially these big disruptors that we've really seen shake up the industry, become the aloha's and the micros's of today.


Right last question. So we talked about Sweet Green's infinite kitchen opening up a couple of podcasts ago. And they came out with some news recently on what's happening at the Infinite Kitchen.


Carl: One of the great things I particularly appreciate about sweetgreen other than the fact that I think they've got great food and are very innovative, is now they're a public company.


And so we get to hear from them regularly about what's going on. And Jonathan, their CEO was talking about the Infinite Kitchen recently on their earnings report up until June 25th on the, the 205 unit chain. That's right. 205 units now for sweegreen. And of course, infinite Kitchen was something that I particularly was intrigued by when the first one that opened up in Naperville that we talked about a few months ago, but there was two numbers that really were quite interesting. One was 26%, the other one was 20.4%. And the 26% was the margin attributed to the infinite kitchen relative to the the chain average. You know, that's quite significant, right?


Every penny counts on this thing, and every point in this regard is huge. And so , What's interesting is Jonathan mentioned this isn't,, just about labor savings. The word he used was labor redeployment and then supply chain sourcing was the other part of this.

So it's not necessarily all in the labor savings attributed to automation. He also talked about the fact that they've got incredibly good feedback in terms of the theater in the store, in terms of showing the scratch cooking approach in terms of the enhanced hospitality that's offered now from team members that have perhaps have the time help, guests understand what they're choosing.


Similarly, speed and portion size and accuracy and all the consistency benefits that come from that. The only thing that I did pick up on was they're looking to open up another one of these locations by the end of the year, but only where there's an accretive return on capital.


So I suspect the cost to do these infinite kitchens still is pretty significant and like anything, like anything new, it always costs a lot initially. And then as more and more people do it, the costs come down and suddenly it makes sense for everyone. So sweetgreen are certainly one of the ones that are pushing the, the boundaries of change and innovation from an automation perspective alongside the Chipotles and the hyphens of course.

Last year the total digital revenue percentage was 62% and 40% of that was for their owned digital revenue, where this year, that owned digital revenue is down to 37%, but still, that's a huge number, right?


37% going through your own channel. And perhaps one of the things that's behind that is that the subscription program, the Sweet Pass Program, isn't functionable for people ordering in store. And so the loyalty program, not being able to work on-premise clearly is a big gap to that. And now more and more customers coming back to on-premise, you've gotta be able to design these subscription, these loyalty programs in an omnichannel way so that you can be able to service them and provide loyalty back to your earlier comments across all the channels. And I think, sweetgreen are working very hard to try and fix that because that will probably get those numbers back up again.

Alright, well look, that is it for this week's digital restaurant. As ever, we would love to hear from you, anything you agree with, anything you disagree with. We'll always like to hear from you about articles that you think we should focus on a future edition. But until next time, thank you 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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