In my July 15, 2007 commentary, we foresaw the potential for a dislocation in the U.S. casual dining industry through technological innovation and adoption. At the time, the iPad did not yet exist; but technologies such as touchscreen, high-speed WiFi, and the necessary software systems for automation were beginning to form. At the time, we believe the appearance of Microsoft’s “Surface” technology will herald a trend of full-blown automation in the casual dining industry. Quoting our July 15, 2007 commentary:
For a “dislocation” technology in the restaurant industry, look no further than the Microsoft “Surface” technology – which is simply an amazing piece of technology. At first glance, kids will simply think of this as a cool technology to view photos or transfer videos, but give it a couple of years and many restaurants will start utilizing this technology as part of their food/drink ordering and clean-up system. Besides having the ability to order food or drinks, the “Surface” will know what you are drinking and will ask you if you need a refill when your cup is half-empty. Once all your plates are empty or nearly empty, the “Surface” will also alert the busboy so he can come and remove your dishes. At the same time, you will be able to start ordering desserts as well, or of course, pay for your meal (either through your credit card or through Paypal). In five years, the number of waiters needed in the restaurant industry will be halved, and 15% tips will no longer be needed (assuming a reasonable 40% decline in cost each year, these US$10,000 machines/surfaces will only cost US$750 by the end of 2012). What outsourcing or off-shoring cannot do (i.e. displace workers whose jobs tend to be localized), technology will.
We were a little early as we assumed adoption would begin by 2009-10. At the time, we did not foresee the severity of the 2008-09 financial crisis. With the over-expansion of many casual dining chains during 2004-06–and with liquidity, borrowing, and consumer spending suffering a major breakdown during the 2008-08 financial crisis–many casual diners simply stopped investing in new stores and technologies. Now that U.S. consumer discretionary spending is back to a 6-year high (and with stock prices of many casual diners, such as EAT, DIN, and CAKE, near all-time highs), investing in new technologies to streamline the ordering and payment process suddenly makes sense again.
For many casual dining chains, there are little points of differentiation among their brands. e.g. Olive Garden, T.G.I. Friday’s, Ruby Tuesday, etc. As we discussed in our May 26, 2013 commentary (“The Generational Divide in Casual Dining Trends“), many traditional, casual dining chains also suffer from three major strikes–at least among the Gen-Ys: 1) A perception of a lack of quality service, 2) A perception of serving cheap-quality food, and 3) An outdated décor. These three strikes are especially glaring when compared to the newer, healthier, and more convenient choices such as Panera Bread, Corner Bakery, or at the higher end of the scale, Cheesecake Factory, RockSugar, and of course, independent operators–especially those with high-end brand names or those serving more exotic (e.g. sushi) and adventurous cuisines. Simply put, what the Gen-Ys settled for when they were kids would not work today.
Seen in this context, there is not much many casual dining chains could do to differentiate their products to increase profit margins–major strategic or product offering shifts notwithstanding. The only option is cost-cutting through technology–in this case, automation technology that streamlines the ordering and payment processes.
Most appropriately, Austen Mulinder, CEO of Ziosk and a former Microsoft executive, is now implementing the idea of tabletop tablets to the casual dining industry. Ziosk’s goal is to “revolutionize the experience and economics of Casual Dining,” and claims that over 100 million guests have already been served under its system. Most notably, Ziosk recently won a national contract to provide tabletop tablets to Chili’s, which will likely accelerate adoption by other national chains.
Exhibit 1: Ziosk Tablet – Order, Pay, and Play Loyalty-Related Games at the Table
Out of the current installation base of over 1,200 locations, Ziosk claims that 80% of customers interact with the device in one way or another. The most frequent use is for direct credit card payment, the 2nd for survey questionnaires, and the 3rd for ordering of drinks, desserts, and appetizers. Ziosk claims that dessert sales are 20% to 30% higher for those who use the device, with quicker table turns and increases in chain loyalty if guests opt for email signup. All in all, restaurants that choose to utilize this device tend to experience 3% higher core food and drink sales on average.
One of Ziosk’s major pitches for this device is that the cost is “less than free,” as the cost of these devices could be subsidized by gaming revenue generated on these devices. A final area of benefit is reduced labor intensity, assuming more customers choose to order and pay through these devices. While restaurants deny that these devices will replace waiters, we believe this is where the casual dining industry is heading. e.g. Some Tokyo restaurants are already doing away with waiters. Make no mistake: The robot revolution has now spread to the casual dining industry.
Exhibit 2: California, Texas and Florida are the Focus Expansion Areas in 2014