The Robot Revolution Invades U.S. Casual Dining

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

Ziosk tablet

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

Ziosk locations

The Generational Divide in Casual Dining Trends

As a 2011 Bloomberg article discussed, the average college-educated “millennial” or Gen-Y today would not be caught dead in a traditional casual dining restaurant (e.g. Ruby Tuesday, Red Lobster, TGI Friday, Chili’s, etc.). Such traditional, full-service, casual dining chains have three strikes against them: 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 and healthier choices such as Panera Bread, Corner Bakery,or at the higher end of the scale, Cheesecake Factory, P.F. Chang’s, and of course, independent operators—especially those serving more “exotic” and “adventurous” cuisines. Simply put, what the Gen-Ys “settled for” when they were kids would not work today (for many of us, venturing into a TGI Friday may also trigger depressing childhood/adolescent memories).

This generational divide in tastes is especially evident post financial crisis as consumers initially cut back on–and then became more selective–in restaurant/discretionary spending. Just as important, casual dining operators such as Brinker International and Applebee’s ramped up store openings from 2000 to 2006—doubling their sales during the six-year period leading up to the financial crisis. As the Gen-Ys come of age and increase their relative spending power, the traditional casual dining restaurants have been trying to reinvent themselves. This need for reinvention became desperate as early as 2009, spurred on by the U.S./global economic recession. According to the National Restaurant Association (NRA), U.S. restaurant sales in 2009 totaled $566 billion, down 2.9% from the previous year. This was the first annual sales decline in the 40-year history that the NRA has been tracking this figure. The 2.9% decline followed a meager 3.2% sales increase in 2008–previously the industry’s worst growth performance. U.S. restaurant sales are projected to rise to $632 billion in 2012, up only 3.5% from 2011. It is obvious that the days of 4%+ growth in U.S. restaurant sales is over.

This generational divide is especially impactful for the traditional casual diners as baby boomers are expected to cut back on U.S. restaurant spending as they retire. Indeed, S&P is forecasting same-store sales growth of just 1% to 2% for full-service casual diners in 2013 (mostly due to higher menu prices). With an ever-increasing number of consumers becoming more health conscious and demanding higher-quality food, independent restaurants are also garnering a higher portion of U.S. restaurant spending. This vicious cycle of declining U.S. causal dining sales (preventing them from increase staffing levels or upgrading their décor) is still an ongoing trend. As evident in the following chart, EAT (Chili’s), DIN (IHOP and Applebee’s), and DRI (Olive Garden, Red Lobster and LongHorn) all experienced negative same-store sales growth during 1Q this year, despite an improving U.S. job market and consumer discretionary spending. Short of a miracle, I highly doubt these brands could develop any pricing power and reinvent themselves in the long-run. Long-term investors should stay away.

Casual Dining – 1Q  2013 Same-Store Sales Change

Casual Dining SSS

Source: Goldman Sachs