Soaring Restaurant Costs Persist and Technology Emerges as a Potential Remedy

The Rise of Tech in the Restaurant Industry: Adapting in the Face of Skyrocketing Costs

In recent times, the restaurant industry is no stranger to rising costs of goods and labor. A fascinating Tik Tok resurfaced this week, showcasing a disgruntled Idaho man complaining about the price of his McDonald's meal, as the fast-food giant reported a surge in revenue resulting from a strategic hike in menu prices. While it's amusing, the video demonstrates a significant trend in consumer spending habits when it comes to food.

At the Global Restaurant Leadership Conference, Carlos Herrera, the Chief Economist for Coca-Cola North America, stated that consumers, at present, are paying more for food than ever before, resulting in them purchasing less overall. Over the past two years, restaurant prices have escalated faster than the overall rate of inflation. As of September 2023, the consumer price index was 3.7%, whereas restaurant prices have risen by 6% within the last year. According to Herrera, "We aren't heartless profit-seekers; we're dealing with rising costs." (Restaurant Business)

This predicament is particularly challenging for operators, as they've encountered a dramatic increase in cost of goods and labor. California, for instance, recently passed a law to raise the minimum wage for fast food workers to $20 per hour in September. As some predict, this move could instigate a domino effect in other major states, posing problems for restaurant operators nationwide.

Consequently, operators have no other option but to shift the burden onto consumers to make up for these changes, ultimately affecting the frequency at which consumers opt for restaurant food within a week. In light of this, Herrera has coined 2024 as the "Year of Management." He argues that restaurants have reached their limit for price increases and must now discover ways to stimulate sales or reduce costs without drastically altering their business model. Based on 2023's overwhelming data, technology appears to be the clear answer. (Restaurant Business)

For Yum! Brands, they've managed to boost total sales substantially through various digital avenues. They aim to reach $30 billion in digital sales by the end of 2023, an impressive leap from the $12 billion they yielded four years ago when they started investing heavily in their digital infrastructure. In a Q3 earnings call, CEO David Gibbs explained that their digital business experienced a 20% year-over-year growth, surpassed 45% globally in Q3, and accounted for more than $7 billion in sales during Q3. Gibbs sees digital sales as a win-win: "The digital sales dollars make us happy because our customers have higher checks, increased frequency when we transition to digital, and we gain the benefits of more efficient operations - all of which help our franchisees maintain solid unit economics." (QSR Magazine)

When it comes to specific technology making a positive impact, tablet and kiosk systems have made a significant impression on both boosting sales and reducing costs. Outback Steakhouse, following their implementation of tablets across 689 U.S. locations, anticipates they'll contribute a projected $55 million in productivity savings in 2023. They also hope the speedier experience will contribute to better traffic as well. (Restaurant Business)

Brands like Shake Shack, El Pollo Loco, and Burger King have also jumped aboard the kiosk bandwagon, attributing higher check averages, higher margins (since no cashier is required), and a large inflow of customer data as the primary drivers. Shake Shack estimates that their recent investment in kiosks has led to them making up over 50% of on-site sales in 2023. According to their CFO, Katie Fogerty, kiosks have become "Shake Shack's most profitable sales channel." Furthermore, Shake Shack has managed to cut labor by approximately 50 hours per week, a notable reduction in one of the most significant costs for any restaurant. (Business Insider)

Even technologies like Pour My Beer, one of Branded Strategic Ventures' first investments, have become indispensable in this era of escalating costs. Pour My Beer allows customers to pour their beverages at their tables through a dispenser, minimizing labor costs. The device pays for itself, with 80% of customers who invest in a dispenser recovering their costs within the first year, creating Statements of Profit and Loss that transform daily for restaurants.

As history demonstrates, goods and labor costs will only continue to climb. Although consumers will continue to buy food and beverages, the higher restaurants increase their prices, the less people will dine out. Eventually, prices will reach a point where some consumers will look for alternative means of food and beverages, outside of restaurants. Consequently, it falls upon operators to find smart, efficient ways to maintain demand where it needs to be. Technology, as it seeps further into the fabric of modern hospitality, can provide the necessary and logical solution to the challenges confronting the hospitality industry.

Insights and Trends

Automation and AI-powered kitchens: They help reduce reliance on manual labor for repetitive tasks and enhance food preparation consistency.
AI-driven POS and inventory tools: These innovations streamline front-of-house operations, provide staff with actionable insights, and offer menu upsell suggestions.
Predictive Analytics: AI-powered tools analyze sales data and consumer behavior to optimize inventory levels, predict demand, and minimize waste.
Digital and Contactless Customer Engagement: Self-service kiosks, online menus, mobile and online ordering facilitate a seamless customer experience and improve order accuracy.
Integrated Reservation Systems: Partnerships between apps like Uber Eats and OpenTable allow restaurants to draw more clients by offering integrated dining reservation and incentives through popular platforms.
Data Analytics and Personalization: AI applications enable dynamic menu adjustments based on inventory, customer preferences, and trends, reducing waste and enhancing sales of high-margin items.
Personalization: Digital menus and marketing platforms use customer data to offer personalized recommendations and promotions, strengthening customer engagement and repeat business.
Cost Management Technologies: Labor optimization software, inventory management systems, and data-driven staff scheduling tools help restaurants assign labor efficiently and reduce unnecessary labor costs.
Portfolio companies seeking to mitigate increasing costs in the restaurant industry might find innovative solutions in the latest technologies, such as automation and AI-powered kitchens, to reduce reliance on manual labor for repetitive tasks and bolster food preparation consistency.
In an effort to stimulate sales or reduce costs without altering their business model significantly, restaurant operators are leveraging digital platforms, like self-service kiosks and contactless customer engagement solutions, to provide a seamless customer experience and improve order accuracy, thereby saving on labor costs.
As technology continues to emerge and seep into various aspects of the hospitality industry, leaders of portfolio companies in the hospitality sector should carefully evaluate these advancements to identify opportunities for cost savings and increased efficiency, ultimately enhancing the lifestyle and financial prospects of their portfolio companies in an ever-evolving business landscape.