Grubhub’s announcement last week, that it will acquire mobile ordering and payments platform LevelUp, is the most recent reminder that software and technology is eating the restaurant vertical, no pun intended. The market reaction to the news underscored that view: Grubhub’s stock price surged by a staggering 25 percent, analysts said, on the news of the acquisition.
“Earnings were a fantastic beat, but the majority of this move is LevelUp. It improves their competitive long-term positioning,” said Guggenheim Partners’ Matthew DiFrisco, according to CNBC.
In food and beverage, Bypass President and CEO Brandon Lloyd told Karen Webster during this week’s Monday conversation, long-term competitive position is critical. That's because the complicated and deeply fragmented playing field that presents itself today in the restaurant space is only going to become more competitive going forward. The entire segment, he noted, is ripe for technological innovations and improvements, and the restaurateurs of 2018 know that. Restaurants of all types, sizes and descriptions are working overtime in reimagining how to bridge the physical with the digital worlds, something that — until very recently — was discussed, but never made a priority.
“The idea of being a truly omnichannel restaurant even five or 10 years ago was still a confusing idea in food and beverage,” Lloyd said. “The reaction was mostly in the family [of] ‘I’m not going to ship my food. This is more of a thing for, like, Target.’ It was hard to put their arms around. Now, it is much more of a question of how are they going to do this, not whether or not they are going to [do this].”
Though, as the saying goes, “where there’s a will, there’s a way,” the truth is that there isn’t necessarily a fast way, Lloyd said. Moving dining into the digital era is not, by nature, something one can make happen with the flip of a switch.
The Legacy POS Problem
Restaurants that wish to “go omnichannel” want to better serve and better understand the preferences of their guests, Lloyd said. The problem is that, until very recently, the legacy point-of-sale (POS) systems, which dominated the industry with things like on-site servers, made it incredibly difficult for restaurants to integrate with third-party apps that make those experiences — and data gathering — possible and run efficiently.
There are middleware solutions that can help, Lloyd explained, but that gets expensive for merchants that find themselves paying $10,000 per year, per location, just to run software. And that spend is terribly uneven. The restaurant POS, which processes about 90 percent of the average merchant's traffic, costs about $1,800 a month on average to maintain. At the same time, Lloyd said, restaurants spend about $1,200 a month to run their online systems to handle the 10 percent of traffic that comes to them via this channel. The real difficulty in making the omnichannel leap is the ball and chain of legacy technology.
This is changing, he noted. Merchants are beginning to embrace the new wave of POS technology providers that are built to be flexible and dynamic, and build online capabilities into their core product. However, that embrace isn’t going to happen overnight.
“This isn’t about just switching out some older POS systems for something new,” Lloyd said, “This is about rebuilding the infrastructure and ‘piping’ that undergirds these systems so that they function differently than they do today.”
He further remarked that it really doesn’t matter what POS system the restaurateur decides to use, since any and all of those technologies will help merchants respond more efficiently to new tech trends, know their customers better and allow third-party vendors a way to plug into POS more easily — and at a fraction of the cost. But getting that infrastructure into place is a time-consuming process all on its own, and is just the beginning of the omnichannel journey for the restaurant operator.
Transformations Take Time
It can be tempting to look at the quick-service restaurant (QSR) and dining space and wonder if the restaurants — like their cousins in brick-and-mortar retail — didn’t quite catch on to the emerging power of the digital economy fast enough. Instead, maybe they focused so entirely on where 90 percent of their business was happening — in their physical location — and decided that food services weren’t going to go digital.
There was, perhaps, some truth in that view a decade ago, when restaurants didn’t quite get how they fit into an omnichannel world, Lloyd noted. However, more recently, the situation has been about the desire to do something and hit hard against the wall of any practicalities to do it.
“Transforming a business [from] analog to digital is difficult to do. If you look at Panera and Starbucks, who both have over 30 percent of their customers coming in through their digital channels, they’ve been at it for 10 years and 7 years, respectively,” Lloyd said.
That's because, he noted, Starbucks and Panera realized they weren’t just rolling out new services, but trying to modify their customer’s behavior over time. So, first, they launched mobile payments and rewards, then order-ahead so that all of the elements stacked easily together, and slow-walked the customer to a new experience in the store.
“For 50 years, consumers have been walking in to stores and handing over a credit card,” Lloyd said. “It takes time to change that ingrained behavior.”
That is challenging, and for many of the large merchants it has worked with so far, Bypass has noted that their efforts have been rather hampered by the fact that they’ve had to cobble together their omnichannel offerings in a somewhat scattershot way. The goal now — that restaurants are better understanding because of the established Starbucks/Panera handbook — is really working toward working a multi-pronged, multi-year approach that helps their customers wade more efficiently into the multi-channel experience the business is trying to build.
The Evolving Future
Not every brand has the same path forward when it pushes into the omnicommerce world, Lloyd noted, because so many variations effect what the right path is going to look like. For example, size matters a lot in considering the plan. For massive players like Panera and Starbucks, a strategy centered very intensely on consumers using their own proprietary apps made a lot of sense, because both are big and ubiquitous enough to persuade customers to download their apps.
Consumers, however, do not want their phones saturated with the apps of every place they might conceivably dine. A one location shop, no matter how beloved, probably won’t get the download. Even if they could, Lloyd noted, there are many regards in which small and even very successful medium-sized brands still can’t do what Starbucks and Panera did.
“Starbucks spent $200 million over the course of 10 years building that system. Panera spent 7 years and $100 million,” Lloyd said.
There are, at best, a handful of chains and brands that can throw that kind of effort at omnichannel. But at the same point, Lloyd told Webster, that doesn’t mean there aren’t powerful omnichannel opportunities for smaller and mid-sized brands that are willing to use different tools. In the market that Bypass services (restaurants with over 10 locations, although Lloyd said most of its restaurant customers operate hundreds of locations, and even as many as the low thousands), those paths are what the Chief Technology Officer (or local equivalent) is more concerned with solving.
“We talk a lot about how to build that core technology — the POS — and upgrade it, so they have a way to deal with the modernization pressure they are encountering to put new and better systems in place,” Lloyd emphasized. “For small merchants, we can streamline that by offering recommended options. For bigger merchants [that] are using something specific, we can work with whatever they have.”
However, he noted, the market is changing in some homogenizing ways. The day of the middleware operator — which connects an old POS system to new third-party services — is coming to an end. Restaurants want providers that actually deliver items, instead of just facilitating a connection so that someone else can provide value. From there, it depends on the restaurant itself. An establishment selling healthy food, and looking to bring new feet in the door three days a week, probably needs a different strategy than one offering an over-the-top gastronomic adventure.
The product one is bringing to market does — and should — dictate a lot of strategy.
Lloyd said restaurant companies need great operators and always will, adding that it’s a mistake to think they can “AI” their way out of a great operator. Making those operators more efficient by putting the right information into their hands, which will give their guests the experience that the brand wants them to have, is the right recipe for success.