Payments Innovation

Amazon: QSRs’ Big Threat Or Essential Lifeline?

The restaurant industry today is a study in contradictions.

Census data tells us that roughly 44 percent of what consumers spend on food comes from restaurants, rather than groceries for home.

Yet NPD reports that 49 percent of all dinners purchased from restaurants are now eaten at home.

In 2017, the restaurant sector, overall, grew 4.3 percent over 2016 — its eighth consecutive year of growth. Experts predict that 2018 will be another year of growth.

Yet, these same industry analysts report that foot traffic is down 2.5 percent across the board so far this year, and, with the exception of fast casual, so are same-store sales. Profits are reported down too. Some of that decline in foot traffic and profits is attributed to quick-service restaurants (QSRs) and fast-casual chains opening more stores, foot traffic being diverted to other locations and the costs related to expansion.

But that’s not a reason to think that all is well in restaurant land.

 

What’s Really Driving Restaurant Growth?

What’s keeping the industry — across the board — afloat is bigger restaurant checks, up nearly 3 percent over last year. But those bigger tickets aren’t because people are ordering more things when they eat out; it’s just more expensive to order from the menu.

Restaurants are raising prices to cover rising costs, including labor and delivery aggregators. Analysts say that if not for the bigger tickets, the restaurant category overall would show no growth in the decade following the Great Recession.

QSRs are the restaurant industry’s poster children for feeling the pinch from all sides.

This segment accounts for 57 percent of foot traffic across all restaurant segments, and QSRs have always been the consumer’s “go-to” for good food served fast. Convenience, price and food quality are the QSR’s main selling points.

Yet, consumer eating preferences are changing — so are the times of the day that consumers now eat their meals.

And so is how consumers think about convenience and their food choices.

 

How Do You Spell Convenience?

Consumers want to eat breakfast food at 12:30pm, not 8:30am; snacks or smoothies at 3:00pm instead of a more traditional lunch; bowls and smoothies instead of a sandwich or a salad during the typical lunch hour and dinner at 7:30pm or 8:00pm.

QSRs with more traditional menu offerings set times during which they offer those items, and set store hours struggle to keep pace. QSRs also aren’t the only choices consumers have today for a quick, convenient, affordable and quality meal.

In 2017, prepared foods and meal kits sold in grocery stores accounted for $35 billion in sales and are expected to grow at a rate 5x that of traditional restaurants, according to NPD. Meal kit options and prepared food selections in grocery stores are expanding to get feet into the grocery store and up the number of visits they make each week from 1.3 to something more.

Convenience stores, focused on reclaiming the convenience mantle they say they were created to fill, are upping their game to get in on the higher-quality prepared foods and meal kit action too.

Not only are the prices of these prepared food and meal kit options comparable to QSRs and fast-casual chains, but consumers can buy and take away food they can heat up or spend minimal time preparing at home to eat with the kids or while watching Netflix.

Remote workers, who used to walk or drive to the nearest QSR to get lunch when they weren’t remote, now walk to their refrigerators instead to eat leftovers or the prepared food they picked up the evening before or just had delivered.

 

Navigating the Shift

QSRs and fast casual restaurants recognize these shifts and are making an effort to respond.

Taco Bell made news when it expanded its hours and menu options to meet the food cravings of the 3:00am to 4:00am crowd, with great success.

At the same time that consumers have decided they want to eat breakfast all day, IHOb shifted its focus to highlight burgers and other “fast casual-esque” menu options for consumers in search of a quick dinner on the way home. IHOb also allows consumers to order ahead from its app so they can walk in and sit down to eat without waiting to be seated and/or to get their food once seated.

That option is something the Applebee’s VP of strategy told us he and his team are exploring too — and for the same reason.

Technology is playing a huge part in helping QSRs bridge the digital consumer expectation gap.

 

Are QSRs Innovation-Ready?

Our work with cloud-based POS provider Bypass and Bank of America Merchant Services in analyzing the QSR sector each quarter also reflects an increased emphasis by this sector on using new tech to innovate and remain competitive.

This work, the Restaurant Readiness Index, examines a random selection of 178 QSRs and feeds more than 100 features available at those establishments online or via mobile apps into our statistical models to create an “innovation readiness” metric for each establishment and the sample overall.

Of the more than 100 features we examine to produce the Restaurant Readiness Index, we pay particular attention to the 15 that account for 80 percent of the Index metric value — and, therefore, help to hone in on what makes a QSR innovation-ready or not.

That Index score serves as a benchmark across the establishments we track and helps us identify and analyze trends and patterns. As part of this study, we use eight of the leading QSRs — the big names, including McDonald’s, Taco Bell, Starbucks, Dunkin’ Donuts — as our control group to add additional context to the benchmarking exercise. The Index score goes from 0 to 100, with higher scores indicating greater readiness.

Our latest report shows a few bright spots, a disturbing trend and another contradiction that could potentially spell trouble.

Let’s start with some good news.

 

The Good News: QSRs Are Focused on Making In-Store Better

The bright spot is that QSRs are doing more to make their in-store experiences more expedient and cost-effective.

We’ve seen an uptick in the installation and use of kiosks to make the in-store ordering process more efficient and, frankly, in effort to contain labor costs. EMV, QR codes and contactless payments all showed an uptick in adoption to keep lines moving, support digital payments schemes and keep fraud in check.

The adoption of cloud-based point-of-sale systems — 61 percent of our sample have them — provide establishments with a greater range of payments and commerce opportunities, even if they don’t have all those options in place today, including two of the features that are also important measures of innovation readiness: the ability to create and promote in-store offers and deals and update inventory in real time.

 

The Bad News: QSRs Are Putting In-Store Ahead of Digital

Now, the disturbing trend.

When it comes to delivering the experiences consumers now use to do their own benchmarking of an acceptable QSR service experience, supporting order ahead, dynamic inventory status, beacon technologies and digital wallets are much more important than efforts to offer in-store promotions or displaying static inventory.

QSRs are local businesses, even if they are part of a national or global chain. As local establishments, QSRs have always defined convenience as being a short walk or drive away for a consumer to get good food, fast and cheap, and they do everything they can to improve that in-store experience.

That’s a bit like Nero fiddling while Rome burns.

QSRs are doubling down on improving their in-store experiences while those consumers are using digital methods to minimize the time they spend there, if they even venture inside at all.

What our Index shows this quarter — and last quarter too — is that many QSRs remain focused on how consumers interact with them in the store and organize their in-store processes to support that in-store service model.

That’s coming at the expense of doubling down on the digital features that can improve a QSR’s ability to remain attractive to a consumer with other options to find good food conveniently: including grocery and convenience stores.

 

The QSR Digital Disconnect

Our Index benchmark this quarter reflects this disconnect: a low score of 38.7 out of 100 across our entire sample, which reflects a slight, but only very slight, improvement over the 38.0 score we saw last quarter.

Top performers did better — but not a whole lot better — averaging 58.1. Bottom performers averaged 17 out of 100, and firms with fewer than 26 establishments were among the worst performers. Those with 26 to 50 performers were among the most improved but still sub-50, with an Index score of 44.

That disconnect puts most QSRs out of step with how consumers define convenience today and expect the QSR establishment to respond.

Convenience now means meeting consumers in the digital environments they use to order their food. Maybe that’s still walking into a favorite establishment to place an order and maybe even using a kiosk to do that. Maybe that’s also even sitting down in that establishment to eat that food.

But, increasingly, that’s ordering ahead to skip the wait — walking in or driving through to pick up food to eat back at home or at the office.

And ordering ahead from their cars using connected devices they bring with them or have available via their car dashboard. Our Digital Drive study of 2,000 consumers, published in January, reported that $212 billion of commerce is done while consumers commute to and from work, with $66 billion in food and coffee orders alone.

Or ordering from an aggregator that can bring food to where it’s convenient for the consumer to eat it.

That creates a rather material dilemma for QSRs: how to go digital in a way that preserves the customer relationship, their brand and their business.

 

Can Mobile Payments Help?

The default answer is often a mobile app, and, for larger players, that can make sense. But unless a QSR is one of the big brands with consumer scale, the prospects of a consumer downloading an app once, much less using it beyond that first interaction, is very likely slim and none.

Most QSRs recognize this too — with only a little more than a third of our sample having a branded mobile app.

Then there are the delivery aggregators — Grubhub, Uber Eats, DoorDash, Postmates and others like them — that give these local QSRs a chance to be discovered by consumers looking for the convenience of delivery. This quarter, we observed a more than 5 percent increase in the number of establishments that have opted into a third-party aggregator for that reason.

That decision comes with a downside — actually, two of them.

The first is the risk that loyalty and affinity move away from the establishment to the delivery aggregator, while the blame for service quality remains with the establishment.

Meals prepared by the establishment are delivered by people wearing shirts and carrying bags with the delivery aggregators’ logos on them. But if the food is sloshed around, cold or missing something that the aggregator forgot to put in the bag, it’s the establishment that gets the blame.

All that said, it’s the only option most QSRs have to deliver food at scale.

The second is the complexity and expense of managing delivery aggregators. Managing multiple iPads across multiple service providers is a process and a management challenge, not to mention an expensive service for the restaurant to support.

Many restaurants have reported that aggregators have become the new “Groupon” — they lead to an increase in the volume of unprofitable orders but don’t produce a loyal following. And, with it, a degradation in the service quality directed to their regular customers.

Of course, there are ways to use aggregators to make the brand connection and lessen restaurants’ dependency on them as the channel to the consumer. Integrating sign-ups to a QSR’s website for email promotion or loyalty programs are among the ways that some in our sample attempt to mitigate that risk.

At the same time, aggregators, who themselves are awash in red ink, are exploring new service models to improve their margins by competing against QSRs and the broader restaurant segment.

Warehouses are being turned into ghost or cloud kitchens that delivery aggregators are using to reduce and/or eliminate the dependencies on the restaurant middleman. Participating food operators have the chance to operate delivery-only “restaurants” cheaper than it costs to open a restaurant and see it as a potential win-win.

Time will tell.

Others are exploring options to leverage their expertise in logistics and delivery using a model that gives the restaurant brand more of a consumer presence by white-labeling their services. We observed this quarter across our own sample that many cloud-based QSRs are exploring options to integrate with those who provide such an alternative.

All of this, for me at least, offers an observation and raises a bigger question.

The future of QSRs will rest with their ability to embrace digital and scale; even the largest players are too small to be in all of the channels and ecosystems that consumers will use increasingly to find and order from them.

 

Convenience — At Scale

Digital payments will be a key enabler to that experience but so will aggregators and ecosystems that can reach a critical mass of consumers — and manage the logistics associated with order, payment and fulfillment.

Many have tried, but few have managed to achieve that scale.

Platforms that have tried to aggregate local restaurants run into headwinds of getting enough consumers interested in a steady stream of QSRs — and vice versa — and solve the logistics conundrum.

Aggregators have a density of consumers and can solve the logistics challenges but haven’t figured out how to make delivery alone a profitable business. Their path to profitability is to explore ways to disrupt the segment by disintermediating the restaurant entirely through delivery-only restaurant concepts.

There is one player, though, who checks all three boxes and even offers consumers a complete portfolio of convenient food options.

 

The Amazon Effect on QSRs

Amazon.

Amazon Pay Places, through a partnership with Clover, allows select QSRs running the Clover POS system to offer consumers order-ahead capabilities from their online menus — using their Amazon Pay account to place and pay for the order.

Amazon Restaurants, through a partnership with Olo, gives consumers in selected geographies the chance to order from 200 or more restaurants and have their food delivered using Amazon’s Prime Now services — also ordered and paid for using the consumer’s Amazon Pay account.

Amazon has also launched its own line of meal kits and, with the acquisition of Whole Foods, has expanded the consumer’s options for the convenient online ordering, delivery and pickup of a range of prepared foods — from meal kits to prepared foods.

Today, consumers in the markets Amazon serves can order ahead for pickup from a local QSR, order ahead for delivery from some the largest QSRs and fast-casual chains and order ahead from a selection of prepared foods at Whole Foods and have it delivered to their front door or pick it up from Whole Foods on the way home. Even using Alexa.

The question is whether Amazon can and will go local — really local — and create with QSRs the same kind of third-party marketplace for food services that it has created for other products that it sells on its platform.

Amazon has the digital assets to do it and the logistics expertise to bridge the digital order with the physical requirement for delivery.

Food also checks the Jeff Bezos box of something that everyone needs to buy, giving Amazon the chance to expand the share of consumer spend it now has on food by blurring the lines between food eaten out and food eaten at home — options already aggregated within the Amazon platform and enabled via Amazon Pay.

QSRs now face the same dilemma as other small retailers: work with Amazon or compete with Amazon.

Neither solution may go down very well.

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