The Restaurant Coronavirus War Chest

Welcome back to The Innovation Armory. This week’s edition highlights key investment areas for restaurant operators, restaurant tech founders and investors that will be important in adapting to the large dislocation to the food sector caused by COVID-19. In addition to much of the sanitation and contactless process innovations underway, I highlight a framework of select technology tools, process improvements and partnership innovations that ought to be considered as part of a holistic coronavirus response war chest.

Separately, I am still conducting a few remaining discussions with black and female founders for the upcoming piece sharing stories of under-represented founder groups. Next week, I will share these stories to highlight the barriers faced by under-represented founders and to empower change in our community. Thank you to the founders who agreed to share their personal stories. Now onto this week’s update.

    The restaurant industry has been severely impacted by social distancing initiatives. Restaurants are unable to seat indoor dine-in patrons and many have experienced meaningful same store sales declines and deterioration in profit margins. Restaurants have become almost entirely reliant on delivery and contactless pickup systems to reach consumers. While the rest-in-place orders are temporary, COVID-19 will have permanent changes on the food sector and numerous others that continue to linger for years and dramatically affect consumer behavior. With some restaurants on the verge of bankruptcy, operators must adopt the mentality of “adapt or die.” While the road to recovery in the sector will not be easy, a combination of existing technology tools, new innovations and partnerships can provide operators with a loaded war chest to defeat the coronavirus and adjust to the post-pandemic reality. In addition to much of the sanitation measures and contactless pickup / payment systems being put in place, restaurant operators ought to consider investing along the following technology trends to successfully transform their operations and avoid indefinite disruption:

1. Prepaid Reservations – eating out is a type of experiential entertainment. People don’t only eat at restaurants to satisfy hunger but enjoy gathering with others, a refreshing ambiance and interfacing with an experienced wait staff. Most other experiential entertainment activities require patrons to pre-pay for tickets or reservations, i.e. movie theatres, plays, and niche site-based entertainment concepts such as Axe Throwing. After being restricted from dining out at restaurants during rest-in-place orders, restaurant-dining experiences will psychologically feel like more of a premium service and luxury. Currently, high-end gastronomic restaurants will often require prepayment for pre-fixe meals. Post coronavirus, this should and will become more commonplace for average-priced sit-down restaurants. Prepayment or cancellation penalties are commitment mechanisms that prevent patron no-shows. Especially after COVID-19, when most restaurants will be forced to operate under-capacity to ensure appropriate table distancing, the incremental cost of a no-show will be even more damaging. Restaurants could still save a select number of walk-ins or last-minute reservations for price insensitive customers and charge a premium. Moreover, over the long-term, prepayment data can be integrated with other data sources (POS, CRM, social media, etc.) as the inputs to supply chain and inventory planning tools. Prepayment has a significant long-term capacity to reduce excess food costs and meaningfully decrease food waste.

2. Grocery and Restaurant Convergence – during the pandemic, traditional grocery stores have been overwhelmed by large numbers of shoppers, facing strained supply chains and capacity constraints in stores given social distancing measures. Numerous additional grocery delivery startups have been popping up to try to alleviate some of the burdens on the grocery system. Food supply chain issues largely stem from a misallocation of fresh goods between channels, i.e. food distributors have not been able to move more perishable items into grocery stores vs. restaurants fast enough. In the future, there could be a convergence between restaurants and grocery with some restaurants taking on grocery-type roles. Instead of dealing with the complexity of allocating food supplies across channels during coronavirus, food distributors should continue to sell groceries through restaurants. This provides food distributors’ restaurant clients with more cash flow during the crisis and merely monetizes perishable inventory through a different fulfillment touch point. This strategy is the food distributor equivalent of the “buy online pick up in-store” model that has become more prominent in retail in recent years, leveraging a restaurant base as stores. Some consumers may prefer fulfillment through local restaurants due to proximity to their homes or lower risk of COVID-19 exposure relative to a larger grocery store. Technology tools should enable restaurants to monetize excess supplier shipments and ingredients directly to end consumers, in effect allowing restaurants to serve a dual-purpose as a micro / neighborhood grocery store. In the short-term, this will provide restaurants with needed liquidity to weather COVID-19. Over the long-term, these excess ingredient marketplaces will allow restaurants to convert supply chain inefficiencies into revenue centers by passing excess ingredients onto consumers. Restaurants could creatively try to sell excess ingredients at a premium by selling deconstructed meal kit versions of popular dishes for consumers to make at home. These kits should include partially prepared components so as to not expose all elements of a proprietary recipe and still incentivize patrons to dine-in post-crisis. Moreover, the food industry could see the emergence of more new builds that have both a grocery and restaurant component, which would provide supply chain benefits to operators and time savings for consumers who can eat and grocery shop at the same location. In the same way many traditional retailers, including Restoration Hardware in NYC, have added bar and restaurant service to incentivize more foot traffic, grocers may begin using bar and restaurant additions in the same way, especially as more delivery-only grocery startups expand and try to disintermediate traditional grocers.

3. Hospitality and Government Partnerships – once rest-in-place orders are lifted, for at least a transition period, numerous restaurants will be unable to seat guests at full capacity and will have to seat the dining room far below capacity to space out customers. Some restaurants may struggle to break-even at lower utilization levels. Operators should seek out partnerships to offload customers above new utilization norms to be served in other spaces. Restaurants could work in partnership with city governments to creatively use outdoor nearby parks or green space to seat patrons. Additionally, due to COVID-19’s impact on hospitality, hotels will likely have excess capacity and conference areas, banquet halls and rooms could be turned into makeshift dining room extensions with numerous restaurants sharing a larger kitchen space to service spillover customers. With both hospitality and restaurants suffering lower utilizations, but restaurant demand likely to come back before travel, this could be a win-win arrangement through creative revenue share agreements

4. Proprietary Ordering Marketplaces – Grubhub / Seamless and other delivery aggregator marketplaces have received criticism for predatory practices towards restaurants by extracting large delivery fee premiums. Post-crisis, more restaurants may invest in white-label ordering development technologies to facilitate an online ordering experience integrated with and native to their own websites or applications. While restaurants will have to pay a fee to establish these native integrations, they will save costs on predatory economic arrangements with current aggregators and also have greater control over their own brand presentation, product information and menu management.

5. Ghost Kitchens – increasingly more restaurants rolling off of long-term leases or seeking more efficient access to the delivery market will look to ghost kitchen models to process delivery orders. Ghost kitchens are shared outsourced kitchen spaces that are optimized with software and technology to process high volumes of delivery orders. Existing ghost kitchen concepts will have more efficient opportunities to expand real estate locations into more populous areas with the drawdown there has been in urban real estate rentals. Expect ghost kitchens to more aggressively expand into additional services including ordering marketplaces for participating restaurant brands and potential courier / delivery services. These new products have the ability to save costs for restaurants through an end-to-end platform offering that would reduce aggregate solution cost and unlock efficiencies through service integration.

6. Voice Ordering Platforms – even though marketplace volumes through Seamless / Grubhub are up, many patrons still seek to place orders via phone calls. Especially among older adults, some baby boomers and elderly prefer to place an order via telephone. Optimized telephone ordering has the potential for better economics to the restaurant relative to aggregator ordering portals by saving fees paid to lead generation. Restaurants will invest more in phone order optimization including phone virtual assistants and voice recognition to allow for greater throughput from phone orders. Domino’s Pizza has already invested heavily in these proprietary technologies. These automation tools will also free up floor employees to focus on more pressing tasks and thereby improve workforce efficiency.

7. Experience Marketplaces – in response to the pandemic, Airbnb launched an experiences marketplace to help connect consumers with locals providing interesting experiences including fitness, dance classes and more. Once the rest-in-place orders are lifted, stay-cations could become a more popular form of vacationing as Americans look to minimize the potential risk of infection from travel that is further away. To capitalize on a greater willingness amongst locals to explore interesting local experiences, restaurants could integrate with Airbnb, Booking.com, Expedia and other travel experience aggregators to offer unique, premium culinary experiences including cooking classes, meet and greets with the chef or alcohol tastings during non-peak hours. In addition, restaurants could seek additional partnerships with credit card companies to enable customers to more seamlessly redeem rewards points for proprietary culinary experiences rather than travel plans.

8. Back-End Kitchen Automation – some futurologists predict robots could soon replace a restaurant’s waiting staff, lowering infection risk and improving store efficiency. While select server roles could be automated much further into the future, front-of-house automation is not likely to occur for a while. Diners enjoy the hospitality, experience and advice of wait staff and front-of-house robotics would be off-putting to too many diners. However, restaurants will invest substantially over the coming years in robotics that automate specific back-end functions. Of course, there are certain culinary techniques or recipes that would be difficult for a robot to execute. However, select routinized tasks (rolling pizza dough, garnishing plates, chopping vegetables) could become increasingly automated by modular robots. This automation would provide sanitary benefits by reducing points of human contact that could contaminate a dish. Moreover, over the long-term these investments would create labor cost savings for operators and improve kitchen efficiency to enable turning of more tables.

The restaurant industry faces a sea change in light of current social distancing initiatives, which will prompt new regulation and lasting changes to consumer behavior and permanently impact the restaurant sector. Post-pandemic, consumers will be open to trying new processes and tools that allow them to safely enjoy dine-in restaurant experiences. Restaurants should seize this opportunity to reset industry norms and practices in a manner favorable to owners. Effective operators can fortify their operations in the short-term and build sustainable long-term moats by investing in a variety of technology tools, creative partnerships and process innovations.

If you have comments or questions, feel free to reach out to [email protected].

All Innovation Armory publications represent expressly my individual views and do not represent the views of companies with which I have previously been associated or with which am soon to be associated. These publications are my personal opinions and are not meant to be relied upon as a basis for investment decisions.