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Restaurants, and their investors, confront a changing reality

Rising labor costs, weak sales and an evolving consumer are pushing the industry to change. But is it worth it?
Photograph courtesy of Spyce Restaurant

Fred LeFranc was thirsty. The founding partner of Results Thru Strategy asked for water while onstage at the Restaurant Finance & Development Conference this week, and out came a small, white robot with a bottle of water atop a tray on its head.

Penny has made appearances at other events, notably the National Restaurant Association Show. So has Sally, a salad-making robot, and Flippy, a burger flipping robot.

Over the years, efforts to automate the back of the restaurant house have come and gone. But this time, such efforts appear more serious. As labor costs skyrocket, more companies find labor difficult to come by even when they can pay higher rates, and consumer tastes evolve and change, robots begin to look awfully attractive.

“We have a $15 minimum wage and a robot costs $30,000,” LeFranc said. “Do the math.”

Industry events have increasingly focused on the changing reality of the restaurant business, that as sales remain weak, labor and other costs rise and consumer tastes change, operators and investors have to consider how the restaurant of the future should operate.

At the same time, however, many wonder whether these changes are necessary or even worth it. Many question the profitability or growth potential of delivery. And many also consider robotics to be the antithesis of what the industry is all about: people.

“If that ever happens at a Black Bear just lock me in a closet,” said Bruce Dean, CEO of California-based family-dining chain Black Bear Diner, speaking of robotics. “I believe we’re in the people business. People come in to sit down and enjoy their meal.”

Yet technology, whether it’s through robotics or through digital orders or kiosks or delivery, is a growing reality in many restaurants.

Consider some recent investments. Zume, the robotic pizza maker that promises logistics designed to make the industry more efficient, recently raised $375 million.

Spyce, which developed a robotic, back-of-house system to make its bowls, raised $21 million with just one location.

Bankers apparently looking at Uber’s valuation value the delivery service, Uber Eats, at $20 billion on its own. Other delivery companies are also receiving millions in investment as investors bet on their rapid future growth.

But even some tech-savvy restaurants are getting big numbers. Fidelity Investments recently led a funding round of the salad chain Sweetgreen, valuing it at $1 billion.

Sweetgreen has 90 locations, all leased.

Do the math and that’s $11 million per existing location.

Many people privately speculated that one of the drivers of the chain’s valuation was its tech-forward business model.

Old guard chains have helped lead the industry in this direction. Chains such as Wendy’s and McDonald’s have made significant investments in kiosks, following the lead of chains like Taco Bell.

Many operators view technology as a way to boost efficiency as they face mounting labor costs, easily the industry’s biggest concern. Numerous speakers mentioned labor as the primary challenge facing operators today.

Even a session on the impact of legal cannabis by Bloomberg Intelligence Consumer Analyst Mike Halen mentioned labor—he noted, for instance, that the biggest potential impact of legal weed will be on labor costs, as marijuana dispensaries provide another major competitor for restaurant workers.

“In the 12 years that I covered the industry, this is the toughest labor environment I’ve seen,” Baird analyst David Tarantino said at the conference. “It’s tough to find good talent in the restaurants. And it’s tough to keep restaurants staffed.”

But it’s not just labor costs pushing this evolution into technology. The industry has struggled with weak traffic and sales for years. Many operators are turning to technology to market themselves to existing customers and gather data on them to get any edge they can.

And they are instituting delivery at a breakneck pace.

“It’s not just an offensive investment,” Gunther Plosch, CFO of The Wendy’s Co., said during the conference. “It’s a defensive investment. Everybody is doing it. This is the new table stakes.”

The sense among operators attending the conference is that delivery is a necessary evil. While some operators say they can generate a profit with the orders, others say that the economics of the delivery fee make that difficult. And many question the service’s long-term growth, wondering whether it will work in suburban or rural areas.

The economics of delivery and the cost of these investments only add to the concern the industry has. Stress on the restaurant industry is arguably at a post-recession high: 10 restaurant companies, including two last week alone, have filed for bankruptcy protection.

Franchisees at several chains, meanwhile, are organizing and becoming increasingly aggressive advocates. That includes Jack in the Box franchisees that have called for the removal of that chain’s CEO, Lenny Comma.

And it includes McDonald’s, one of the most aggressive chains at adding kiosks and delivery and mobile ordering. Franchisees have formed the first independent association in that company’s long and storied history.

“Franchisees are becoming internal advocates,” Allan Hickok, senior advisor with the Boston Consulting Group, said at the conference.

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