Unpacking the Restaurant Technology Landscape

Food, food, food. It’s what occupies our brain space for a good chunk of the day. What am I going to eat for lunch today? Will I be healthy like I promised myself? Does the restaurant that my friends want to go to have gluten-free options for me? How much do I want to budget for my meals this week? On and on…

Because food is at the center of everything we do, entrepreneurs and startups are constantly trying to innovate and improve the customer experience. Given the infamously low margins in the restaurant industry, new solutions must have cost efficiency at the forefront to the nth degree (i.e., even more so than is the case in other industries). If a new software is to be implemented, the ROI must be obvious right off the bat; further cramming down on margins is a non-starter for restaurant owners.

IN-HOUSE

We’ll start with tackling the traditional brick & mortar dining experience.

Where Are We Today?

Despite the challenging landscape, the restaurant industry has seen some progress in regards to technological advancement. For one, more modern POS (point-of-sale) systems are becoming commonplace and replacing legacy versions (think NCR, for example). Two of the newer, bigger players are Square (IPO’ed in 2015) and Toast (IPO’ed in 2021). Both offer a large suite of products and services aimed at streamlining restaurant operations; the platforms provide one central place to manage all orders (in-house & delivery), payments, inventory, menu changes, etc. I won’t go through a detailed comparison between the two as that’s already been done but essentially it comes down to whether a restaurant is willing to pay more for a deeper feature set (Toast) or finds a lower price point more than sufficient for ROI purposes (Square).

There are a number of other players in the space as well including TouchBistro, Upserve, CAKE and Revel, making this pocket of the industry less exciting when evaluating new investment opportunities. Especially since most of these players sell their own (proprietary) hardware to customers, restaurant owners want to see these fixed-cost investments pay off rather than constantly trying new iterations of POS systems.

Staffing optimization software solutions tell a similar story as there is a plethora of companies operating here and restaurant owners aren’t looking to constantly retrain employees on new tools that only slightly move the needle. 7shifts is one example of a solution that is making employee scheduling and division of tasks much simpler and less time-consuming. Critical to the platform’s success in 25,000+ restaurants is the fact that it integrates with the leading POS and payroll systems, keeping management centralized. It most recently raised an $80M series C round, which included a strategic investment from Union Square Hospitality Group (think: the creators of Shake Shack).

Other players in the space include Deputy, Push, SchedulePop and Quinyx.

In The Early Stages

Now that I’ve briefly covered areas in the restaurant tech space that are inching closer to maturity, which spots are in the infancy stages that we should be paying attention to?

The movement towards more tech-forward management systems has opened a new door: the data door. The amount of data that restaurant owners now have access to (thanks to their newly SaaS-driven businesses) is astounding. From sales data and customer preference insights to inventory information, business operators can’t let any of that go to waste. The challenge that they now face is successfully leveraging that data and extracting key takeaways, like other industries have been doing for years. Utilizing all of the available information to forecast and adjust business decisions in real-time can be invaluable to management teams and restaurants’ bottom lines.

And entrepreneurs are definitely taking note of this opportunity; the number of startups building here leaves restaurants with no shortage of choices. Just to name “a few”: Lineup, Galley, Bridg, Bikky, Avero, Ingest, ClearCOGs, Tenzo, Brizo, SynergySuite

Parsley, and Crunchtime. That’s 12 options right off the bat.

So, who will ultimately be crowned the winners? There are a couple criteria I’d look for that will be instrumental to these startups’ success. First is integration. Which other restaurant systems does each respective tool integrate seamlessly with? Are these the ones that restaurants are already using most frequently? Target clients will prioritize solutions that sit on top of their existing tech stack and pull in data from every corner, creating a comprehensive picture. Second is ROI — given the number of options out there, business managers will want to see the value-add quickly. Is the chosen solution helping me bring more first-time customers through the door? Increasing loyalty among return customers? Identifying opportunities to cut costs by improving inventory management? All of the above? A major differentiating factor here is data collection versus data analysis. Is the platform simply aggregating data from all other systems or is it truly providing actionable insights?

The third piece of the puzzle is sales strategy. The restaurant industry is extremely fragmented and selling solutions at scale is a major obstacle. It’s critical to see startups targeting large food groups early on as this will lay the groundwork for upselling to additional locations in the future. Selling to one-off restaurants only will create a significant uphill battle and likely slower growth rates.

Looking To The Future

Lastly, I wanted to cover some untapped or less developed areas of restaurant tech. I’ll start with the latter.

Automation and A.I. are two buzz words that are rampant across all industries today and the restaurant space is no exception. Restaurants had been suffering from labor shortage issues before COVID struck but the problem got significantly worse in March 2020. Today, 73% of restaurants say they are understaffed and on average, 21% of positions remain unfilled. Just compared to 2019, full-service restaurants are operating with 6.2 fewer kitchen employees, an unsustainable reality. And as the minimum wage continues to rise and restaurants experience pressure to offer benefits historically not ubiquitous in order to retain employees, filling all of these unfilled positions will be impossible. Because of these most recent trends, this infamously miniscule-margins business will be hard-pressed to find technology solutions that allow it to operate more efficiently with less staff.

McKinsey & Co estimated that 73% of the tasks that workers are responsible for have the potential to be automated. Perhaps more importantly, the previously hesitant-towards-tech-adoption industry, now, actively wants these solutions. 90% of restaurants agree that increased automation would allow staff to focus on other tasks (likely those that can’t be automated). There’s been a ton of R&D poured into tackling this beast and some solutions have already failed. I won’t spend too much time on the topic because it really needs an entire piece dedicated to it in order to fully do it justice but I’ll provide a quick snapshot of what’s already been tried:

• Zume was the pizza-making robot, which raised $375M from Softbank but completely pivoted to focus on food packaging after its burn rate reached $10M per day.
• Chowbotics was the salad-making vending machine that was founded in 2014 and acquired by Doordash in 2021. Less than 2 years after the acquisition, Doordash shut down Chowbotics..
• Founded in 2015 by MIT engineering students, Spyce also aimed to automate the salad-making process (though not in as compact of a space as a vending machine). It shut its doors to both Boston locations in late 2021/early 2022 and the tech was acquired by SweetGreen (though it’s not live at any SweetGreen sites to date).
• CafeX is the robotic kiosk that makes coffee but it has shut down its 3 SF locations and laid off staff. The kiosk’s retail price is $200,000.

There are a number of obstacles that have to be overcome before solutions like this can truly take off. For one, many of the above failed because they attempted to replace employees but were actually slower than humans and couldn’t multi-task. Second, the amount of upkeep required to maintain the machine’s productivity oftentimes creates more problems than it solves (not to mention how costly the upfront investment is). Third, customer preferences have to be taken into account, especially when the machine isn’t in the back of the house. Are everyday consumers ready to eat pizza or salad out of a vending machine? I would argue, no.

So is there any opportunity here? I think there are 2 primary places we’ll see successful automation in the near-term. The first is technology that aims to automate very tedious tasks that have zero variation. Taking the human out of pizza-making or salad-making is challenging given how many combinations there are for 1 pizza or 1 salad. For pizza, think about the number of different cheeses, sauces and toppings there are. For salad, just open Sweet Green’s app and you’ll see 7 different options for your base, 19 included and 15 premium toppings to choose from, and 14 dressings (plus whether it’s mixed in or on the side). I don’t think we’re close to eliminating the employee from that process. But solutions like Miso Robotics’ Flippy which solely focuses on making fries or Chippy (I promise these names are real) which hones in on perfecting Chipotle chips may see faster adoption. Flippy is rolling out to 100 White Castle locations this year after a successful pilot and has also secured a multi-million dollar contract with CaliBurger. The immense pressure that restaurant workers are feeling right now needs to be relieved somehow. When they are being pulled in multiple directions at once, they may leave the fries in for too long or take them out early, causing brands’ pride in their food’s consistency to suffer. Solutions that remove this seemingly small burden from employees will allow them to deliver better customer service and fill other gaps perpetuated by the labor shortage.

The second kind of technology solutions that can succeed in the near-term is one that complements the human workforce rather than trying to replace it. Food servers/runners fit into this bucket and we’ve seen some (very early) traction here. Bear Robotics’ Servi and Richtech Robotics’ Matradee can transport meals from the kitchen to customers’ tables and send dirty dishes back to the kitchen after customers are finished. You might be thinking, “How is this not replacing wait staff?” Servi & Matradee are freeing up employee’s time and allowing them to spend more of it with customers. Right now, a waiter/waitress is covering more tables than he/she is accustomed to and is still striving to get customers’ their food within the same time window, which means running back and forth from the kitchen and spending less time engaging with guests. With Servi & Matradee, one waiter/waitress can send a whole table’s dirty dishes back to the kitchen (in one trip) while starting to take the next table’s orders. This increases the amount (in tips) that wait staff takes home at the end of their shifts and reduces turnover as employees will be more satisfied. Saving these few minutes on each customer may seem inconsequential but operations in the restaurant industry need to be airtight and every second matters.

Caveat: one limitation I’d be remiss not to mention when it comes to solutions like Servi & Matradee is with regards to physical space. I could see these being more successful in suburban areas and at fast food restaurants, where there is more “dead space”. In areas like NYC, where restaurant layouts are super tight, servers/runners will likely do more harm than good.

Now, for the untapped opportunities. What I haven’t seen is technology that creates full, comprehensive profiles of customers. I’d expect to see facial ID or fingerprint readers become more common in restaurants given the number of use cases. Some might initially be hesitant from a data privacy standpoint but I believe the younger generations are close to a point where they wouldn’t even blink at the thought. We’re using our faces to open our iPhones countless times a day and, for the 1.5M people enrolled in Clear, every time you go through airport security; the comfort level will continue to adjust over time.

And think about how much more seamless the in-house dining experience can be with this technology. Rather than waiting for a hostess to seat your party upon arrival, facial ID or fingerprint software (if linked to your Resy account, for example) can give you your table number immediately. Going even further, if you’re a repeat customer, it can show you all the dishes you’ve ordered at that restaurant in the past and whether you’ve liked them or not. Or, even better, what if the recognition software could recommend the best dish for you given your dietary restrictions and what else you’ve eaten that day, helping customers work towards a more balanced diet? Lastly, there is an obvious use case for payment purposes, eliminating the need for the customer to wait for the check at the end of their meal and for the business owner to invest in payment hardware as diners’ credit card information will be automatically linked to their face or fingerprint. It might sound weird or outlandish today but I’m sure, years ago, we didn’t think we would be scanning QR codes stuck to every table in order to access restaurants’ menus.

Caveat #2: I do believe that there will be a ceiling for the level of automation that consumers are satisfied with in certain settings. For example, the fine dining experience is practically founded on human interaction (i.e., level of customer service); it’s nearly impossible to recreate that atmosphere through automation. While there will be plenty of use cases for A.I. to make restaurants more efficient, it will have to be balanced with customers’ expectations. If consumers are willing to pay premium prices for a higher-end experience, they’ll demand that the value be matched and not degraded.

OFF-SITE

Shifting gears from brick & mortar experiences to out-of-house dining.

Where Are We Today?

Very few, if any, are strangers to food delivery today. The plethora of apps (Doordash, Grubhub, UberEats/Postmates, Caviar) that bring your favorite restaurant’s food to your doorstep make it too tempting to consumers who try to commit to cooking more often. However, the ubiquitousness of delivery apps has not been easy for restaurants. Keeping up with in-house demand and delivery requests is nearly impossible, especially given the labor shortages discussed earlier. In addition, restaurants’ physical layouts are not properly designed for this. As one expert notes, “I predict that what used to be a 70/30 split, with more front-of-the-house dining space and a limited back-of-the-house kitchen area, will flip to 30/70, with more back-of-the-house space by 2025.” And lastly, the 3rd party delivery fees are eating away at profits. So, while delivery becoming a more commonplace option has its benefits, it also comes with hurdles that new technology advancements can attempt to solve (or at least mitigate).

In The Early Stages

One solution that’s aiming to tackle this problem and is starting to get more attention is cloud (or ghost) kitchens. The idea behind cloud/ghost kitchens is to allow business owners to prioritize the off-site dining experience. One shared “cloud” site features multiple brands preparing food for deliveries. Advantages include (1) sharing large fixed costs, (2) centralizing pickup spots for couriers to disseminate meals from, (3) reducing overcapacity issues & order errors that stem from the distracting nature of balancing in-house and off-site demand under one roof. However, there are a lot of drawbacks as well. For one, this approach erases the benefits that come with having a physical storefront, eliminating any business gained from natural foot traffic. This makes it especially challenging for new brands to get started with this method and would likely require a decent amount of marketing spend to take off. Personally, I’m not particularly bullish on this model being the wave of the future as the unit economics are very challenging but Uber founder, Travis Kalanick, would disagree. His latest venture, CloudKitchens, promises to help restaurant businesses grow “with lower risk and higher return” and has raised $1.75B according to Pitchbook. Depending on which side of the aisle you fall in the “Is uber a good business?” debate will likely influence whether you think CloudKitchens can gain traction. But with regards to the probability of turning a profit, I would bet against it. Kalanick isn’t the only one aiming to prove me wrong, though. Players like Forward Kitchens, Nextbite, Mealco, Lunchbox and Kitchen United are all looking to bring virtual restaurants to life and capitalize on the growing delivery demand.

Looking To The Future

Demand for eating your favorite restaurant’s dishes in the comfort of your own home isn’t going away (in fact, it’ll likely only increase). But the opportunity to improve the process and customer experience is tremendous. There are tons of broken links in the chain as it stands today. From the reliance on an extensive network of human couriers and large 3rd party fees to significant delays (or worse, cancellations) and poor maintenance of food quality, both restaurants and customers are unsatisfied with the experience. We need a better system.

For starters, I’d love to see an AMAZING route optimization software. When I watch a delivery courier pick up my food, bike past my apartment to drop off another person’s food (likely cold at this point) and then bike back to my apartment, that tells me that the current methodology isn’t optimized. Perhaps, there needs to be a system, or at least an option within the system, where customers can place their dinner orders between 3pm and 5pm, agree to a 2-hour delivery window and allow that amazing route optimization software to go to work. Obviously, you’ll still be able to place orders at 7pm but at least this will improve couriers’ efficiency rate, minimizing their travel time in between deliveries and increasing the number of customers they can serve per hour (thereby, increasing the dollars they go home with). From a consumer’s perspective, especially for those that can think 4 hours ahead, you might be giving up a more precise food arrival time but, let’s be honest, how often is that original target actually met today? And, if this process works as it should, we should see delivery fees go down (benefiting from economies of scale) and maintenance of food quality/temperature go up.

Eventually, we’ll get to a delivery system that is less centered around human couriers. Although self-driving cars aren’t conspicuous yet, once they are, there will be an obvious use case for food delivery. Some, like Domino’s, are already starting to do testing here. A leader in pizza delivery sales, Domino’s recently partnered with Nuro to pilot self-driving delivery vehicles in Houston. Sitting here in NYC (city of 8.3M) in 2022, it’s hard to imagine how this wouldn’t cause complete and utter chaos. But the technology will more likely start by scaling in suburban areas, on college campuses or hotel properties, and then be iterated on 100+ times, before making it to the big stage.

If you let your imagination run even more wild, past delivery robots, you might start pondering about drones. And you’re not alone. In 2016, Google partnered with Chipotle to test drone delivery on Virginia Tech’s campus and although burritos weren’t delivered directly to students’ doorsteps, Project Wing was considered a minor success. It’s unclear where the status of this initiative stands but as recently as a few days ago, the FAA (Federal Aviation Administration) expanded the size of permissible delivery zones (for the second time in less than a year), continuing to unlock doors. Series C company Flytrex was an instrumental part of both of these shifts, as it strives to make its mark in the space and compete with Big Tech (Amazon included). Originally launched back in 2013, Flytrex now has greater ability to scale; when the original extension was announced in December 2021, its technology could service 10K households and with the most recent approval (July 2022), that number is up to 100K. While that may not seem very big, as the technology improves and innovators build on their relationship with the FAA, the radius range will grow exponentially, expanding to more and more customers.

Closing Thoughts

Looking at the current state of both in-house and off-site dining, there is no shortage of appetite for tech-enabled solutions that will mitigate the massive pain points in the space. Although the landscape has progressed, given the industry’s most recent trends and challenges, restaurant owners will be out, searching for the next big thing. No doubt, given the tremendous obstacles in the restaurant business, it will be challenging to build this aforementioned “next big thing” (especially true for the off-site bucket given the demand here is newer and therefore learnings are still developing). Many will try to innovate and eliminate painstaking processes and barriers; a subset of those will build a great platform, however, scaling that solution to restaurants nationwide will be a beast of its own. BUT the few that can successfully disrupt, with the combination of a killer tool & a strong selling strategy, will be game changers.

If you’re a restaurant tech expert, building a startup in the industry or investing in the space, feel free to reach out on Linkedin! I’d love to chat more.

Note: by no means did I tackle every area of innovation in the restaurant industry as that would require a book. Other interesting pockets include food packaging & loyalty initiatives, and I’m excited to continue learning about the latest and greatest tools that are helping restaurant owners thrive.