Connected Cars and the future
Redefining the QSR Industry with Connected Cars
QSR industry and the next phase of computational revolution
by Harshal Agarwal, Kim Dodds, and Xuchen Yao
Highlights
- The post-COVID world will give rise to a new normal, where consumer behavior will be driven by health safety, love for planning or ordering ahead, and newly acquired love for convenience.
- A voice-enabled app for Connected Cars has the potential to save 95% of the costs of QSRs directed towards fee payment for delivery services.
- A voice-enabled app for Connected Cars has the potential to save $432 worth of time yearly for commuters for one drive-thru a day.
We presented our views on connected cars being the next technological revolution in our last blog. Connected cars encompass a plethora of capabilities, from hardware-enabled features like network access and car-to-car communication to software-enabled capabilities like those of smartphones. In this blog, we take a case of Android Auto and its potential impact on an industry: Quick Service Restaurants (henceforth referred to as QSRs).
State of the QSR industry
Please allow me to share my personal experience here. It was January of 2020, and things were as normal as they could be. I would perform my daily chores during the day and would grab dinner on my way home during the evening. Every weekend, my friends and I would explore a nearby restaurant and would try out some nice food there.
Come April, the description was completely different. The roads were crowd-less, the establishments abandoned, and the restaurants had big banners of “take-out or drive-thru only” hanging on their doors. COVID had an impact on the local economy of Seattle. We wanted to understand what kind of impact the restaurants were facing. Apparently, many restaurants reported a decline in overall sales, ranging anywhere from 20% to 50%, and an uptick in drive-thrus/deliveries in the range of 30% to 90%.
In general, people are now talking about “the new normal”. The idea is simple: even if the COVID crisis is resolved, there will be a shift in the day to day behavior of people. I believe that a significant segment of the people who will display this change will be “commuters”. As offices gradually open and people start going out for work, there will be a sense of safety always ticking in the minds of people: “What if I go to the restaurant in person and contract some other disease? Is the facility hygienic enough? Is going to the restaurant safe enough? Am I immune already?” This thought process will be enhanced by the secondary behaviors of people. For instance, there could be a significant percentage of commuters who might have been frequently ordering food even before the pandemic, and they would now want to continue that. Others, who were not so comfortable in the drive-thru before, might begin to like the convenience of ordering while or before driving and collecting food using drive-thru lanes.
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What if… there was “The App”
As our minds started thinking about the problem at hand, we broke the problem into 4 parts:
- Essentially commuters might be driven by safety concerns
- They would prefer drive-thru lanes
- They would want as much convenience and seamless experience as possible
- What does this problem look like at scale?
If we were talking about a single commuter in a city, there is no problem. But when we talk about hundreds of thousands of commuters, we need to think about the problem at scale. The drive-thru lanes had already been crowded even before the pandemic. The change of customer behavior will drive longer wait times in the queue after the pandemic is over. Thus, the major issue will be time management from a consumer/commuter perspective. In the current system, the commuters would come to the QSR in their car, order the food on a speaker or a drive-thru window, wait for some time, and collect the order. But this means wait time. And in today’s fast-paced world, time is money. So, this wait time might even discourage some commuters to go for drive-thrus, thereby slashing the earning opportunity for the businesses.
So what if there was an app to solve the problem? This app would enable the commuters to use voice commands to order food while commuting. This app could be easily installed on a smartphone and could also somehow integrate with the hardware of your car like the head unit. It would be able to interact with you like a voice assistant, for instance, Alexa, Siri, or the Google Assistant. From selecting menu items you wish to order to make payments, everything would be driven by voice and absolutely hands-free!
The benefits of having such an app would be multifaceted.
- The commuters would be able to order food while driving using a voice-driven experience, without worrying about picking up a phone.
- They would not have to order before getting in their car and pick up “cold” food, as the food can be ordered just at the right time.
- The app facilitates the hygiene safety aspect as users do not have to touch anything, not even their credit card for payment purposes.
- Most importantly, it saves commuters time as they just have to drive in and collect the items.
But there is a fundamental question. If the app is installed on a phone, how does the app enable a “no-phone” experience?
Enter Connected Cars, Android Auto and Apple CarPlay
Although the proposed app will be installed on phone, Android Auto and Apple CarPlay could enable a seamless integration of the app with the car. What this means is that the users could now use the head unit of the car for all visuals, while interacting with the voice interface of the car to give orders. From a consumer/commuter behavior perspective, this is not something new. A survey conducted by pymnts.com before the pandemic revealed that 53.3% of survey takers use voice assistants while driving, and 36.6% of commuters who use voice assistants connect to the internet via mobile devices. So, if there is an app on Android Auto and CarPlay that enables commuters to order from QSRs using voice option, behaviorally it could have positive support from commuters who are driven by hygiene safety considerations, have existing trends to order on the go, or for whom convenience plays a big role.
As per the survey by pymnts.com, 53.3% of respondents use voice assistants while driving even before COVID times. So the market is already ready for voice enabled connected car apps for QSRs.
But what impact would it have on the sales of the QSRs?
The Financial Analysis
In order to understand what kind of financial impact we were looking at from the perspectives of the QSRs, we did some financial projections on the addressable market value of Android Auto and CarPlay apps that would enable food-ordering from your car while driving. To come up with an answer, we made a few assumptions which can be broken down as follows:
1. Due to fears of contracting COVID, there is a significant shift in consumer behavior and a large section of people still prefer drive-thru over dining in. We assumed that on average, 40% of the business was coming from drive-thru/takeaway, all using the proposed app. (This is still a conservative figure. Don’t believe us? Watch this video by CNBC where they mention that 60–70% of the restaurant sales come from drive-thrus. And this is just before the COVID crisis.)
2. The sales of the restaurants followed a similar trajectory as they had been following in the last 5 years, whereas the sales of cars follow a trajectory similar to the last economic crisis of 2008–2009.
3. We found that the market share of iPhones is 45% in the US. We went with the behavioral preferences and decided that a consumer owning an iPhone would not want to deviate from their preferred platform even in connected cars, and would thus prefer Apple CarPlay. The same assumption was made for Android users. For the sake of simplicity, we assumed a 50% share for CarPlay and Android Auto.
As a next step, we took the top 6 QSRs and conducted our calculations on, namely, TacoBell, Burger King, Chick-fil-a, Wendy’s, Jack in the box, and Jimmy John’s. We pulled up their financials from either annual 10K filings (wherever available), or other sources like Franchise Disclosure Documents or surveys. We then came up with the financial projections till 2023 based on historical data for the past 5 years and assumed that 40% of the total business was drive-thru and takeaway driven out of Android Auto or CarPlay based apps. We divide our findings into two categories: Sales and Revenue, and Consumers.
Findings on Total Addressable Market and Revenue
We decided to conduct an analysis of the impact of such a proposed app on the total addressable market, costs to the businesses, and any consequential savings. In order to conduct this analysis, we assumed the following:
1. A standard rate of 20% is being charged by the 3rd party delivery apps to the restaurants as part of contractual obligations to provide the services (Source).
2. If there was an app on CarPlay or Android Auto, the apps would charge only a nominal rate of 1% of business brought to the restaurant. This amount seems reasonable, since there is no major physical service provided by the app.
To summarize our findings,
1. The total addressable market (TAM) for the app for the 6 QSRs would be $3.7B in 2020, 4.7B in 2021, 5.8B in 2022, and 7.2B in 2023.
2. Based on a 20% rate, the 6 QSRs would be paying to the third party delivery apps $739M in 2020, $933M in 2021, $1.1B in 2022, and $1.4B in 2023 if commuters choose to order ahead using these apps.
3. The proposed app would save the 6 QSRs (Taco Bell, Burger King, Chick-fil-a, Wendy’s, Jack in the box, and Jimmy John’s) $703M in 2020, $887M in 2021, $1.1B in 2022, and $1.36B in 2023, if the commuters use the proposed app to order ahead.
In 2023 alone, the restaurants might end up paying $1.4B to the 3rd party delivery apps. However, if the proposed app is in play, the restaurants can save $1.36B in 2023 alone by just paying 1% service fee for the new app. This means that the new app has the potential to save businesses 95% of the total costs addressed towards 3rd party delivery services.
What about consumers?
Consumers are the most important aspect of any business. Understanding their perspective is critical to project the success or failure of any proposal. In this particular case, we were not able to come up with numbers using a traditional approach on the consumer side, since there are many floating aspects to consider, a few of them are as follows:
- Do the consumers currently use 3rd party delivery apps, native restaurant apps, or simply drive to the restaurant for the order?
- What is the percentage distribution of usage in the above categories?
- How to determine the switching cost associated with moving from existing consumer behavior to a new one?
However, we did try to find out the time value of money associated with ordering food while commuting using the proposed app. An average American earns $936 on a weekly basis. This translates to $48,672 yearly for a 40-hour workweek (Source). This also means that the cost of 1 hour for an average American is $23.4.
We referenced the average wait time for drive-thru lanes in the above QSRs in 2019 (Source). The average speed of service for breakfast is 238.84 seconds, dinner is 258.28 seconds, late afternoon is 274.71 seconds, lunch is 255.68 seconds and mid-morning is 250.57 seconds. A simple average of the above numbers gives us an average speed of service of 255.62 seconds or 0.36 hours of wait time weekly (for a 5 day week).
Now let’s consider the commuters using the new app. If they are able to order the food while driving, all they need to do is drive to the store to pick up their order whenever ready and not wait in any queue while the order is getting ready. This means that a simple change in behavior driven by the new app could save every commuter 18.46 hours a year, which is worth $432 annually (5 days a week, 52 weeks a year). It is important to note that this saving is assuming only one meal a day using drive-thrus. If a consumer averages 1.5 meals a day, this saving could translate to 1.5X432 or $648.
A change in consumer behavior driven by the adoption of the new (and proposed) app could help commuters save $432 worth of time on an annual basis for an average of one meal a day via drive thru.
Conclusion
The key takeaway from this study is that voice-enabled apps running on connected cars have the potential to transform the way businesses operate in several industries. Such apps have tremendous implications for cost savings and revenue streams for businesses at a time when they are struggling to increase revenue streams and decrease costs. From our studies, it is clear that businesses can save up to 95% in cost savings on the commuter/drive-thru segment in the fast-food industry, whereas average commuters themselves can save time worth $432 yearly. Imagine all the savings it can trigger other industries! Such savings have the potential to drive changes in consumer behavior, thereby attracting new consumers in the industry reeling with maintaining profit margins and figuring out ways to attract new customers. This might especially hold true for smaller businesses and restaurants, for whom a 95% saving in costs can be a game-changer.
We are not asserting that our study is perfect. There are several generalizations and assumptions that we made. However, these assumptions have been made keeping real-world scenarios in mind. In light of our study, it is clear how Connected Cars have the potential to transform the QSR industry forever. Some might argue that the COVID situation might get over soon and we might never observe a permanent change in consumer behavior. We beg to differ. Every financial crisis has always had a lasting impact on a few industries, so will the current one. However, whenever there is a crisis, there is also an opportunity. We believe that the opportunity is in the Connected Cars, a revolution waiting to happen.
