Swipe Right for Big Macs and Burrito Bowls

(Bloomberg Opinion) -- The past two weeks have brought a stream of earnings reports from major restaurant chains that, in some ways, offered a familiar portrait of the industry. Price hikes continue to be a key tool for juicing sales growth, including at Chili’s and Burger King, while  pressure from higher wages in a tight labor market continued to weigh on profits at operators from McDonald’s Corp. to Cheesecake Factory Inc.

But there was one way this batch of earnings seemed different: The impact of digital ordering and delivery started to show itself in more pronounced ways than we’ve seen previously.

Take, for example, Domino’s Pizza Inc. The company is in solid shape, reporting U.S. quarterly comparable sales growth of 3.9 percent from a year earlier. But the chain acknowledged on its recent earnings conference call that the results were pressured by “aggressive marketing of third-party aggregators.” Translation: Services like Uber Eats and Doordash were dangling free and discounted delivery to encourage trial of their services, and even Domino’s –  itself a digital leader – felt the effects. And with a gusher of capital likely to rain on Uber Technologies Inc. in its IPO next week, I wouldn’t expect those kinds of investments aimed at luring new customers to its food-delivery service to slow down.   

The quarterly results of Chipotle Mexican Grill Inc. also felt like an inflection point. While the company has seen digital sales – a category that includes delivery and mobile pickup orders – grow steadily for some time now, they were nothing short of turbocharged this quarter. Digital sales rose a whopping 100.7 percent from a year earlier. This likely was helped by a splashy delivery promotion as well as the expansion of designated burrito “make lines” devoted to filling online orders as well as special pickup areas.

Digital is no longer just a nice talking point for Chipotle executives to show they are playing a long game; it is moving the needle on the all-important comparable sales growth figure. The company said its 9.9 percent quarterly increase on this metric was mostly attributable to a much-needed traffic boost to its restaurants. But it also said 2 percentage points of the growth was due to “mix,” or the combination of items ordered. And that figure was largely propped up by digital orders, which tend to have higher average checks.  

I’ve noted before that, despite the challenging economics, chain restaurants basically have no choice but to figure out how to make delivery work, whether on their own or with third-party partners. The industry is at much the same moment mall giants were in the early 2000s with e-commerce, and it seems like many of them are truly getting that now.

Increasingly, earnings calls aren’t peppered with talk of experimental delivery pilots, but of evidence of aggressive delivery expansions. Restaurant Brands International Inc. now offers delivery from 1,300 Popeyes locations, almost all of them added in the last year. Denny’s Corp. said this week 79 percent of its domestic restaurants had a delivery partner at the end of the quarter, up from just 50 percent in the same period last year.

And restaurant behemoths should be emboldened by new dynamics in the delivery arena. Bloomberg News reported last week that McDonald’s is renegotiating its deal with Uber Eats to include reduced commissions and thus make delivery more profitable for franchisees, an effort McDonald’s essentially confirmed on its Tuesday earnings call.

Of course, McDonald’s roughly $96 billion in annual system-wide sales give it outsize power in the restaurant business, so it may have particular ability to extract favorable terms from the likes of Uber Eats. But it is becoming clearer that chain restaurants — with their built-in customer loyalty and name recognition — are a big prize for these delivery upstarts. Uber told us as much in its recent filing to go public: “A significant amount of our Uber Eats Gross Bookings come from a limited number of restaurant chains, and this concentration increases the risk of fluctuations in our operating results and our sensitivity to any material adverse developments experienced by our significant restaurant partners.”

I still think the aggregators are going to hold increasing power in the dining industry. Customer loyalty will sometimes be to the app, not to individual restaurants; after all, in this set-up, diners don’t even interact with a McDonald’s employee when they get their McNuggets – their customer service experience is in the hands of Uber’s drivers. But, at least for now, restaurant chains have plenty of leverage to make this new dining economy work better for them. And that’s good news, given that the restaurant world’s digital future has truly arrived. 

Higher prices also helped drive comparable sales growth.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

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