Pandemic Is Fast-Forward Button for Fast Food
(Bloomberg Opinion) -- Technology has loomed large as a transformative force in the restaurant industry, with the rise of digital ordering and delivery promising to upend the economics of running a major chain restaurant. The pandemic has served as something of a fast-forward button to this future, as customers steered clear of restaurant dining rooms because of safety concerns, local regulations, or both.
The recent earnings results of McDonald’s Corp. and Chipotle Mexican Grill Inc. – two restaurant chains widely perceived as digitally savvy – have made it clear that embracing tech to win over customers can and should mean different things, depending on whether Big Macs or burritos are on the menu.
In its Tuesday earnings conference call, McDonald’s said that 90% of its U.S. sales in the quarter ended June 30 were drive-through. That format has long been a cornerstone of the business and was able to remain open even when many of its dining rooms were shuttered, so this is not necessarily surprising. But it is revealing. McDonald’s executives said delivery grew “significantly” in the quarter, but it was clear that the drive-through lane was the hero. And no wonder: Paying a delivery fee on an order where your meal might cost only $5 doesn’t seem to make much sense, and I don’t think McDonald’s food travels particularly well.
That delivery didn’t soar to a higher proportion of sales even in this unusual environment makes me skeptical it will ever be a significant part of McDonald’s business. That’s not to say McDonald’s shouldn’t keep competing aggressively in the digital realm; it’s a business that will certainly keep growing and that can bring in incremental business. But these latest results suggest that McDonald’s other, less-sexy technology investments might actually be more focal to its future. In particular, it underscores the importance of its 2019 acquisition of Dynamic Yield, a company whose technology is allowing McDonald’s to work on real-time change-ups of its drive-through ordering menu board based on factors such as weather.
The situation in the quarter was much different at Chipotle, where digital pickup and delivery orders accounted for 61% of its sales. At the same time, though, the company’s restaurant-level operating margin sank to 12%, sharply lower than the 21% it recorded in the second quarter last year. This reflects several factors, including doling out bonuses to workers amid the crisis. But much of it came down to the impact of its online business: Delivery expenses soared amid the explosion in orders.
Chipotle would have to rethink many aspects of its business if that 12% operating margin were to become a new normal. But I don’t think investors should expect that – and not just because every restaurant chain is bound to see in-restaurant dining make a bit of a comeback as more states allow it. Much of Chipotle’s digital sales growth is coming from pickup orders, rather than delivery. The company said that compared to pre-pandemic levels, its digital pickup business is up 140% percent, greater than the 125% increase it has seen in the delivery segment. It is a good sign that it is seeing greater growth in the more profitable type of transaction.
Chipotle also has tools to cushion the profitability blow. The restaurant chain had offered free delivery for much of the quarter to encourage customers to try out the service but is tightening the spigot now. Sure, it’s possible customers it loses those customers altogether when delivery is no longer free. But, notably, the company said it has observed that trying Chipotle’s app for delivery has been a gateway for customers to place pickup orders, once they realize the latter format has no fees and often shorter wait times. If enacting a delivery fee simply pushes more customers to embrace pickup, that is a win.
Chipotle is also experimenting with higher menu prices for delivery orders to help with profitability. I expect that move will do little to dampen sales in this format, given that the chain has implemented in-store price hikes in the past with little pushback from its relatively affluent customers. Plus, as a major national chain with strong brand recognition, it can flex muscle with third-party delivery companies to secure favorable commission rates.
There is no doubt that digital ordering and other innovations will continue to rattle the restaurant industry and play a role in determining its winners and losers. McDonald’s and Chipotle show that just as important as it is to invest in tech is knowing how to use it.
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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