Restaurant ‘digital trend’ to push food delivery stocks higher: Analyst

William Blair Vertical Technology Analyst Stephen Sheldon joins Yahoo Finance Live to discuss dining trends, consumer engagement, food delivery stocks, and the outlook for the restaurant space.

Video Transcript

JULIE HYMAN: We all know we've been going out back to restaurants. The numbers bear that out. What is perhaps surprising is when we order takeout, how we're doing it. Still in person, still via the phone. That's according to a new survey out from William Blair, and William Blair's vertical technology analyst Stephen Sheldon is joining us now. Stephen, I think that was the most surprising finding for us that maybe people aren't going on the apps on their phone to order. They're still picking up the phone. Were you surprised by that? And what do you think that's about?

STEPHEN SHELDON: Yeah, and first off, just thank you for having me on. When we did this report where we were trying to look at, we surveyed about 900 consumers just looking at how they engage with the restaurant, how frequently they're ordering, how much they're spending, things like that. I think in this industry, you saw a big spike in digital engagement that picked up early in the pandemic and a lot of that related to delivery and takeout as people couldn't eat out in person. But it's still, like you mentioned, even with those interactions, there are still a lot of manual processes typically within that with people-- consumers-- calling restaurants directly to place a delivery or takeout order.

And we think more of that's going to move to digital channels over time. But even beyond that, we think that, again, one of the big reasons we published this report was to look at the broad-based trend in digital engagement. We think that not only is delivery and takeout going to be the channel of engagement digitally over time, but it's going to move into other channels like in-person ordering, QR codes, kiosks, things like that, where consumers have more ability to self-service. So it is interesting that there still are a lot of manual processes in the restaurant space.

I mean, you can look at-- and it's kind of evident when you look at tech spend as a percentage of total industry revenue-- you look at that number. It's about 3%, give or take right now. You look at other industries, retail, others. It's more like 6%. We think that the digital trend in this industry, where consumers are engaging more frequently with restaurant digitally, is going to be one thing that helps push that higher over time. So the benefit, I think, a lot of the restaurant tech companies we cover.

- OK, so what's that mean for the apps out there? You've got Uber and Uber Eats, you've got Caviar, of course, part of the DoorDash consortium there. So what does this mean for the number of apps that are also engaging with these restaurants?

STEPHEN SHELDON: Yeah I think those apps are really important in a lot of ways. We think about DoorDash and you think about Uber Eats. I think for consumers, it's really important for the discovery process, finding new restaurants, engaging with them. Some consumers, still, that's their main channel of engagement. But I think from the restaurant owners' and operators' perspective, the goal is, you still want to plug into those. I mean, that's going to be important again for consumers to discover your restaurant. But over time, then, the goal would be let's have an app or a website where we can get that consumer maybe for their first order or two to come through the marketplace, but then over time, shift to a direct-- ordering more directly through their own either internally-developed or white-labeled app or website.

And that's important for a few reasons. One is the customer data and owning the customer relationship. The restaurants want to do that versus maybe the marketplaces. I think, too, it's about the margin profile. If you're a restaurant and your only channel of engaging digitally with customers is through the marketplaces, now there are a lot of fees associated with that. And so the goal is, really, to take probably your more frequent customers, and make sure that if they are finding you through the marketplace that you're shifting it more to a direct relationship over time.

JULIE HYMAN: And you're looking at stocks like Toast, Par Technology, Olo, to benefit from that more direct relationship, right? I mean, I have to say, just on a personal basis, sometimes I opt out. I try to find the company-- the restaurant website and go direct as much as I can, because A, I'm paying less usually, because I'm not paying those fees. And I think also some of those apps we mentioned have gotten a bad rep because of what they collect on top. Do you think that there has been at all a backlash against them?

STEPHEN SHELDON: So, for the companies that I'm covering, it's more about like, Olo would be a good example of a company that's helping a restaurant create a white-labeled website and app, and they're kind of-- you're probably ordering through Olo frequently and you don't even know it.


STEPHEN SHELDON: So they're kind of the backbone behind it. They don't really have a consumer-facing brand. It's more about the e-commerce facilitation. So I do think for consumers, I do think that the more data that some of these companies can collect on you, the more that these restaurants can personalize the experience for you over time. So I think there is some benefit from it. In terms of the marketplaces, it's tough to call how much data they're gathering, if there's been pushback against it.

BRIAN SOZZI: Stephen, I have 10 seconds left. What is the best restaurant tech play, in your view, to buy? If you had to bet the farm, what's the name?

STEPHEN SHELDON: So, my 2023 topic was Toast. I think they're doing a great job in the S&B restaurant landscape. They're doing a great job adding locations, and then they've got 19 elective modules where the revenue per location is trending significantly higher over time.

- All right, William Blair, vertical technology analyst. Stephen Sheldon joining us today. Thanks so much for the time.