How will junk fee legislation affect food delivery?

Discover the future of eating out without stepping foot outside your door as Meredith and I slice into the digital dining revolution. We kick off with the surprisingly sophisticated world of pizza trackers, examining whether these real-time updates truly enhance customer satisfaction or if they're just a tech gimmick. But it's not all about the tracking – we also sink our teeth into the heated debate surrounding junk fees in the restaurant industry. How will new legislation impact those extra charges tacked onto your meal by delivery platforms? And what's cooking at McDonald's with their digital marketing fund? We serve up fresh insights as we tour the National Restaurant Show, revealing a trend toward tech that delivers tangible results over a mere flash in the pan.

As we continue to simmer on the topic, we scrutinize the precision and customer value of pizza delivery systems through the lens of YouTuber Sam Reid's deep-dive investigation. Can you trust the name on your pizza box? We'll share how these tools are connecting customers to the in-restaurant experience from the comfort of their couch, despite occasional system gaming. And as consumer behavior shifts under the weight of rising delivery fees, we explore McDonald's smoldering strategy to stoke the fires of customer loyalty through personalized digital experiences. Tune in for a hearty portion of food for thought as we dissect how these trends might reshape your dining habits and the restaurant industry at large.

Transcript

Speaker 1: 0:00

Do pizza trackers actually work and why are they important? Are junk fees going to really hit the restaurant industry and why the McDonald's Digital Marketing Fund is such a good idea? That's all ahead on this week's Digital Restaurant. The Digital Restaurant works like this we're going to ask each other five questions about headlines that affect the worlds of restaurants, off-premise and technology, but in some way tie back to our book series Delivering the Digital Restaurant. Are you ready? Let's go? Good morning, meredith. How are you today?

Speaker 2: 0:46

I'm very good. How are?

Speaker 1: 0:46

you Very good. Of course our podcast is going out as you and I are walking around the floor of the National Restaurant Show Biggest show, I think it's fair to say, across the conference calendar. It's been a very interesting period of time looking at the various amount of exhibits that are going around the shows this year. If I may, that I don't think we're seeing a huge amount of variety in comparison to previous years. What do you think your reflection, not just on the show but also many shows that are out there?

Speaker 2: 1:14

I think we went through this massive explosion of innovation, part of which was caused by COVID, part of which was caused by it's just time the consumer is ready for restaurants to change, part of which is caused by increasing underlying commodities and wages and the need to change, and part of which was funded by low interest rates. And you combine all of those things and we just had tons and tons of ideas and everyone was at the shows, and now we're in a period of consolidation where it's not that technology is no longer important, it's that we're kind of out of the creativity phase and now into the what actually works phase what do I actually need? And we see that with quotes from last week at Food on Demand, where people were talking about consolidating their own tech stock, and we see that like in the news this week with Revel and Shift4. So it is a period of consolidation.

Speaker 1: 2:06

Yes, and that consolidation, though, and also probably the higher amounts of digital transactions that are happening not just in the restaurant space, is probably something that's driving the focus on our first question today, Because one of the things that, of course, we've been talking about a lot is junk fees, and we've been speculating for a while about, well, what's this going to mean for the world of food delivery, and I know you have a few things to share on that.

Speaker 2: 2:29

Well, first of all I want to put a disclaimer out there because I'm going to speculate some more. I did a bunch of reading in preparation for talking about this and nobody knows what this means. Everyone has a different opinion and I confess I did not read the entire bill and I'm also not a lawyer. So even if I did, I probably wouldn't have the best opinion. But wow, this is quite quite the news. And what has happened is that SB 478, which is a bill that passed a while ago in the state of California, was interpreted about two weeks ago by the state's Attorney General to apply to restaurants, and heretofore we had thought probably didn't apply to restaurants, we were probably fine. And now everyone is in a tizzy trying to figure out exactly what does that mean and which fees are going away. Tipping Not going away. I know you're about to ask that, Carl, because I know you were really excited. We're about to turn into Europe, but not yet.

Speaker 2: 3:22

Any fee that goes directly to the employee 100% to Europe, but not yet. Any fee that goes directly to the employee 100%, totally fine. So that can stay on there. But any other fee needs to be wrapped into the price of the menu. Of course there are healthcare surcharges, benefits surcharges, large party surcharges, all kinds of fees that restaurants may stick on to a bill. Those would be at risk and need to go away.

Speaker 2: 3:46

And then the outfit in the room, I think, is delivery and the service fees. So there is an explicit carve out in the bill for delivery fees, because that is considered a service that is separately provided and you can pay for that service in the form of a delivery fee. But it requires, according to Peter Romero, it to be a fixed fee and not a percentage, which means that the service fee on delivery is at risk. So you couple that together with what we learned from Medallia last week at Food on Demand, that consumers would way rather pay a higher price on the menu item and not have a high delivery fee.

Speaker 2: 4:24

If you can't charge a service fee, where are you going to stick it? Well, this is tough for the third-party marketplaces because if they stick it in the delivery fee, consumers won't like it. That's one they have control over. They can't stick it in the menu price because they don't control the menu price. So this is a pretty big potential blow to the third-party marketplaces. Now, of course, doordash had put out a statement saying that they are very transparent with their fees and they tell everyone up front what they are, and so this does not apply to them, which anyone who's ordered from DoorDash thinks that that is the craziest statement they've ever heard.

Speaker 1: 4:55

What do you mean? It's behind a little lie. It's behind a little lie, Meredith.

Speaker 2: 4:58

They do give more information, but it changes every time and you only find out what it is at the end, which I think is exactly what this bill is trying to get after. So that will be very interesting to see how they deal with that and what they do. And I'm excited because it could usher in an era of switching consumers from the third parties to first party ordering, because on first party ordering, of course now the restaurant has complete control over charging menu prices or delivery fees. They don't charge service fees. By and large. That seems very easy. So there's a lot of uncertainty. It's very exciting. You can tell that I majored in government because I'm very excited about this and you look entirely nonplussed.

Speaker 2: 5:37

My political statement about this would be even restaurants who think they're doing the right thing are at risk because, in classic California fashion, they have made this totally ambiguous. Nobody knows how the bill applies. I read one article where somebody wrote into the attorney general to get some clarification and the attorney general wrote back and said we cannot provide legal advice, so someone who's trying to comply with the law can't, because they have no idea what the law means. And then again, in classic California fashion, after writing a completely ambiguous law. Guess how it's enforced In the courts. So a restaurant who thinks they're doing the right thing but nobody's really sure because the law is so ambiguous could get sued by someone who thinks they're doing the wrong thing. And even if they ultimately prevail in court, now they've got a bunch of time and court fees. So this is not a great law.

Speaker 2: 6:27

And now the California restaurant association no-transcript. Maybe they challenge it in court and say this shouldn't apply to restaurants. The argument I read that they put forward seems a little suspect. They said that this bill applies to goods and services, and restaurants are neither a good nor a service. Therefore it shouldn't apply. Probably though.

Speaker 2: 6:47

I don't know. I mean I think they are a good and a service, but that doesn't mean they're neither a good nor a service. I don't know. That seems like some tricky legalese language there, but let's leave that one to the lawyers. This is certainly a very interesting development. I think we'll all be watching keenly to see how it actually gets applied and what the implications are.

Speaker 1: 7:07

Sounds like the lawyers are going to be the true winners right now, anyway until this thing gets figured out, right?

Speaker 1: 7:11

Yeah, that's usually the case in California. Hi Carl here, Just to interrupt the show briefly to remind you that if you have yet to get your copy of either of the Delivering the Digital Restaurant books, now is the time to get one. If you head to thedigitalrestaurant, you're going to be able to get the best price available. You can also listen to both books with yours truly talking about them on Audible. You can get a copy of Amazon if you'd prefer to order through them. But if you haven't got the books yet, get them. They really are going to transform the way in which you look at the restaurant industry and the way in which technology is disrupting it.

Speaker 2: 7:44

All right, carl the pizza tracker. This was a huge innovation when it first came out. I think Domino's was the first one to have it, and now this has become a somewhat commonplace feature on various different platforms. You think of DoorDash or Papa John's. But is it really accurate? Is your pizza where you think it is?

Speaker 1: 8:06

Yeah, really interesting question, meredith. I think the interesting one for me about this is that when you've got YouTubers starting to explore things like pizza trackers, it shows you how important it is perhaps to folks when it comes to where their pizza is, where their food is and, of course, it's something we see a lot these days in terms of our delivery experience having a promised time trying to figure out where it is. Of course, we see a bit of this on the third parties, but, as you say, domino's really laid the groundwork for this. They even have a patent for it and Sam Reid, a YouTuber that has had, I think, something like 650,000 views of this particular 20-minute video, really explored it. He hired out a van. He went and stuck himself in the parking lot outside of Domino's.

Speaker 2: 8:49

It was a very silly video.

Speaker 1: 8:51

And he was with binoculars, looking to see exactly when pizzas were being put in the oven and tracking to see when drivers were showing up. Tracking to see whether indeed the person that was supposedly preparing the pizza was indeed the name of the person preparing the pizza. Fun little video. We'll put the link in our newsletter, as always, but let's go towards the back end of the video. Let's watch a couple of minutes of it, because I think it's useful just to be able to understand the differences of what he saw, at least between the Papa John's and the Domino's experience.

Speaker 3: 9:21

And once it's on the screen, the tracker assumes it's being prepped. The screen can obviously only hold a certain number of orders, so if the restaurant's not too busy, your order will immediately go up on the screen, which is why I suspect I kept seeing an immediate advancement to the making stage. And once your order gets cleared off the screen, the tracker assumes it's being put in the oven. That's another tracked event. But the oven itself is predictive. It's just timed six to eight minutes at most Domino's and a little bit shorter at Papa John's.

Speaker 3: 9:45

And if you want to get technical, apparently the actual cooking time is specifically calibrated at each restaurant and there are a few different models of ovens out there that have different cook times. So that part's timed. And then the next main data point is when the driver checks out the order for a delivery. I said this before, but most delivery drivers have GPS now, so once it's in the car it's pretty dang accurate. So that's how it works. But there are a couple spots where this thing can kind of go off the rails.

Speaker 3: 10:08

I read online that apparently orders will get taken off the screen for various reasons, including to improve the store's make times, because you can always go back and look at it after it's been submitted.

Speaker 3: 10:17

So managers can like pad their stats a little bit.

Speaker 3: 10:19

Or if, for some reason, your order needs to be remade after it's cleared off the screen, there's no way to let the tracker know, and even if your order is prepped at the exact time that it's on the screen, it might not go right into the oven, like, for example, if there's a giant order ahead of yours.

Speaker 3: 10:32

Another point that's a little fuzzy is during the boxing or quality check stage. From what I observed, it takes less than 30 seconds to slice and box each pizza, and yet this step usually takes three to four minutes on the tracker. So it essentially serves as a buffer until the next delivery driver comes back to the store, or for the driver to collect the next several orders after yours and take them all at once, and then finally during delivery. Some former employees noted that there's a cap to the number of orders you're allowed to take on each delivery, but it can be more profitable for the driver and sometimes more efficient if they take more than that number. So the way to do that is by creating a second ghost account under a different name.

Speaker 1: 11:07

Meredith, no longer ghost kitchens, ghost accounts, my goodness. Yeah, we've talked about this before on the show and interesting just to get obviously a layperson's perspective on, uh, the dominoes tracker. And there are clearly things in this video that are accurate, things which he hasn't necessarily completely understood about the way in which, uh, something like this will come together.

Speaker 2: 11:27

but I don't know. I thought he broke it down really, really well.

Speaker 1: 11:30

I was impressed for a non-restaurant person well, certainly the part of the video that I shared. Yeah, I think that that really was interesting. But the thing that I think really stands out for me here is that Cartwheel was quoted in the article on QSR saying that 80% of customers are happier when they know where the delivery is in its process. Right, and I think that's a really important thing. To start with here. The Domino's tracker is so powerful because of the fact that it helps the customer know where they are on the journey. Think about those little touch points of when you're eating in at a restaurant and the server comes by the table and says won't be a couple more minutes, they're just finishing off the last touches of your dish. This is where the Domino's Tracker creates more of that kind of on-premise feeling because you know where things are. But Sam's video here really explores more around. Well, how accurate is that? In fact, I'll bring this up here because this was his summary, if you will, of the kind of differences between Papajohns and dominoes, and what was interesting was that there were clearly differences. It wasn't completely perfect. This, of course, is linked to a KDS, where you've got different folks that are at different times tapping progress items and, of course there is the GPS element that Sam mentioned as well, which in its own right is limited by the network connectivity of the driver's connection to the wider network, and so there always will be some level of variation there. And Domino's as you can see in the bottom left-hand corner, it says closer to the times listed on the tracker. He thought generally it was pretty good, whereas actually on Papa John's there were multiple instances of the updates being off by five minutes or more. But what was also interesting is Papa John's typically delivered earlier than the promised time. So what's better, right? Is it better to have an accurate promised time or is it better to be able to have something where you're actually knowing exactly where it is going through each stage? What I'm really intrigued about on this one is how are restaurants starting to think about this whole experience, the connectivity of a dish as it goes through and its communication to the customers? What types of metrics are they using to be able to assess where there are bottlenecks? What areas are they having control? Because of course, they don't completely control everything. We saw at the end of the video about how certain drivers batch orders by creating fake accounts. All of those types of things are challenges to a delivery operation, but the more restaurants are focusing on it, the more they can ask the questions about how to try and solve for those issues. And much like in your days at Taco Bell with drive-thru, where every step of the drive-thru to be able to find those few extra seconds to improve the expediency of a drive-thru experience, that is how technology can help delivery as well, and I think we're seeing some real advances in this space to be able to help restaurants really think about how to do it better, and I'm glad this was brought to the surface as a result. Okay, so next question, meredith. I'm glad this was brought to the surface as a result. Okay, so next question, meredith.

Speaker 1: 14:27

Really interesting article about a topic that is quite frequent here on the show value. Are customers getting value from their restaurants these days? This particular article focused on the new value equation for quick serve restaurants. What were your reflections on this?

Speaker 2: 14:42

You're right, talked about this so many times and I think there is no conclusion we can draw other than prices are up and transactions are doomed. Consumers are totally rational and when prices go up too far they make slightly different decisions on the margins that cause industry-wide transactions to be flat to declining, which is not a healthy place to be. But there were two things in particular about this article that I really liked. It cited consumer insight data. They surveyed a bunch of consumers and apparently do consistently over time with the same questions, which was great because we're able to see how the answers change. So let's bring up the first one this is talking about.

Speaker 2: 15:18

The first question is I pay close attention to menu prices so I can find the best value. You see that dark bar on the top and it kind of dipped down during the pandemic and then has come back up to where it was before. So I think what we can take from that is that during the pandemic, people had other priorities and other concerns, as well as some extra cash for many people, and so they were able to be a little less focused on prices. But that value concern has come back, and you'll see the same thing on the other two questions. I usually pick restaurants with lower prices. That number has come roaring back as well, but now at 52%, and then I always compare prices before deciding what to buy. Again, that number was at 61% pre-pandemic or at the very start of the pandemic, then really dipped down during the pandemic and now has come back up to 60%. That particular graph is coming from Technomic.

Speaker 2: 16:15

And then the other graph I wanted to get into here because we are the digital restaurant. We care so so much about delivery. Talking about compared to the month before, how has your use of the following methods of food ordering changed? And then this one particularly is looking at delivery of restaurant food from a third party delivery service and delivery direct from the restaurant. And on the far left is consumers who are ordering delivery more often, and on the far right is consumers who are ordering delivery less often. Right there in the middle is about the same, at least from what consumers are reporting. They are ordering less about twice as many people as are ordering more. So that should mean that we're seeing some deceleration in delivery volume.

Speaker 2: 17:01

As to whether they care more about direct from the restaurant versus from the platform, there's some slight variations there, but it's hard to tell if it's statistically significant. I think the real place that we see the statistical significance is between the left, where about in total 20% say they're ordering more, versus the right, where in total, about 40% say they're ordering less. This really gets to where price matters, right, we've said for a long time. It seems like consumers are just price insensitive on delivery. They value the convenience so much that they're willing to pay more for it. That's certainly been true, as restaurants have increased their menu prices and the platforms obviously charge all the service fees that we talked about in the first question, but it feels like we are reaching the upper limit of that, particularly as underlying prices are increasing everywhere around the consumer as well. Okay, our next question is for you. Carl McDonald's launches its digital marketing fund. Wow, like a separate fund, is it incremental? Is it part? What is happening?

Speaker 1: 18:07

Yeah, quite a significant shift towards modernizing its marketing strategies. I think it's fair to say. They've announced the establishment of a new digital marketing fund starting in 2025. And the initiative is going to enhance the company's digital presence and improve customer experiences through innovative digital tools and personalized marketing efforts, right? So pretty interesting. It's going to be a fund that only applies to franchisees here in the States in the UK, australia, canada and Germany and it's going to contribute 1.2% of their projected digital sales and it's aiming to support the development and maintenance of advanced digital marketing channels. And, of course, it's aiming to support the development and maintenance of advanced digital marketing channels and, of course, it's going to cover ongoing operating costs of maintaining their app. And the corporate investment side is going to continue to spend time on innovating and developing digital products and features as well. So just using 1.2% of your digital channel sales to remarket to your identifiable customer base seems like a relatively small price to pay, given that 1.2% is a lot easier to measure in terms of its efficacy, right? If McDonald's gets this right, they should be able to get a much higher lifetime value result from their customers, from whatever cost they can then attribute back to their acquisition costs, and those acquisition costs, of course, are made up of the free items or the time-based offers during a customer's first few uses of the app, and that is where I suspect funds will also be utilized, of course, providing those reasons for people to use the app. But building a digital strategy to acquire guests, give them a great digital experience through the user experience on the app and then also to retain them, is super critical. We talk about it all the time. If the journey for the customer through funds like this can then create visits three or four times and then create that habitualized behavior, if you will, then you've got that customer locked in and you've got a much greater chance of being able to channel them to come back more often. So I think this is part of McDonald's broader strategy right To shift away from traditional marketing methods such as TV print ads and certainly towards more dynamic and higher return digital platforms.

Speaker 1: 20:13

Now, you know better than anyone, tv and print has been vital for QSRs in decades past and they have, of course, driven huge brand awareness. But they're not necessarily great for measuring success. Certainly against a specific customer right. You can measure them against, I'm guessing, certain demographics and geographies, but we're heading to a customer-specific world of marketing, and that means being able to build something specific, to create promotional mechanics that can drive each guest to buy more, to visit more and, perhaps most importantly, order direct. That shows that McDonald's have got it right. They understand the importance of personalized customer experiences, but to be able to do this in a franchise world, you have to have your franchisees play along as well. Now, the article that we're referencing here is the author got sight of a memo that was recommending that franchisees allocate funds for their new digital marketing initiative from their existing marketing budget, which requires them to spend at least 4% of total sales. By the way, the company also plans to expand on its Ready on Arrival initiative, which allows staff to prepare mobile orders before the customers arrive, otherwise known as the Chipotle, which gets a shout out every time on the show.

Speaker 1: 21:21

Ceo Chris Kemsinski highlighted the importance of the shift during the earnings call for Q1. And he said this Meredith. With pressurized QSR traffic, we have an opportunity to get the customers who already visit to visit more often, as more customers make purchase decisions based on personalized recommendations on their phones. Driving frequency means using our digital capabilities, like loyalty, to know when to serve our customers better than anyone else. They've got 34 million loyalty users in the US alone. They've got a target of getting that up to 250 million by 2027. Funds like this are certainly going to help them, and I think you're going to see this type of initiative become far more prevalent across franchisors in the years ahead.

Speaker 2: 22:04

That is really interesting. I think I have more questions than answers based on that article. Just as a franchisor and, frankly, a person who worked in finance as a franchisor, I have so many questions about like, where's the money coming from? What is it being used for? What it sounds like you're saying is that they are taking out of that total marketing budget. They are taking the local marketing piece, what had been the local marketing piece that the franchisees controlled locally and they're redeploying that into a national digital marketing fund and that, mostly, that digital marketing fund is a tech fee being used to support the app and loyalty program.

Speaker 1: 22:40

I think I think that's what's happening, but it's hard to tell, Hard to tell, but the momentum is in the right direction and I think that's the super encouraging thing. Okay, last up, huge funding news Rare that we get to talk about this type of level of funding. But Restaurant 365, $175 million worth of funding Tell us about this.

Speaker 2: 23:00

Restaurant 365 brought in money from an investment firm called Iconic, with continued support from their existing investors KKR and L Catterton, and it really is like big news. I think they refused to disclose valuation but said it was an up round from their again not totally defined more than a billion dollar round last year, so that's all very positive for them. I thought what was most interesting in the TechCount article was CEO Tony Smith talking about use of funds, why they were raising this money, and it wasn't to fund cash burn. It wasn't to grow a whole bunch more.

Speaker 2: 23:39

There was a lot of talk about making more acquisitions and, of course, restaurant 365 has been an active acquirer in the space. The most recent thing that they purchased was Expanshare, which was a training software that they're putting onto the platform, so I'm excited to see what other types of things they're interested in buying. Heretofore, they've been very, very focused on the backend of the restaurant and those are the primary things that they have purchased, but could this open up the possibility for them to, you know, buy something on the front end and be completely end-to-end? I don't know. It's very, very interesting and I'll look anxiously to see what they buy next.

Speaker 1: 24:18

Yeah, I went to one of their local events actually in their head office earlier this week and was listening just to the variety of different services that they're offering restaurants. Everyone associates accounting as their kind of primary base as such, but when they're touching on things like employee scheduling and other aspects that are supporting restaurants to run themselves more effectively, it shows that they have really got some great ground grounding to be able to take it to the next level. So super exciting. Congratulations to Tony and the team.

Speaker 2: 24:46

Yeah, absolutely Congratulations. The one thing that surprised me in the article it said that their prices start at $4.69 per location, which seemed incredibly expensive for accounting. So I don't know if what of all the products that includes, or if that's the base price or if there's a discount when you bring in lots of locations. That was quite surprising to me, and it'll be interesting to see how that holds up as more and more of these platforms you know stretch maybe into their space as well.

Speaker 1: 25:15

Fascinating. Well, we'll keep an eye on it. They are local to us here in Southern California. Hopefully we'll get a scoop when we hear more. But that is it, meredith. It's time for us to go. Thank you, as always, to those of you that reach out to us with your recommended articles for us to be able to look at for the show. If you have any ideas as to what you'd like us to cover next time, please get in touch. But thank you, as always, for listening and we'll speak to you next time. The Digital Restaurant Podcast is available for you to follow and subscribe. Wherever you listen to your podcasts, watch us, rate us and subscribe to the Digital Restaurant on YouTube, and follow along on all our social media digital restaurant channels. Thanks for listening.