Motley Fool Hidden Gems Investing - Fast Food Innovation

Episode Date: August 6, 2023

Cola-flavored ketchup, Taco Bell’s musical for Mexican Pizza, and McDonald’s Grimace Shake are just some of the ways that food companies are fighting for your attention. But does social media buzz translate to long-term sales? Mary Long caught up with David Henkes, Senior Principal at Technomic and an expert on the food and beverage industry. They discuss: - What it takes to bring a new fast food product to market - How social media changed the restaurant industry - The challenge of automating a kitchen Companies discussed: YUM, MCD, PEP, WEN, CMG, SG Host: Mary Long Guest: David Henkes Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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That's all coming down the pipe, but the challenge, I think, for a lot of restaurants is, and the McDonald's CEO acknowledged this last year, is that none of it is necessarily reducing labor. I'm Mary Long, and that's David Henkes, senior principal at Technomic and an expert on the food and beverage industry. I caught up with Henkes to talk about innovation in fast food kitchens, the publicity game that more food companies are playing, and the tech that is and isn't working for restaurants. When most people hear the term research and development, R&D, they probably think of tech companies, but there's a lot of, shall we say, hidden innovation that goes into making a fast food product. Could you take us behind the curtain of a fast food test kitchen? What does it take to bring a fast food product from concept to market? Sure. Yeah, no,

it's a fairly complex process. And I should note that it's typically a fairly long process as well, right? And a lot of it depends on the chain and what they're doing, but they tend to look at platforms, right? And so when we talk about innovation, you know, typically it doesn't happen in a vacuum. And the R&D team is always looking at inspiration. A lot of times they're looking for inspiration from their suppliers, whether it's a beverage supplier, a protein supplier, a sauce supplier, right? And so there's a lot of symbiotic relationships that go on between a chain restaurant and the suppliers. And so, you know, and particularly nowadays where the labor situation is challenging and chains are tending to try to do a lot with fairly shoestring

budgets, you know, even the larger chains. But and so, you know, I mean, chains run the gamut from McDonald's all the way down to, you know, 30 or $40 million chains. And so it's a little bit hard to generalize. But I would say in general, there's a there's an approach that they take where, you know, it's not all sort of crazy mad scientists in a in a test kitchen trying to develop all these crazy things, right? It's a very systematic and systemic process that change will use where they, you know, first need to ideate and look at what's happening. And so there's a lot of trend research that happens. There's a lot of consumer research, understanding what the hot flavors, the, you know, what consumers and particularly their consumers

are asking for. And so a lot of times they'll start with hundreds of ideas, right? I mean, you know, the idea generation piece is probably, you know, where I think we look at for the big creativity piece. And then a lot of times they'll bring it down to maybe 15 or 20 concepts to test. They'll organize those ideas by platform and maybe develop pipelines. And in some cases, it might be a longer term pipeline. In some cases, it might be a limited time offer. And so it's something that gets escalated or elevated and accelerated. And then they go through the development process. And that's where you start to iterate around flavors and where a lot of the sort of the food scientists come in in terms of just developing flavors and products.

And the important piece that you've got to remember is this has to be commercialized, right? And for chains, it's got to be commercialized and it's got to be easy to reproduce in kitchens, you know, in hundreds or thousands of kitchens across the country. And so it's also got to be done fairly easily. And so there's this whole process of iterating around, you know, developing an idea, you know, testing it out operationally, you know, once they have something that they think is going to work, they typically roll it out to maybe five or 10 or 15 locations to test it and gauge consumer response and sort of then go back and update it based on consumer feedback. And so the process itself sometimes can last 12 or even 18 months.

It's hard to get an average and particularly post COVID. I think it's a little bit shorter because a lot of chain restaurants are really trying to jump a little bit quicker on some trends, but it's, it's not always a fast process. And, and, you know, sometimes you see these things, especially if they're really trying to get it right, where it takes a long time to go from that ideation period all the way to when it actually gets rolled out and it's actually on the consumer's tray at a fast food restaurant. And so, um, it's, uh, it's an interesting process, but it, it involves a lot of research, a lot of testing, uh, a lot of back and forth. And, And, you know, at the end of the day, they end up scrapping probably more concepts than they bring out just because it doesn't work for whatever reason.

Either the consumer doesn't like it or it's not operational. It doesn't fit at their operation. It's hard to commercialize. It's hard to operationalize. So, you know, they they tend to test a very short handful, but there's a lot of things that get left on the cutting room floor for sure. The interesting thing about this to me is that fast food isn't just about taste. it's also an engineering problem. And you hinted at this when you were talking about commercialization and reproduction. I had read that Taco Bell's Innovation Kitchen,

for instance, features a $40,000 machine that mimics the way that a human mouth bites into something. So they can determine the perfect crunchability of a product. What's the return on investment of developing a successful new flagship product, something like the Crunchwrap Supreme from Taco Bell or even something with more of a cult following like McDonald's McRib? Yeah, I think, you know, first of all, the challenge is actually hitting on that cult favor, right? Because those are few and far between and every restaurant wants to hit on it. You know, if you go back and you look at what the ROI is on this, I mean, new menu items are really the lifeblood of restaurants. And in many ways, to your point, you know, restaurants are

mini factories. They're mini food factories that are essentially manufacturing a food item. And so you almost look at these test kitchens and even the kitchen in the back of the house at a restaurant as a sort of a mini factory in a way, right? They are creating foods to a formula and doing it over and over again. In terms of the ROI that happens on this, I mean, it's hard because, you know, you look at menu items and I looked up, you know, something like a Big Mac as an example is probably, you know, from what I've seen from what McDonald's has issued, maybe 20% of their sales. You're, you know, you're not going, but, you know, it's been out for a long time. And so when you start to roll out a new item, what you're really looking for is the ROI

on it is, is it driving new traffic? And particularly in today's environment where traffic is flat to declining, if you can get a bump in traffic and show positive results for people that are coming in, because, you know, as they come in, they're not just buying that menu item, they're buying a drink, or they're buying fries, or they're maybe buying a dessert. And so, so the ROI on a menu item is not necessarily just how much it sells, but how much it creates incremental traffic, and how much, you know, and there's other sort of non-financial measures. Is it Instagrammable? Is there a buzz that comes with it? Does it create a social media firestorm, right? And so there's a lot of other things that are hard to quantify from a financial standpoint

that are still incredibly important to chain restaurants, particularly as they're trying to break through the clutter of all of these chain restaurants that are also innovating at the same time. And so what we see is there's been a lot of activity, and I'd say a lot more since we've come out of the pandemic of these limited time offers, right? Where it's maybe a four or a six or an eight week menu item that, and if it does well, maybe it sticks. But I think a lot of the innovation happens around shorter term items that are meant to generate a buzz, generate a short term return, and then they move on to the next thing. And so if you think about the pressure that that puts on your R&D team to create and to constantly be coming up with these

buzzworthy and Instagrammable new limited time offers and menu items, the pressure is really there. And so I don't even remember what your initial question was, but the ROI is sometimes a little bit harder to define, but you know, certainly driving traffic and incremental sales is going to be a huge part of it. No, I feel like we've seen so much recently of that, like short term offer type stuff. And I've seen it called be called stunt food too. Right. Like, um, where the line between like marketing and food kind of gets blurred because you get this like wild product. I, over the 4th of July, Pepsi, I think launched like a condiment called Pepsi Kalachup, which was like cola flavored ketchup only available that day at four only four ballparks around the country

yeah um and but i see that and the short-term stuff kind of makes me wonder like if press is an or instagram ability is the main goal here is there such thing as a flop if it's just to generate buzz i mean there there is i mean and and you think about the cost that goes into developing a cola flavored ketchup right i mean that's not something that just happens overnight and so that there was a lot of work that went into that. And I presume at some point that that'll make a repeat appearance, but you know, the, the, I think the flop tends to happen if consumers don't embrace it. And it's, you know, I mean, it, it almost takes on a life of its own when it comes out because everyone picks up on it. Right. Even if consumers aren't necessarily buying it, the

media loves a great story about the, you know, this, this crazy product that got developed, that's available for a limited time off or limited time only. And so, but you know, the, the, the cost to do a lot of that is I think a lot of times a lot more than the actual financial return that you're getting on that. And so, so then the question is, why are you really doing it? And I think it is, you know, the going back to what I said earlier about cutting through the clutter and, and standing out. And even if consumers are like, I don't know that I really want to try that, but you know, now that I've got, you know, a ball game on my mind, or I've got McDonald's on my mind or Pizza Hut, and they're going to be talking about it. And hopefully then that's

driving them to maybe a visit that they wouldn't have otherwise had. I think that's where it comes in, you know, where a lot of these items are not necessarily menu items per se, but they're more marketing events, right? And they're big promotional events to drive awareness, to drive buzz to drive some type of consumer action toward that chain that otherwise wouldn't have happened. And I think that's where the ROI happens. And again, you know, I'm not necessarily sure how you always put a financial return around that, but that's really what a lot of them are trying to do. And, you know, if you start to get known as a chain or as a concept that does this a lot, then consumers start to expect it. And maybe, you know, maybe there's a longer term

impact on your image, on what consumers think of you, right? And so, you know, a lot of it becomes more of a long-term play about changing the consumer's mindset towards your particular restaurant and what they think of you. Changing the consumer's mindset and also, like, being aware of what your mindset is. Like, Wendy's has kind of waded into taking up a certain tone on Twitter, I've seen, and that's almost backfired a little bit sometimes. But Taco Bell, on the other hand, has like leaned into making a 12 minute TikTok musical about the Mexican pizza. Like, you know, you have to know who you're catering to, no pun intended. And, and like what they'll think of what you're putting out there. Well, and that's, that's really what's different today than 10

years ago, right? Is so much of the activities for restaurants are geared around social media and are geared around creating that buzz, you know, 10, 15 years ago, or even going back to when I was a crew trainer at McDonald's in my teens, it didn't matter. Right. And so the menu innovation process was completely different. They've got different standards and different gauges for success today than they would have, you know, even 10 years ago. And a lot of that is number of clicks, number of views, um, you know, the viral moment that gets created. Um, you know, I just read something just earlier this week from the McDonald's marketing chief about the grimace, uh, you know, shake and how that became viral. And they really didn't have

anything to do with that because it was the users. And they sort of questioned about how much they should lean into that and how much, you know, they wanted that to be viral from their customer base versus something that seemed like it was coming from them. And I think that's, you know, anytime you as a menu developer can create that kind of buzz that sort of emerges almost naturally from your customer base, that's the win, right? Because now everybody's talking about you and it seems authentic because it's not something that you sort of planted the seed for. It just sprung from your customers. Sometimes the innovation is on the menu, in the food. Sometimes it's how the restaurant gets the consumer the food. What are some tech innovations, to switch gears a little

bit, that you're seeing at the intersection of fast food and technology that have you excited? Yeah, you know, I just did a whole research project on tech within restaurants and food service. And, you know, I mean, what tends to get talked about a lot are robotics, artificial intelligence. And there's no question all of these things are happening, right? You look at Chipotle or Sweetgreen and how they're automating the process for building their bowls and their products. That's all coming down the pipe. But the challenge, I think, for a lot of restaurants is, and the McDonald's CEO acknowledged this last year, is that none of it is necessarily reducing labor, right? And so the big bugaboo for most restaurants right now is there's just not enough workers.

And, you know, and so tech is always sort of positioned as the savior. And, you know, we're going to take out labor and, you know, create all of these automated processes. It doesn't seem like that's happening. And so where the labor or I'm sorry, where the technology really impacts now is more in the experience. And and it happens much more on the fast food side than it would in a sit down restaurant. Right. And so, you know, you think about the drive through and how, you know, there's geo fencing around the drive through and they can recognize your license plate and have your your orders called up through the loyalty program or through, you know, recognizing your car driving up. And and then the order can be taken by an artificial intelligence order taker and then connected directly to the point of sale and into the kitchen prep. A lot of that automation is is already there and is possible.

I think the you know, the main challenge with these restaurant operators and you see it all the time when you go to order on a kiosk is half the time this technology is down. And so there's always got to be backup and redundancies in place for restaurants when the technology fails. And, you know, and hopefully the technology gets better. But, you know, most restaurants, if if one of these big tech platforms fails and that's all they're relying on, it's going to be a huge negative impact on their sales. And so most restaurants haven't eliminated a whole lot of labor because of tech. What I'm excited about, though, is just, you know, the you know, the the continued automation. I was at an equipment show for the restaurant industry earlier this year and even at the restaurant show in May. And it's just amazing the automation that's out there in front, you know, and a lot of it is happening around the delivery and takeout order. And so, you know, building loyalty programs and, you know, and again, all of the things that go into just ordering on your phone and all of the back office technology that's there. I think the robotics piece is really cool and exciting.

I'm not sure the extent to which, I mean, I think it's going to continue to grow and there's a lot of experimentation with it. We'll see where that goes. I, you know, I've sometimes been accused of being technomics, I like to call us our skeptic, or, you know, I'm a little more, I'm a little more skeptical about technology. There's no question, though, that it's dramatically impacting. And I think where the the impact is, is on the experience and and and whether it's enabling faster, easier ordering or payment or pickup on orders. You know, that's where the technology wins. It creates a better experience and hopefully drives consumers again, you know, to to come back and and engage with the restaurant brand again.

It doesn't necessarily happen, at least at this point, from actually reducing costs. And so it's more on an experiential side. And I think there's a lot of really cool things that are happening and will continue to happen that enhance that experience on the fast food side primarily. You may be a skeptic, but you bring up a really good point. Simple but true, that technology, cool though it is, doesn't always work. That's something to keep an eye out for. And quite frankly, and, you know, restaurants are different than, I mean, to almost contradict what I just said, I mean, restaurants are different than factories in one simple way is that we're a hospitality business. And whether you're a fast food restaurant or a fine dining restaurant, there is still a human element to restaurants, dining and ordering that consumers don't always want to eliminate completely. And so, you know, whereas, you know, the Amazon warehouses and factories in general are much more robotics driven, it's not always, you know, it's got to be a very simple process to automate. And for a lot of restaurants, it's not always a simple process. And, you know, and building a pizza is complicated and, you know, creating customized burgers and, you know, I mean, and certainly robotics, you know, and the technology can increasingly handle that.

But it's always going to be a human first industry. And so, I mean, technology is going to continue to help drive some of the growth. And so I don't want to downplay the role of technology. But I do think that we get a little ahead of ourselves when we talk about, you know, sort of, you know, completely automated restaurants and totally discount the human factor. And if you go back over 100 years ago, there was the automat, right, which I think was rolled out first in Philadelphia. And that was a completely automated restaurant 100 years ago. And it hasn't stuck, right? I mean, and so we're starting to do a lot of the same things that the industry was doing 100 years ago with better technology. But I'm not sure that consumers, maybe they're a little bit more ready because they've got technology throughout their life. But I still think the human elements, you know, probably probably more important than we think for for the future of restaurants. Yeah, for sure. Thanks so much for your time, David.

It's been really fun to talk about kind of the two different sides of innovation that we see in the fast food space. Absolutely. Yeah. Thanks for having me. I appreciate it. As always, people on the program may have interests in the stocks they talk about. and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow, Fools.