The (Hard) Business of Eating

Long VC Subsidies & Facebook's Copying Skills

Generally speaking, there are four categories in the dining space. First, there are the QSRs (quick service restaurants). Your run-of-the-mill fast food spots fall into this space. For the most part, these guys are doing okay: McDonald's ($MCD) and Wendy's ($WEN), for instance, have both seen great stock performance in the TTM. Second, there's the fast casual space. Competition here is fast and furious covering all manner of ethnicities and varieties. Chipotle ($CMG) and Panera Bread are probably the two best known representatives of this category. The former has gotten SMOKED and the latter got taken private. Generally speaking, there'll be some shakeout here, but the category as a whole has been holding its own. Third, there's the fine dining space. This is a tough space to play in but there are clear cut winners and losers (Le Cirque, see below): not a lot of chains fall in to this category. And, finally, there is the casual dining category. Here is where there's been a ton of shakeout. This past week, for instance, Ruby Tuesday Inc. ($RT) - the ubiquitous casual dining restaurant loosely associated with bad New Jersey strip malls - got bailed out...uh, taken private by NRD Capital at a fraction of its once $30/share price. (There was some assumed debt, too, to be fair). Moreover, Romano's Macaroni Grill filed for chapter 11 bankruptcy. In RMG's bankruptcy papers, the company's Chief Restructuring Officer said the following, "The Debtors’ operations and financial performance have been adversely affected by a number of economic factors, but perhaps most notably by an overall downturn for the casual dining industry. The preferences of such customers have shifted to cheaper, faster alternatives. On the other end of the spectrum, there is a trend among younger customers to spend their disposable income at non-chain “experience-driven” restaurants, even if slightly more expensive." No. Bueno. See below for a more in-depth (and slightly repetitive summary) of this particular bankruptcy filing. 

Unfortunately, the restaurant world received some other (slightly under-the-radar) bad news this past week: UberEATS, Uber's food delivery service, reportedly generated 10% of the company's total global bookings in Q2 - which, extrapolated, equates to $3b in gross sales for the year. That's a lot of food delivery to a lot of people sitting at home doing the "Netflix-and-chill" thing instead of the eat-microwaved-mozzarella-sticks-at-the-local-Ruby-Tuesday-thing. Of course, this is attributable to Softbank and other venture capitalists who are subsidizing this money-losing endeavor: UberEATS is unprofitable in 75% of the cities it services. On the other hand, do you know what IS profitable? Facebook ($FB). Yeah, Facebook is profitable. And Facebook is going after this space too; it released its plans to get into the online food ordering business earlier this week. And many suspect that this may be a precursor to a foray into food delivery as well. Why? Perhaps Mark Zuckerberg saw Cowen's prediction that US food delivery would grow 79% in the next several years. Delivery or not, anything that helps make online food ordering easier and more mainstream is an obvious headwind to the casual dining spots. Given that this area is already troubled and many casual dining spots have already fallen victim to bankruptcy, there don't seem to be many indications of a near-term reversal of fortune. Headwinds for the casual dining space correlate to tailwinds for restructuring professionals. Sick? Yeah. Sad? Sure. But true. 

Amazon Go and the Future of Quick Service Restaurants

This week Amazon announced the Seattle-based beta launch of its (a) cashier-free (b) line-free (c) self-checkout-free (d) sensor-based food shopping experience. The typical convenience or grocery store UX includes: put items in cart; wait in line for an absurd amount of time; take items out of cart and place them on a conveyor belt; watch person in front of you attempt to pay by check; wait more; watch items scanned and pay for items; watch items get bagged or bag them yourself; and, maybe, put items back in cart for external transport. Amazon Go would eliminate all of that. 

Instead, the entire user experience would be managed by way of sensors on the food items, sensors at the doors, and an app that catalogues the items once you place them in your bag and walk past the scanners on your way out. The transaction is paid for using your Amazon-linked credit card. For the technophiles among you, here is a summary - based on the filed patent(s) - of how this would work.

Now, initially, the Wall Street Journal and Business Insider reported that Amazon may roll this out to 2000 physical locations - which, if true, would put Amazon at a brick-and-mortar grocery scale of the likes of Kroger and Tesco. On Wednesday, Amazon denied that number.

What does this have to do with the restructuring community? On Tuesday, we discussed these developments with an Amazon employee and what follows is the (slightly-edited for length) narrative:

Amazon Employee: Curious to hear your questions and what your different angle is.

PETITION: Well [we're] in the restructuring space and so [we're] looking at it from the angle of "who gets f*cked?" if this concept takes off and scales to the Kroger/Tesco like level of 2000 stores. Wondering your thoughts there...? [Our] list of losers: manufacturers of conventional scanners...plastic separator bricks...cash registers...conveyer belts; landlords (maybe? - less square footage required without the cashier and self-checkout stations); print media/candy manufacturers/gift cards - all things that benefit from lines and impulse buys at checkout; human capital; people on the wrong end of income inequality.

Amazon Employee: I've noticed that because not many people have seen it in person they tend to over-index on the idea that this affects grocery stores the most. But really, when you go inside, you realize that this is for quick shopping. A family of 4 or 5 cannot go in and by a week's worth of groceries. Really this is going to impact the quick service restaurants and the real growing category is in-grocery-sit down eating. So this is really for 20-30s who live in a dense urban environment and want a quick breakfast/lunch/dinner that is healthy/fresh/organic.

PETITION. So, this would affect the Pret A' Manger types more? And how does this reconcile with the reports that this technology is meant to be deployed in 2000 stores: you're saying the 2000 number applies to the fast-healthy-casual concept? And a lot of what [we] said would seem to still apply, no?

Amazon Employee: There are a lot of rumors out there about 2000 stores etc., but those people have zero idea what that really means. Amazon is probably testing more than one concept so there's no way to know if Go is the only concept and how widely it will be deployed. But a lot of your losers - belts, candy, impulse buys - will definitely still be at traditional supermarkets. So the Go concept seems to map more closely to QSR and in-market-dining. So those seem to be the big losers here. Pret A Manger is a good example. 

For now, then, it seems that this is more of a supply chain exercise than anything else though we'd be remiss if we didn't highlight that nothing was said about potential job loss (statistics on cashiers here and a counterpoint to the common counter-argument about the ATMs/bank-teller dynamic here). That said, if this technology takes hold, there is no reason to believe that this wouldn't eventually affect incumbent grocers as well. And as we all know - and we here at PETITION have well covered - the grocery and restaurant space could do without additional headwinds. Here is the list of the top 50 QSRs in the United States for good measure.