Technology drives guest satisfaction and restaurant stocks

Market Realist

Restaurants and technology: Investing in tablets (Part 2 of 5)

(Continued from Part 1)

Customer satisfaction

Research from Cornell, one of the best hospitality schools in the United States and perhaps the world, has found that customer satisfaction is an important revenue driver. In one study it conducted on three restaurant chains with 80,845 customer visits, authors found that a 1% increase in customer satisfaction, measured by customers’ likelihood of returning, amounts to as much as $1.3 million in extra sales.

Customer satisfaction drives share price

While the degree of significance may differ for restaurant types, the same can be said for other restaurants. Brinker International Inc. (EAT), for example, has been one of the best-performing stocks since 2010, outperforming the S&P 500 by 50% over the past three years, while its guest satisfaction ratio gradually increased from 50% to 60%. It would be surprising if the relationship didn’t hold for other restaurants like Panera Bread Co. (PNRA), Dine Equity (DIN), and Starbucks, as well as consumer stocks under Consumer Discretionary SPDR ETF (XLY).

Deliver more accurate information and get engaged

Aside from satisfying impulse orders, use of tablets like the iPad and other technologies can help increase customer satisfaction by making the experience more social and menu items clearer. For example, a custom-made app in the tablet may allow diners to browse pictures of menu items (phew, no more Yelping in restaurants), read tasting notes, follow what other customers have said or what they’ve also purchased, and remove sold-out items from onscreen menus.

With pictures and more information, guests know what they’re going to get. One common problem in a steakhouse is that a medium rare often differs from one store to another. Using pictures can limit the risk of consumers getting something they don’t want, so the customer can go home feeling sated and more likely to come back. This also saves employees the time that they would have had to spend taking the food back to the kitchen to cook the meat further or redo it. That may not be very important to customers who are regulars at a place like Texas Road House (TXRH) or LongHorn Steakhouse held under Darden Restaurants Inc. (DRI), but it sure does increase customer satisfaction for new guests. Consistently of good food is one of the most important factors that drive customers to come back.

Tracking inventory

Use of tablet and technology can help restaurants track their inventory more precisely so that they don’t run out of ingredients and lose a potential sale to a customer who came to the restaurant craving the shop’s signature coconut ice cream. Conversely, if an inventory is running low, restaurants can reduce waste by offering special promotions, and that can be implemented easily and cheaply with a digital menu. It’s as easy as a few clicks here and there. That should help increase inventory turnover, reduce working capital, and return capital to shareholders—if all goes well, of course.

Continue to Part 3

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