Companies that specialize in AI are the darlings of Wall Street as investors bet the future will be immersed in the technology.
AI is now proving a competitive advantage in many industries, not the least of which is quick service restaurants (QSRs), or fast-food restaurant operators. Traditional due diligence within the QSR sector is focused on real estate, core operations, gross margins, labor turnover and other typical guideposts of value within a company. However, as investors in the industry evaluate restaurant companies, they need to change how they conduct their due diligence as AI alters the playing field.
Two major focuses for the use of AI in QSRs is on stocking the right inventory to reduce waste and predicting traffic to improve staffing models. These areas — inventory and people — are the two largest items on the profit and loss (P&L) statement, outside of rent, making AI a logical solution to apply across major chains with hundreds or thousands of stores.
Today, the current market valuation for restaurant AI is estimated to be $9.68 billion and is expected to swell to $49 billion over the next five years.1 Approximately 41 percent of restaurant operators in the U.S. plan to use AI to forecast sales and 33 percent say they are using the technology to personalize customer experiences.2
Private equity (PE) firms looking for acquisitions in the industry must undertake three actions while evaluating companies in the space:
- Understand the technology trends in the QSR universe;
- Conduct proper due diligence of technology for restaurant operations; and
- Establish a plan to optimize spend for AI initiatives in target companies.
Hold the Pickle, Not the AI.
From the biggest chains to regional QSRs, restaurant operators are deploying AI with varying levels of effectiveness. The best applications are making a real impact on P&L, reducing costs, adapting to regional customer preferences and personalizing the customer experience to boost sales and improve loyalty.
You may have heard of some of these AI use cases and even encountered them yourself in the drive-thru or at the fast-food counter.3
- Wendy's is rolling out its "FreshAI" chatbot technology to speed up and streamline drive-thru ordering and claims it saves an average of 22 seconds per order.4
- YUM Brands, which operates Taco Bell and Pizza Hut among other chains, is piloting a voice-enabled AI solution in its drive-thru lanes to make them more efficient and populate "automated upsell recommendations" to customers. [5]
- Chick-fil-A, known for its efficient drive-thru operations even before the pandemic changed customer ordering behavior, is applying AI to ensure food products are fresh when served, warning staff to discard food products for safety reasons. It also monitors social media for mentions of food poisoning to proactively detect food safety issues in order to be as proactive as possible.6
While these are mostly examples of "front-of-house," customer facing AI applications, companies are deploying technology to better time inventory deliveries, recruit more effectively and free up employees from repetitive tasks.
What Steps Should PE Firms Take When Evaluating QSR Targets?
Restaurant operators are spending billions of dollars on AI for all the right reasons, but how do they know which initiatives are adding to margin, growing sales or trimming costs? Are their investments focused on the best areas today or for the future?
Understand the Trends in the QSR Space
The future of AI in fast-food chains will focus on "back-of-house" applications, using robotics and automation for cooking and packaging food, reducing human error and improving food preparation. Customer interaction will continue to be an ever-expanding category that will benefit from AI.7
Companies can spend billions of dollars on technology, yet it may not be driving value. Building an app or conducting data analytics may be good ways to deploy technology, but how can companies quantify success? There is no single answer.
As technology evolves, its integration into the fast-food
industry promises even more groundbreaking changes, offering
exciting prospects for both businesses and customers alike.
— Neil Sahota, AI advisor, in Forbes
Consider the complexities of customer preferences in various areas of the countries. Customer behaviors and partialities may be much different in rural Mississippi than in Boston. Can a company's AI network account for this and deliver the right inventory and raw materials to meet regional demands?
Companies need a way to test market segmentation on scale and even think about implementing market specific technologies.
The trend in QSRs is to use AI not only to cut costs but to establish a more holistic approach that targets improvements in efficiencies, safety and customer engagement that together can drive value, loyalty and sales growth.
Do Proper Due Diligence When Evaluating Technology for Operations in QSRs
PE firms often conduct due diligence with limited access to limited data. How does a target compare to competitors and peers in the sector? Investors must be willing to put in the time to collect the data to properly evaluate an acquisition's technology effectiveness, investment sufficiency and unique value proposition to customers and answer this question.
Acquiring a QSR means evaluating how well the acquisition is using technology to optimize supply chains and logistics, automate processes, engage customers and predict demand.
Buyers in this market should focus on detailed technology diligence — far more so than in recent years and transactions. Technology beyond just AI is quickly becoming a driving force of growth and cost control, so understanding the value of the spend will be critically important in these deals going forward.
Create a Plan to Keep Technology Spend at an Optimal Level
Once companies understand the AI trends in QSR and feel confident in their technology due diligence, buyers should be outlining a plan to either keep technology spend as is or to further optimize AI with additional investment.
Ideally, the plan should cover multiple years over which the company may sign multiple contracts with partners, or, to purchase technology companies to aid them on their AI journey. Once the integration phase begins, investors should start small, rolling out initiatives in small batches and testing them before committing to long contracts.
Often overlooked are the associated costs of employing AI. Companies will need to train employees in stores where the new technology is implemented. That can be a significant task and expense for a chain with thousands of locations. If in-store training is too cumbersome, companies will need to invest in remote training to more efficiently cover its vast store landscape. Typically, QSRs will have to hire teams of data scientists and engineers to monitor and work with AI, further adding to labor costs.
Measuring effectiveness can be tricky but is a critical step. Traffic revenue and basket size are highly tangible measurements, but beneath those performance indicators is a more important measurement: customer retention and loyalty. Does the in-app offer or text display encourage the customer to come back more often, say an average of 2.5 times a month post-investment rather than 1.5 times? Understanding these metrics can help justify investment spend.
Now Is the Time to Get AI Wise in the QSR Sector
PE firms have been experiencing longer portfolio company holding periods because of higher interest rates, so the pent-up demand for IPO exits is also high. To choose the right acquisition in this market means buyers should not simply rely on the P&L and traditional due diligence check boxes. They must seriously assess the target's AI effectiveness and determine if the investment will drive value or require more dollars.
How Can A&M Help?
Alvarez & Marsal's Restaurant Subject Matter Expert Practice combines operational expertise, technological knowledge and transaction experience, conducting due diligence in the industry thousands of times per year. A&M's portfolio of practices covering technology, digital, retail, mergers and acquisitions and food services ensures clients benefit from our combined approach to lead with a bias toward action and results.
Footnotes
2https://www.emarketer.com/content/restaurants-using-ai-personalize-marketing
3https://venturebeat.com/ai/how-mcdonalds-is-serving-up-ai-innovation/
4https://www.newsnationnow.com/entertainment-news/food/wendys-ai-drive-thru-chatbot/
6https://aiexpert.network/case-study-how-chick-fil-a-is-pioneering-ai-in-the-restaurant-industry/
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.