Will You Actually Eat at the Restaurant of Tomorrow?

Several tables lining the windows of a restaurant overlooking a city.

At Motley Fool Asset Management, our investment process rests on four pillars of business quality: management, culture, and incentives; competitive advantage; business economics; and sustainability and trajectory. Business sustainability is perhaps the trickiest component to figure out because it requires us to assess a company in the context of its shifting industry dynamics and determine whether it's likely to be a stronger business a decade from now than it is today.

I can walk you through how we approach that challenge by using the restaurant industry as a case study. Over the past five years, technology has dramatically influenced how consumers interact with their favorite restaurant brands, and we can observe how different types of restaurants are adapting to this change.

A former holding in one of our portfolios, Panera Bread, is one example of how a restaurant can successfully implement technology to engage with its customers, drive higher sales, and improve store productivity. Over several years, the Panera 2.0 initiative encouraged customers to shift their orders to an online app. This change made customers happy because they could walk into the store and pick up their food without waiting in line. It made Panera happy because average transaction sizes were higher for online orders than for orders taken by a cashier. The tech platform also served as the launch pad for Panera to start its own delivery service, similar to the national pizza chains. Over four to five years, Panera used technology to modernize its business to great effect.

Not all restaurant chains have the financial resources to make the investments in technology that Panera did without relying on external partners. Over the past two years, independent restaurants and even national chains are increasingly turning to online ordering and delivery platforms to enable them to meet customers on their terms. Meanwhile, market leader GrubHub , which we own in our fund, consolidated some of its early competitors, including Eat24 and Seamless, even as newer competitors, such as Amazon Restaurants and UberEats, emerged. It's not enough anymore to just provide an ordering app. Customers are demanding delivery options, too. They also want their food to show up hot and fresh. This is a big challenge.

Consider Shake Shack , a small, but very popular, national burger chain. Seemingly every time a new Shack opens, there's a long line of customers wrapped around the block. Co-founder Danny Meyer and CEO Randy Garutti have long been wary of online ordering and delivery, and for good reason. Perhaps the most important ones are that a restaurant that outsources its delivery efforts cedes control of the time it takes to deliver food. Having a driver hand over a bag full of cold burgers and fries would be damaging Shake Shack's brand. Yet even Garutti noted on the company's most recent conference call that there is growing demand for delivery, and the company has to respond. Shake Shack is taking a measured approach with partners Door Dash and Caviar and developing food packaging to protect quality.

Perhaps even more interesting at Shake Shack is what it's doing at its Astor Place location in New York City. This is a cashless location, where orders are taken only at a kiosk or by online app. Shake Shack employees who would have been cashiers are instead shifted to either guest hospitality or food preparation. What Shake Shack is doing here is even one step further than Panera went. Time will tell if it gets similar results.

What's next?

There are start-up companies making their own call on the future of the restaurant business. Without existing store bases to retrofit for online ordering and delivery, they can operate at the extremes of what a restaurant business model can be. A Fast Company article described new businesses in NYC that have deconstructed the restaurant business model into nothing more than a kitchen with an online presence and outsourced delivery capabilities, provided through the likes of GrubHub or UberEats. As the article discusses, what companies like Green Summit are doing is a logical endgame for restaurants that aren't driving traffic. A kitchen-only restaurant eliminates all of the overhead of a dining area. The trade-off, of course, is that a kitchen-only restaurant is entirely reliant on the food ordering and delivery platforms to send them customers. I love the entrepreneurial spirit and the drive to do something different. We'll see if these virtual restaurants catch on.

As a portfolio manager, I have to be aware of industry trends and changing conditions. Within our team, our investment process relies on feeding those observations into our conversations about business sustainability and, ultimately, quality. To invest for the long term, we first have to shape our view of what the long term may look like.

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The author(s) may have a position in any stocks mentioned.

Charly Travers owns shares of Grubhub. Charly is an employee of Motley Fool Asset Management, a sister company of Motley Fool, LLC. Motley Fool Asset Management manages portfolios that own shares of GrubHub Inc.John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. The Motley Fool owns shares of and recommends Amazon. The Motley Fool is short shares of Shake Shack. The Motley Fool recommends Grubhub. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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