Big Food Automation

Articles From: Smartkarma
Website: Smartkarma

By: subSPAC

EXECUTIVE SUMMARY

  • While the pandemic has uprooted many industries, perhaps none have seen a larger impact than the Restaurant and Fast Food Industry.
  • These industries have been hit with a barrage of issues including a mass exodus of workers, inflation hitting the prices of ingredients, and foot traffic being much lower due to a change in eating preferences.
  • These chains have struggled with their profit margins, which have yet to reclaim their pre-covid levels and could get worse due to several headwinds in the coming months.

DETAIL

While the pandemic has uprooted many industries, perhaps none have seen a larger impact than the Restaurant and Fast Food Industry. These industries have been hit with a barrage of issues including a mass exodus of workers, inflation hitting the prices of ingredients, and foot traffic being much lower due to a change in eating preferences.

These chains have struggled with their profit margins, which have yet to reclaim their pre-covid levels and could get worse due to several headwinds in the coming months. With the industry staring down at a barrel of the shotgun, it might finally give them the opportunity to transition to Automation and AI-based solutions, which have been long in the making. Presto, a company that provides these solutions, is betting big on the transition. But can it succeed in making restaurants more efficient and less prone to human errors, or is it still too early? 

The Great Transition 

Founded in 2008, Presto is a restaurant technology company that helps chains automate their services and improve the in-person dining experience. The company offers kiosks and tablets which let customers order and pay directly at tables while also using speech recognition to let them order during drive-throughs and other settings. In addition to this automation, the company uses Artificial Intelligence and Computer Vision to optimize operations and save costs. The question then is if Presto’s solution is better than traditional human interaction and if brands will look to make long-term investments to change the dining experience. 

It is no secret that Fast Food Restaurants have gone through some drastic changes over the past two years due to the great resignation. Restaurants that were once reluctant have now accelerated the transition to technology to manage worker shortages and wage increases. There were over 1 million unfilled positions across restaurants in the US, well below pre-pandemic levels, despite demand rebounding rapidly. Restaurants and Fast Food chains have also found it harder to retain existing employees, with more than half of all restaurant workers considering leaving their existing jobs due to poor working conditions and lower wages not matching the cost of living due to high inflation.

Employers have resorted to raising the minimum wage and providing incentives to attract talent, but this has only led to higher turnover across the industry. Even when companies have managed to hire and retain top talent, they have been hit with various other challenges, like unionization efforts. Behemoths like Amazon, Apple, and Starbucks have all seen Successful Unionisation Efforts, which is a worrying sign for the rest of Main Street. Unions have historically meant higher wages and costs due to better collective bargaining efforts, and this could particularly hurt the fast food industry in the future, adding to its current woes. 

The final nail in the coffin could be the impending regulatory headwinds being imposed by governments. On Labor Day this year, California passed the Fast Food Accountability and Standards Recovery Act, which could have long-term implications on wages and working conditions. The new law creates a ‘Fast Food Council’ comprising ten members ranging from employees to franchises, advocates, and government representatives. This council will have the authority to set the standards across the Fast Food Industry, from things like the number of working hours to the quality of working conditions and, most importantly, the minimum wages paid to employees.

While the state’s current minimum wage is $15 per hour for businesses that employ more than 25 people, the council plans to increase it to $22 per hour by 2023. The laws will not only increase the extent to which chains are micromanaged but could also create bureaucracy and increase costs over time. If other states follow in California’s footsteps (most states have on many previous occasions), then the Fast Food Industry could be left with no other option than to accelerate the transition to Automation and Artificial Intelligence solutions from companies like Presto to preserve their margins.  

Humans vs Machines 

While there are plenty of reasons to be optimistic about automation across the industry, it is safe to say that the transition is at least a few years out, primarily due to the technical, regulatory, and operational challenges associated with implementing it on a large scale. 

First, while customers have somewhat reluctantly accepted no-contact solutions like kiosks and tablets at the height of the pandemic due to safety concerns, the experience is still a ways away from replicating human interaction. For instance, the error rates and time to order are likely to be much higher when ordering through a kiosk or through voice recognition. McDonald’s, which tested a voice recognition system across select locations in 2021, said that it had accuracy rates of just 85%, forcing the company to let the system bake in the oven for a little longer before thinking about deploying it across all their locations.

From their point of view, this makes complete sense, as Fast Food and Dining are all about providing the most efficient service. One Misstep can cause a long-term customer to walk away and switch to other outlets. This would mean that most restaurants will be reluctant to be the first movers in the market for fear of being perceived as a ‘less than’ experience compared to their competitors. 

Another problem that could slow down the rollout of automation is the logistical and operational challenges in deploying the systems. Most restaurant chains have limited space, which is usually optimized to pack the most number of tables to maximize revenue per square foot. Deploying Kiosks or Voice Order Solutions will take up crucial space and could lead to lower revenues than expected.

Companies will also need to commit investments into restructuring their store footprint to maximize order flow and minimize wait time, which could be significant one-time expenses. These factors are sure to make some companies reconsider committing to a massive rollout and instead test the solution to see if the costs outweigh the benefits over time. Another factor that could come into play is the regulatory challenges of implementing such a system. Pro-labor politicians are sure to scrutinize companies that favor machines over humans and may disincentivize them through additional taxes or penalties. 

Financials and Valuation 

Presto recently completed its SPAC merger with Ventoux CCM Acquisition Corp, raising $92.1 million in gross proceeds, which the company says will help fund its growth and expand its existing partnerships. When Presto had previously announced the SPAC deal, it had done so at an $800 million valuation but has since revised it to $525 million to reflect the current market conditions.

Based on the existing growth and margins, the revised valuation may still be too steep to consider.

To be fair, Presto is still early in its lifecycle. The company is still making investments in deploying its solutions and has only penetrated a fraction of the larger fast food chains like McDonald’s and Yum Brands’ KFC and Taco Bell.

Bottom Line 

The restaurant industry has faced several headwinds since the inception of the pandemic, including rising costs and labor shortages. This makes the industry ripe for disruption as costs mount, and margins become compressed. Automation and AI solutions to lower costs and better optimize operations. Presto, which builds these solutions, could capture much of the expected growth but could face skepticism from both customers and brands. With a deal valuing the firm at a premium, time will tell if the company can justify its valuation by improving its growth and margins by making investments and expanding its footprint. 

Originally Posted September 19, 2022 – Big Food Automation

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