Restaurant closures, bankruptcies, reopenings with restrictions… The restaurant industry has had a pretty rough time, to say the least. And things should remain difficult in the foreseeable future as Covid-19 doesn’t seem in a hurry to go away.
In spite of this adverse environment, we have been investing in various restaurant software names since day 1 of the Food Revolution certificate in early June, considering that the restaurant industry, like many other “purely” physical industries, has no choice but to embrace some form of digitization and that the health crisis acted as a wake-up call. All these stocks have contributed positively to the portfolio performance so far.
For many restaurants, the first step of this digitization effort in recent months has been to open an online delivery option in partnership with the likes of Grubhub in the US, Just Eat in Europe or Meituan Dianping in China, to keep working and generating revenue.
It could go one step further in the future with the concept of cloud kitchens taking shape, i.e. restaurants that do not have any physical location and only offer online ordering & delivery. The low capital intensity of this model (reduced rent, reduced staff costs) is an obvious attraction for wannabe chefs.
The accelerated shift to digital payments (contactless cards, mobile, online) has also been a major highlight in recent months. Even assuming significantly less traffic in restaurants and an average basket down due to the economic recession, we would expect the volume of digital transactions to go up, with an immediate impact on the top-line of restaurant software names, as close to 100% of guests avoid cash payments and use electronic payments thanks to Covid-19 fears.
Leveraging the power of cloud computing, restaurant operators all over the world are now investing in fully integrated SAAS (Software-As-A-Service) platforms helping them not only to build and link online ordering, delivery and payment options but also to manage reservations, loyalty programs, staff schedule, payroll and inventory and to harness data analytics.
The latest earnings from PAR Technology, a leading pure-player in this specific field, clearly illustrate this nascent trend. Q2 top-line growth was unsurprisingly affected by the global lockdowns but was nevertheless quite resilient at +3%. And more importantly, the backlog was up about 30% quarter-over-quarter as the company attracted new restaurants thanks to the “cloudification” of its Point-Of-Sale (POS) offering. More than 6.5 million restaurants in the world are currently using a POS system, with a major proportion of them not yet cloud enabled.
In all, digitization, which is one of the major secular drivers behind our Food Revolution certificate, along with health and sustainability, is starting to make significant inroads in the restaurant industry. This, combined with the recovery/cyclical profile of restaurant businesses, could make restaurant software vendors attractive names heading into 2021.