The growing pressure of labor inflation is driving the restaurant industry to embrace new guest-facing technologies — and rapid consumer acceptance is further spurring that move, said one Wall Street analyst in a report Thursday.

In a note to investors about rising labor costs, Christopher O’Cull, senior analyst with KeyBanc Capital Markets Inc., said rising minimum wage rates and increasing health care costs are causing restaurant operators to change a fundamental aspect of the consumer experience: service.

Chain restaurants have attempted to combat inflation with productivity improvements, such as better demand forecasting to optimize labor scheduling and new back-of-the-house technologies, O’Cull wrote.

“Unfortunately, excluding menu pricing actions, we estimate those productivity savings have not outpaced labor inflation,” he said. “Given the weak traffic trend, we believe restaurants also need to find alternatives to menu price increases for addressing potential labor inflation.”

A growing number of restaurant chains are turning to guest-facing technology to address such pressures. Casual-dining chains, such as Chili’s and Applebee’s, are rolling out the use of tabletop tablets for ordering and paying in their restaurants this year, for example. And BJ’s Restaurants Inc. revealed this week that guests will soon be able to order and pay using their own smart phones and other devices.

Chili's tabletop devices can take menu orders, accept credit-card payments and let customers play 99-cent video games.In quick service, Taco Bell is rolling out mobile ordering and payment this year, and others in the segment are also testing or have launched similar programs.

O’Cull notes that Chili’s found in test stores that 80 percent of guests used tabletop tablets for viewing pictures of menu items, playing games and reordering items, and more than 50 percent used it to pay the bill. “This acceptance rate is pretty staggering considering that, five years ago, only half of guests were paying with credit cards,” he wrote. “Assuming guests embrace ordering/payment technology, we would expect operators to modify their service system.”

O’Cull estimates that a mid-scale casual-dining chain that produces $2.5 million in sales could save 100 to 200 basis points in labor costs, or roughly 1 percent to 2 percent, by offering technology that will allow guests to order and pay.

With that estimate, O’Cull said he assumes the restaurant increased the number of assigned tables per server as guests use a tablet to order and pay, freeing the server to take on more tables. “We estimate that the restaurant could eliminate 30 percent to 40 percent of its total server hours and reduce labor costs by 100-200 basis points,” he wrote. “Obviously, the number of servers employed would fall, but the take-home pay of remaining servers would increase significantly.”

O’Cull also noted that in Chili’s test restaurants, the use of tablets resulted in improved guest satisfaction. Guests might like having more control of their dining experience, he said, or it could be that the use of tablets speeds service, reduces meal duration or improves accuracy.

“Regardless, guests, on average, seem to view the tablets favorably, as many chains report higher tips after implementing the tablet,” he wrote, noting that the server still delivers food, refilled drinks and cleared dishes.

“It will be interesting if the tip rate changes once full ordering capability is enabled, but we suspect most guests are tipping for the other services, rather than order and payment taking,” O’Cull wrote.

Contact Lisa Jennings at lisa.jennings@penton.com.
Follow her on Twitter: @livetodineout