E Restaurant Delivery And Meatless Initiatives: Is It Really Incremental?

In restaurants, debates are raging about delivery and meatless alternatives and what is the impact upon sales, comps and earnings. What is said by some is “it is incremental”.  The first question what is incremental, and to whom?  Restaurant fundamentals talk is so numbers intensive now, it is easy for investors to get confused by the array of numbers.    

One recent example of this is the debate underway within the restaurant space is whether delivery is contributing new customers.  Some restaurant operators and 3rd party delivery providers passionately claim that delivery is incremental (e.g., see Restaurant Business piece by Peter Romeo [1] but yet others claim that it can’t be (e.g., Dominos (DPZ) CEO Rich Allison noting the industry is still producing negative traffic despite all the delivery business claimed[2])  Another most recent incrementality question involves meat alternatives (e.g., meatless); hit rates have jumped up to the mid-single digits in many operators and one study reported a 18% April traffic bump at Burger King in its St. Louis meatless trial, but is it incremental?

So, what does incremental really mean?  Incremental means verifiably additional and it applies to revenues, operating expenses and capital expenditures in our business. Most of the debates on “incrementality” fall in the revenue and marketing analysis area. Incremental can refer to additional revenue net of cannibalization and other mix shifts but ideally, in my expanded view, it is that revenue that offsets all the associated costs and capital outlays…so it is truly free cash flow positive. [3]

One very important question to sort out initially about incrementality of anything; is it recurring, showing up period after period, or is it one time in nature?  Sometimes, when a new concept or product platform is implemented, we simply won’t know what the implementation cycle will be. For example, if meatless burgers are added at White Castle, will there be a sales bump sustained? This is why test markets and control markets are necessary. There will always be uncertainty and hence “excitement” in retail and restaurants, and we won’t know the answer at once. Operators, analysts, investors and observers should be cautious while a new product or concept is being proven.

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Disclosure: I have no position in the stocks mentioned, nor plans to initiate a position.

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Bill Johnson 4 months ago Member's comment

Good read, what do you think of the current landscape of the restaurant industry? Which will survive the pandemic?