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    In or Out?

  • Operators debate the pros, cons of dine-in and dine-out business.

    papa murphy’s
    As a take-and-bake concept with no in-store seating, Papa Murphy's has long thrived as a take-out brand.

    For decades, traditional quick-service restaurants have leaned heavily on selling food that’s ultimately consumed off-premise, whether it’s delivered through the drive-thru window or carried out from the counter.

    But with the rise of fast-casual brands—which bank on a high-quality experience in which customers find value eating inside the stores—operators are weighing the merits of both on- and off-premise dining while also analyzing what the right balance is for their brand.

    In recent years, traditional drive-thru-dependent fast-food brands have spent big bucks renovating their dining rooms, moving away from generic plastic furniture to comfortable leather chairs, fireplaces, and flat-screen TVs in attempts to entice customers wanting to eat onsite. Meanwhile, all manner of restaurants are experimenting with delivery, making it an option for far more than the old mainstays of Chinese food, pizza, and sandwiches. And fast-casual concepts, traditionally more dine-in-oriented, are increasingly adding drive-thru windows.

    “I can see a day when Chipotle is making burritos in the drive thru,” says Darren Tristano, executive vice president of Chicago consultancy firm Technomic. “I think at some point, when they finally slow down in growth, they may have to think about late-night, breakfast, and the drive thru.”

    So far, Chipotle has showed little interest in adding drive-thru windows. But in the increasingly competitive and fragmented restaurant business, many brands are looking to make inroads with customers by diversifying their on-premise and off-premise options.

    Experts say that most concepts should strive to strike a balance of on-premise and off-premise dining offerings. Still, some say not every company can—or should—try to operate a drive thru. And for some brands, it doesn’t make sense to have a sizable dining room, or even a dining room at all. Generally speaking, restaurants with drive thrus do a majority of their business (about 70 percent) at the window, Tristano says, while those without drive thrus generally see a 50/50 split between on-premise and to-go orders.

    “I think during the day, it tends to moderate from a dine-in perspective,” he says. “When you start with breakfast, it tends to be higher off-premise; lunch is a mix, and dinner tends to be more dine-in.”

    Of course, what customers value in a dine-in experience and what they value in a to-go order can vary widely, Tristano says. Inside, they want fresh, great-tasting food, while they’re often more concerned about speed, convenience, and portability with drive-thru and carryout orders. Restaurants have more at stake with to-go orders, especially at the drive thru, where service times and face-to-face interactions are (ideally) lightning fast.

    “I think your risk is much higher in the drive thru,” Tristano says, “because with in-store dining, you’ve got a better chance to fix a problem than you do with a customer that’s already pulled away and is down the road.”

    While many brands are changing their strategies on both sides of the equation, restaurants are seeing the most growth in on-premise dining, according to market research from The NPD Group. In the year ending May 2015, industry-wide drive-thru and carryout traffic remained flat, while on-premise dining increased—driven largely by growth in the fast-casual segment, says Bonnie Riggs, an NPD restaurant analyst. Limited-service restaurants, which represent 78 percent of total industry traffic, increased dine-in visits by 5 percent last year, the biggest gain of all restaurant segments, NPD found. (While on-premise diners tend to spend more, Riggs says, they’re not necessarily loyal to certain brands.)

    Across the restaurant industry, dine-in visits totaled $223.4 billion in annual sales, while off-premise visits reached $200.3 billion.

    “All of the growth in on-premise is coming from the morning meal, whether it’s weekday or weekend. More people are eating breakfast on-premise at [quick-service] places,” Riggs says. “The real growth area has been breakfast, and it’s been that way for quite some time. The consumers beyond the Baby Boomers are now heavy users of restaurants. And they’ve got the time to spend to eat on-premise.”

    Still, about 60 percent of quick-serve orders are eaten away from the restaurant, whether it’s bought at the drive thru, carryout counter, or delivered. Of 12 billion drive-thru visits annually, Riggs says, 62 percent come by the way of the hamburger segment, which has been on the decline for the last three years. She says traditional quick-service brands have overly complicated their drive-thru menus in attempts to compete with on-the-rise fast-casual concepts. And poor service and lackluster technology have turned some customers off, she says.

    “Stick to your core business. Remember why people come to you,” Riggs says. “If you want to put on all those menu items where you’re trying to compete with fast casual, OK, do it in the restaurant. Don’t do it in the drive thru.”

    While food-forward convenience stores, fast casuals, and, increasingly, the draw to cook at home have cut into the drive-thru business, Riggs says, some concepts are seeing growth at the window, including the Mexican, chicken, and coffee-and-doughnut segments. While she says the drive thru’s convenience factor will always give it a competitive advantage, more traditional brands are realizing the importance of the in-store experience. A sizable portion of the limited-service customer base wants to eat on-premise, and customers now expect comfortable seating, free WiFi, and contemporary stores.

    “There was always the thinking that we didn’t want people in our restaurants who were sitting around using the WiFi and not ordering anything,” Riggs says. “But it sure has been successful for Starbucks, hasn’t it?”

    Changing dynamics between food designed to be eaten on- and off-premise are evidenced with fast-casual pizza concepts like PizzaRev and Blaze Pizza, both of which recently partnered with Postmates, a third-party on-demand delivery service. Delivery has long been a hallmark of the pizza industry, but the fast-casual pizza category to date has thrived on dine-in traffic.

    PizzaRev CMO Jeff Zuckerman says the brand’s recent addition of delivery wasn’t intended to be a huge sales generator. Rather, it was seen as an additional convenience for customers, who have long asked for a delivery option. The brand is testing the app-based technology at several Los Angeles–area stores.

    “I think we’ll always be focused on the dine-in experience, but the technology for third-party delivery has taken such a giant leap forward in the last few years that we couldn’t ignore the tangible benefits and convenience to our guests,” he says. “When we really dug in to the details of in-house versus third-party delivery, and most importantly, when we had the opportunity to evaluate Postmates’ highly efficient model and their commitment to customer service and satisfaction, the decision was fairly straightforward.”

    At first, most delivery orders came from Postmates users who were looking for pizza on their apps, Zuckerman says.