The quick-service restaurant industry is witnessing yet another revolutionary trend as employee wages increase and consumers utilize drive-thrus and pickup options. A speedy drive-thru can be a competitive advantage, and operators are taking notice. As such, quick-service restaurants are swift to implement more profitable systems, including tech innovations, modular builds, or relocating business operations from expensive coastal markets with high rents and wages, unemployment benefits, and lack of willing workers.
Consumer Dining Trends
Consumer habits have fundamentally changed thanks to the global COVID-19 pandemic. In an RMS survey completed in November 2021 of 800 restaurant consumers, 76 percent of respondents said they were going to the drive-thru at least once a week. App adoption is growing, too, with 36 percent of respondents having five or more quick-service apps installed for loyalty rewards and easier ordering. Forty-three percent of respondents believed the app ordering process to be better or much better than ordering in person. For these reasons, quick-service restaurant buildings and rents are downsizing.
There’s no doubt that drive-thrus are an integral part of the quick-service restaurant business model. NPD Group reported drive-thru visits increased 26 percent in Q2 2020, at the height of the pandemic, and accounted for 42 percent of all restaurant visits. McDonald’s revealed that its top market’s drive-thru orders accounted for 70 percent of total sales. Since then, restaurants have viewed drive-thrus as an excellent way to increase revenue and improve efficiency, evidenced by 45 percent of restaurant operators planning to build out additional drive-thru locations, according to Restaurant Franchise Pulse’s survey. Some operators have already implemented mobile-order drive-thru, eliminating wait times altogether by allowing customers to order ahead on their own device and pick up their food at a dedicated mobile-order lane.
Quick-service operators have increasingly requested permits to construct and operate drive-thrus adjacent to their food venues. Prior to the pandemic, several jurisdictions tried to limit the number of drive-thrus in the area due to traffic concerns. However, the pandemic illustrated just how imperative drive-thrus were to restaurants. Today, food vendors fully realize the value of seamless pick-up and delivery.
Before the pandemic, drive-thru orders accounted for 75 percent of quick-service business. The prospect of generating another 75 percent of revenue by adding another drive-thru is appealing to operators facing eight percent inflation, rising labor costs, a shortage of employees, and increasing interest rates.
A significant concept taking off is modular drive-thrus, which are fully adaptable, custom-designed drive-thrus that are built to fit an existing structure. These modular designs can be made with different lane widths, boast quick installation, and can be built out in six to eight weeks, compared to six to eight months for a traditional build-out, according to Humdinner, Inc., a modular kitchen, dining, and drive-thru manufacturer. The idea behind modular drive-thrus is the ability to double or triple an establishment’s revenue without building a whole new restaurant. Further, modular builds are often created in a large indoor facility without the labor, contractor, or skilled trade issues saving operators capital and allowing for ease of relocation to save on rental expenses while boosting store performance.
Modular drive-thrus are becoming a preferred strategy among investors as mobile orders and delivery are becoming a more popular customer preference. In the past, the multiple drive-thru concept would create bottleneck issues at the payment and pick-up windows. Further, creating distinct lanes for these orders required finding large parcels with suitable circulation patterns to accommodate multiple lanes that can be serviced from one building. As modular drive-thrus are created custom to the building, operators can dedicate the lane for pre-paid and pre-ordered meals, requiring no orders through a window or payment at a booth. This helps third-party delivery drivers eliminate wait lines and traditional drive-thru processes.
With dine-in trends for quick-serves on the decline and drive-thrus exploding in customer preference and investor popularity, fast-food brands quickly adopted the drive-thru-only concept. These to-go-only prototypes feature the kitchen and drive-thru lanes with no dedicated dining area, saving operators costly labor fees, capital expenditure, and rent. They boast a smaller footprint, quicker service times, and high-profit margins. Tenants and operators will gain negotiating leverage over landlords as they relocate via modular build in less than two months.
Drive-Thrus in Action
In 2020, Chipotle made over $2.5 billion in digital sales, illustrating how much business is generated from mobile and delivery orders. The fast-casual brand made headlines when announcing new stores with drive-thrus called Chipotlanes in the preceding year. With the burrito chain prioritizing and rolling out several drive-thru-only locations, this marked the future of to-go dining. Chipotle utilizes Chipotlanes as a critical growth strategy, reporting that the existing Chipotlanes outperform the margins of non-Chipotlane units by 15 percent. Chipotle believes 75 percent of growth is due to Chipotlanes, given the high delivery cost of its non-drive-thru locations. Chipotlanes are a powerful profitability driver as the incremental investment cost is $75,000–$85,000.
Non-drive-thru Chipotle locations must be closely monitored by comparing the rent to the market, as Chipotle’s $45 billion market capitalization can increase the property’s value and compress cap rates. Because of this, landlords must then pay hefty leasing fees on top of downtime without rent to capitalize on the relocation to a Chipotle with a drive-thru. Owners of existing quick-serves with a drive-thru but lower average store sales are waiting for existing leases to expire to relet to Chipotle or even structuring lease buyouts. Chipotle landlords can learn from competing landlords. For example, Panera Bread is experiencing dark stores at non-drive-thru locations with ten-year leases signed as recently as six to eight months ago. Landlords shouldn’t assume that Chipotle’s traditional 15-plus person in the same market as existing inline stores. Landlords of non-drive-thru Chipotle, inline or freestanding, should understand their building's value can be maximized with the current tenant. In other words, there is only rental downside if or when Chipotle relocates to a drive-thru-equipped site.
Dutch Bros Coffee is among the most notable fast-food brands to utilize modular builds for its locations. The coffee chain announced its first factory-built unit in Oregon in 2019. The company has since opted for modular builds in lieu of traditional construction as they provide more environmentally friendly structures. More importantly, these small modular buildings (900 square feet) take up less space on the property, allowing for dual lane drive-thrus. The factory-built buildings deliver in six weeks, on average, and are constructed to the highest standards of each state’s building code. The build will be able to withstand harsh interior and exterior environments compared to wood and other deteriorating products. The modular build appears to be working, as Dutch Bros reported a 10.1 percent year-over-year growth in same-store sales by the end of 2021, for total revenue of $497.9 million. Dutch Bros understands that large building footprints are antiquated in the 21st century—think of the customer base that enjoys eating inside a fast-food restaurant and their spending power.
McDonald’s has long been the pioneer in new trends. The fast-food goliath has adopted and implemented technology for years as part of its growth strategy. McDonald’s has had dine-in kiosks at several locations dating back to 2018 that are becoming implemented in all locations. In 2019, McDonald’s acquired Dynamic Yield, a platform that uses tech and personalization for custom menu options based on external data, for $300 million, which it later sold. The burger chain also acquired voice-tech company Apprente to help strengthen drive-thru ordering during that same year.
Additionally, long before COVID-19, McDonald’s was ahead of the curve with dual drive-thru lanes, with one lane dedicated exclusively for pick-up orders that deliver the food on a conveyor belt system. McDonald’s is the trailblazer in the quick-service world due to its sheer size of 40,000 locations worldwide and its inevitable influence over other drive-thru tenants. These implementations will continue to evolve mainstream technology in the industry.
Starbucks is following suit with the closure of 800 restaurants to be replaced with new stores featuring at least two drive-thru lanes. Starbucks has taken an aggressive approach when negotiating with landlords. Investors who acquired new drive-thrus from 2016 to 2019 should consider evaluating their long-term investment thesis, especially if they are responsible for roof and structure with only 10 years of warranty. After all, there is a reason leases are drafted by the tenant.
With the skyrocketing demand for quick-service restaurants, California investors are getting priced out of the market as drive-thru owners hold onto their assets, and the state’s restrictive policies prevent further drive-thru development. Operators can’t afford rent or the labor due to the increasing labor costs, while the unemployed find more benefits in unemployment. As such, California operators are forced to relocate to smaller markets where land is cheaper but risks decreased foot traffic—this is a pitfall of franchise operators with required development agreements with their parent company. Cap rates are aggressive in California, trading at 4.2 percent in the first quarter of 2022, but there is no growing demand for the restaurant business in the state from an operating perspective. California quick-service owners with high rents should consider utilizing a 1031 Exchange to trade into a business-friendly state as their tenants operate on higher margins allowing for more significant rental growth, and the overall cap rates provide a higher yield.
In a world where most guests never enter storefronts, drive-thrus reign supreme. With dine-in trends on the decline, quick-service operators will face new challenges of creating branding out of the minor outdoor details in order to connect the brand and product to the guest and their needs. All features and initiatives many brands are exploring illustrate just how much operators prioritize the drive-thru experience and will continue to redefine the industry, keeping the customers in mind at each step of the way.
Mitchell Glasson: Mitchell’s proven track record in institutional and private individual assets and portfolio transactions have assisted in growing one of the largest national market shares of NNN transactions in Convenience & Gas, Hospitality, and Restaurant transactions. Although experienced and accredited to underwrite all national tenants in the net lease sector and assist with tax-deferment via the Matthews 1031 Exchange program, Mitchell has always held a specific emphasis on Hospitality, Restaurants, and Convenience & Gas. Via the Business Franchise Solutions program, Mitchell has experience in sale-leasebacks and enjoys utilizing his financial background in assisting operators and dealers in the underwriting, lease structuring, and marketing of their business and real estate.
Nolan Lehman: Nolan Lehman is an associate specializing in the acquisition and disposition of single tenant net lease properties, with an emphasis in quick-service and casual dining restaurants. His extensive involvement in the restaurant industry has left him with a passion for finding and creating value in changing markets. Using his comprehensive knowledge of the industry, Nolan is drawn to projects where he can combine his can-do attitude with outstanding communication skills to construct diversified portfolios for his clients and reap long-term benefits.