SiteSource / May 10, 2019
Tech has impacted every facet of our world and restaurants are no different. How do changes taking place ripple to the commercial real estate world?
In 2014, the Uber launched Uber Eats, a courier service for food. Food is shuttled from restaurants to customers in their offices or homes or wherever else they might choose. Food delivery app downloads have nearly quadrupled in the last three years, according to App Annie, an analytics and market-data firm. And there are new apps all the time, which may reflect in delivery charge reductions for the restaurateur. New methods of the actual delivery are also increasing with the use of drones to supplement the traditional car and scooter.
How does this impact restaurants and is it the same across all categories?
When it comes to quick service food, it figures to be a boon for some restaurants, a new revenue stream previously left to pizza shops and Chinese food joints. Firehouse of America LLC, peddler of such submarine sandwich staples as the Hook & Ladder and the New York Steamer, is an example. Company CEO Don Fox described the phenomenon to Bloomberg News last fall. He was perturbed a couple years ago to find his physical locations largely empty at lunchtime, but sales were up. In fact, annual revenue at that time had increased 7 percent, driven by online and app orders.
Research giant Cowen and Co. projects average annual U.S. sales gains of 12 percent in restaurant delivery over the next four years, swelling the market segment to $76 billion. Numbers indicate not merely a trend but a transformation. Delivery transactions composed just 7 percent of restaurant sales in 2016, but Morgan Stanley analysts project that share will soar to 40 percent.
At Fox’s Firehouse Subs, delivery orders now make up 60 percent of revenue. No wonder he told Bloomberg, “The impact from delivery is the greatest shift we’ve seen yet.”
But what about fast, casual dining?
Michelle Gauthier has one answer. She opened Mulberry & Vine, in 2013 in New York’s Tribeca neighborhood, then added branches uptown. Delivery now makes up 30 percent of sales at the restaurant that initially did not offer the service. But Gauthier told New Yorker 20 percent to 40 percent of revenue from delivery goes to third-party platforms and couriers. Her margins have been sliced by a third over the past three years. “We know for a fact that as delivery increases, our profitability decreases,” she told the magazine.
That assessment is widely held. For restaurants still jumping into the delivery game, technology investments are required and those are not cheap. That is especially problematic in an industry where margins are notoriously slim. But skyrocketing demand coupled with the allure of consistently higher customer spending on to-go orders means there’s no ignoring delivery, not for those who plan to survive in an era when convenience is king.
Firehouse and others are rolling with the shift. Last summer, the company replaced some tables and chairs with shelves for stacking delivery orders at each of its 1,102 locations nationwide. Firehouse has reduced its footprint to 1,800 square feet of space, down from 2,000 to 2,200 square feet. McDonalds Corp. plans to spend $6 billion on restaurant upgrades that will include designated parking for curbside pickup, so not only is the size impacted, but the parking ratio as well.
So is the answer creating production only kitchens that interact with customers only on a delivery basis? Known as ghost kitchens, cloud kitchens or virtual kitchens – the idea is to focus on the facilities. Here, companies either prepare food for delivery or offer the space for others to do it. In some cases, existing restaurants are relying on ghost kitchens for extra space to deal with delivery.
Surely the reduced costs in prime real estate and staffing could make this a profitable alternative. The reality is that there has been limited success with this as well. David Chang of Momofuku tried this approach. The reality was that delivery costs were extremely high and
people missed the visceral experience of a restaurant. Ultimately this concept, Ando, was given a retail façade for takeout orders, but nonetheless ended up shuttering.
However, this approach is gaining momentum and as it’s fine-tuned may prove successful. The potential savings in real estate costs, both for square footage and a move from “A” locations, are substantial.
“I’m working with a kitchen operator in Dallas to form a new co-op kitchen warehouse company that services only Uber Eats and other delivery platforms,” said Jennifer Frank, president of Segovia Retail Group. “This is going to have a crazy impact on the industry. Cloud/virtual kitchens will become huge.”
And for fine dining?
For customers seeking a dining experience, whether for an occasion, business, or merely seeking something special, no delivery service is going to replace restaurant dining. The challenge is going to be for restaurants to create the buzz and make dining at their establishment an event. People have higher and higher expectations for experiences and dining is no exception. What does this mean for high end restaurants? Location is more critical than ever – being in the part of town that’s popular and accessible to make it as easy as possible. The restaurant itself needs to be built out to reinforce dining as an event; whether it’s top of the line buildout, an open kitchen, or a robust bar. The experience needs to be one that is not duplicable at home.
With all the changes in the restaurant industry and the implications for the choice of real estate, it’s more important than ever to work with a knowledgeable real estate expert. Please reach out to the Site Source Retail Broker Network for questions and assistance.