Drive-Thru Real Estate 101: What’s Driving Demand
Accelerating Demand Has Retailers, Restaurants and Investors Queuing Up
The first edition of this series on drive-thru (a common spelling of drive-though) focuses on how demand for the property type has accelerated since the pandemic, with experts explaining the reinvigorated appeal and exploring whether it's always the smartest bet.
The next installment will consider how other options — such as pickup windows and cubrside pickup — may fare better depending on operations, and we'll take a look at costs as well as how technology is evolving to hint at the future.
Drive-thrus have been one of the most searched-for property types on LoopNet for both sales and leases since the pandemic began. That’s probably because, when assessed next to an otherwise comparable store without drive-thru capability, they’ve historically performed better — even before the world turned upside down. In the past year, for food retailers especially, they became some of the only locations able to perform at all.
“If you were a food or restaurant concept going into the pandemic and you had not invested in drive-thru or curbside pickup, you were at a tremendous disadvantage,” explained Nick Egelanian, the founder and president of SiteWorks Retail Real Estate Services.
In fact, if you didn’t at least have some sort of off-premise digital ordering capability, “you’re probably dead by now, or pretty close to it,” said Juan Martinez, principal of Profitality, an industrial engineering advisory firm.
The message is that the demand for convenience — not necessarily the virus outbreak — is what’s redlining drive-thru real estate activity. If your customers can order goods without physically entering a store, whether it’s food or anything else, and then pick it up efficiently and be on their way, you’re a business that is positioned to succeed in 2021, according to Martinez.
“Drive-thru is always about the business model and about driving revenue. You have to determine what you are trading in margin for that revenue.”
Juan Martinez, principal of Profitality
As a real estate decisionmaker, he continued, you need to ask whether it’s an actual drive-thru that you need — one that has a large enough footprint for cars to queue while ordering on-premises — especially considering that they are “really difficult to find nowadays” — or whether you just need digital ordering capability and an efficient physical operation that allows for easy pickup.
To expound on that premise, experts LoopNet spoke with compared “true” drive-thrus to pickup windows and various curbside pickup models, and explained why some operations are best served by one of those solutions and others benefit from another.
What’s Revving the Engine of Drive-Thru Real Estate
Drive-thru properties have become like gold in the retail and restaurant world, the sources explained. In the early days of the lockdown, “People were scared,” Egelanian recalled. “Information was changing. The authorities didn't want you to touch things or go into stores, and so drive-thrus were critical to offering that kind of convenience.”
McDonald’s, for instance, was historically one of the first ever chains to really put the pedal to the metal on the drive-thru business model, and by early 2020, it had even been doubling down on double-lane drive-thrus, making it “uniquely well-prepared for the pandemic.”
Brands like McDonald’s thrive specifically on drive-thru as their business model, he continued. Egelanian estimated that drive-thrus acccount for around 70% of McDonald’s sales, and 80% to 90% for some locations. Amid the nationwide lockdown period, some properties actually saw total business surge by 30% to 50%.
And it wasn’t just traditional drive-thru heavyweights like McDonald’s that relied primarily on the drive-thru model for sales in 2020. “For example,” Egelanian continued, drugstore operators have realized even more so since the pandemic that “it’s not such a good idea to have their sickest customers in the stores."
But originally, “[Prescription] drugs were considered a loss leader for drugstores, so they put the counter in the back of the store to draw people through the store to buy other things when they walk through. Slowly over a long time, the whole business of prescriptions has become more of a volume model where the pricing was really set by the insurers, changing drugs from a loss leader model to a primary distribution model.”
Increase in volume meant it became profitable to equip drugstore properties with drive-thru capacities.
It’s important to keep in mind, he continued, that drugstores’ drive-thru model is actually just a pickup window on the side of the building, which, from a real estate perspective is “a lot easier to find than a true drive-thru,” according to Martinez.
“If you really look at drive-thru, it’s always about the business model and about driving revenue,” he continued. And, since drive-thru real estate is not cheap, "you have to determine what you are trading in margin for that revenue.”
“I think a drive-thru makes a ton of sense when you’re selling high-margin fast food and fast casual through a window where the people are in a big hurry,” Egelanian said. “It doesn't make a lot of sense when you're selling low-margin items that you have to devote a significant amount of additional resources to that cause you to actually lose your margin in the process.”
Drive-Thru Decisions: Speed Up, Shift Gears or Stall Out
It also comes down to what you're selling and how you want customers to experience the process. “In the world of retail,” Egelanian noted, “there are two buckets: one is commodity and convenience, which is about getting your stuff at the right time and the right price. The other is the specialty category, which is a smaller percentage that is more about having the right experience.” For the former, a “drive-thru is almost essential today.” For the latter, everyone is trying to figure out whether they need drive-thru real estate or not.
Starbucks offers the perfect example of where the lines are blurred. On one hand, it’s just a cup of coffee. But for many of its millions of customers, it’s the cup of coffee; it’s the brand and the aroma and the atmosphere of the experience that customers are seeking, Egelanian said.
Starbucks CEO Howard Schultz initially “really resisted” drive-thrus, Egelanian explained, relaying a story he’d been told by a former partner who went on to be the head of real estate for the behemoth coffee chain. “Schultz’s whole idea was to create a place that was arrested in space … a place you want to be in. Drive-thrus were anathema to that.”
Eventually, after “an enormous amount of time designing not only what the Starbucks drive-thru would be like mechanically, but what the experience would be like while you're waiting in the line, they were able to create some form of ambiance associated with the store. Fast forward to 10 or 15 years ago, and Starbucks was at the point where they would only do stores with drive-thrus.” Now, Egelanian said, drive-thrus provide around 50% to 60% of the chain’s business. “It's an enormous amount of business for a big company that at one point didn't have it at all. So that that tells you the potential impact of a drive-thru.”
Compass Coffee offers an interesting contrast, he continued. “A beloved brand in Washington, D.C., Compass, has so far been primarily a [core business district] operation. It really didn't have a strong reason for having drive-thru or even curbside pickup. I'm sure they would have been planning for that more if they were going into the suburbs, but everything about their locations was convenient to where people work, so [prior to the pandemic lockdowns of spring 2020] they weren't going to necessarily be planning for that sort of thing.” As a result, he continued, “they were disproportionately hurt by what happened, strictly because of their locations.”
How Off-Premise Ordering Steers Retail Today
It goes back to Martinez’s philosophy: off-premise, digital ordering may be even more important than the physical drive-thru property. Because of its drive-thru prowess, Starbucks, while still primarily in urban locations, had greater capacity to quickly pivot and at least be able to take orders for curbside pickup, Egelanian noted. Now, he said, the decision on how permanent some of these solutions are will be mostly determined by consumer preferences.
And because the off-premise ordering technology was accelerated by the pandemic and more ubiquitously adopted among all food retailers, all while the lines between convenience and specialty are becoming increasingly blurred, every food retailer from Panera to Outback Steakhouse is considering or initiating drive-thru real estate models, he added.
“If you think you're in the business of offering an experience, you may be,” Egelanian explained. “But there's a certain segment of your business where it turns out that people really don't care about the experience; they care about the food.”
Another good case study, he said, is The Cheesecake Factory. He estimated that the restaurant chain does $10 million in revenue on average per store. “During the pandemic, they averaged $5 million a year strictly from curbside pickup. It's pretty amazing, right? Imagine if those locations were all drive-thrus.”
That hits at the crux of the real estate decision, the sources seemed to concur. Certain operators, Egelanian said, “must have drive-thrus.” Others, meanwhile, need to consider “where it is profitable."
As Martinez will go on to explain in the second part of this series, a pickup window on the side the building might be the better option, or parking lot access for a curbside pickup model might even be the answer. But in today’s environment, off-premise ordering technology, and an efficient operation to run it, is almost non-negotiable in the retail and restaurant industry. It then comes down to how that plays out from a real estate perspective.
“Ultimately, it's going to be about who pays. In the end, the consumer has to pay for it, because you just can't give it away,” Egelanian said, referring to both the added real estate costs of a drive-thru, which LoopNet will cover in another part of this series, and the tradeoff of convenience over experience.
“Starbucks, for example, has figured out that more than half of its business goes through the drive-thru window, [making it worthwhile]," he said. "They were right in the early days about creating an experience, but they created such a love for their product that, for many people, the experience became just getting the cup in their hand.”