Quick Service Restaurants (QSR) have changed significantly in recent years. With food inflation up over 11% year-over-year (2022/2021) and an unprecedented level of labor shortage, food service users are barely getting by if they are even still around. Material and construction labor has some of the highest costs we have seen in this country in decades with prices expected to settle around a 14% year-over-year increase by the end of December (2022/2021). Sprinkle in rising interest rates, supply chain issues, and an international war, and you have a recipe for disaster. With the future looking grim, many restaurant tenants have put their expansion plans on hold. In a recent National Restaurant Association (NRA) study, 40% of restaurants say they have postponed expansion efforts, and 29% said they froze hiring efforts until a light at the end of the tunnel presents itself. These overwhelming factors may just be a blip on the radar for the many big players in food service. Surprisingly, according to a report by “Fortune Business Insights”, the global foodservice market valuation is expected to grow at an exponential rate from $2.3 Billion (2021) to an estimated $5.2 Billion by 2029, a compound annual growth rate (CAGR) of 10.75%.
Expansion? In this economy?
Between July 2021 and August 2022, restaurants implemented the following cost-saving remedies; 90% raised menu prices, 40% cut staffing levels, and 65% cut menu items. Even these drastic measures could not combat the uphill battles that restaurants are facing in this financial crisis.
So why are QSRs not waiting for the dust to settle?
Increased demand for economical, convenient, ready-to-eat food products in lieu of the rising grocery costs seems to be the solution for many consumers. As inflation shows no sign of slowing down, many consumers flock to QSRs to stay on a tight schedule and keep costs down during uncertain times.
In order to meet this demand, some QSR brands are changing their game plan. New minimalistic building prototypes, combined with Artificial Intelligence (A.I.) and digital/mobile ordering appear to be the trend, as the International Data Corporation estimates that 50% of QSRs are planning to implement new digital & automated technologies into their business model within the next 3 years if they have not already.
Shrinking the footprint:
Many QSRs are now pivoting to “Off-Premises” sites, which reduce or remove the dining area in order to focus specifically on serving customers via drive-thru, take-out, and delivery. Digital kiosk menus, A.I. voice recognition speakers, double drive-thru lanes, and dedicated pre-order mobile pick-up lines are going to be applied to increase the customer turnover rate, and improve order accuracy.
Gambling on the footprint reduction has saved major brands like “Jack in the Box” significantly, especially on critical expenses. The brand recently began a nationwide 1,300SF off-premises “prototype expansion” after 98% of its total sales came from Drive-thru and mobile orders throughout the pandemic. Jack in the Box estimates that this new prototype will cut construction and operating expenses by up to 23% per location. Drastic improvements to their bottom line and sales projections have allowed Jack in the Box to sign over 100 additional locations throughout the US in 2022, with an annual expected growth of 4% by the end of 2025.
Two birds with one stone:
The emphasis on reducing the building footprint to significantly save on construction costs has resulted in less square footage to employ restaurant staff. This is a strategic move by QSRs, as a recent study by the NRA has reported that 63% of fast-food restaurants do not have enough employees to meet customer demands, and 86% of operators reported labor cost increases since 2019.
To combat this labor shortage, QSR giants Checkers and Rally’s recently experimented with an A.I. “voice assistant” to take customer orders in the drive-thru lanes. Over a four-month period, the system resulted in an impressive order accuracy rate of over 99% or higher at these locations.
Drive-thru tenants are not the only one’s recognizing the value in reducing the building footprint. Traditional sit-down restaurant chains like Buffalo Wild Wings, IHop, and TGI Fridays which typically require a larger 4,000-9,000 square foot concept, have pivoted to off-premises concepts that are a fraction of the square footage. TGI Friday’s, which saw its pickup and delivery revenue triple from 2019 to 2021, recently unveiled its newest development concept “Friday’s on the Fly”, a 2,500 SF digital “to-go” focused concept. After experimenting with some prototypes, each “Friday’s on the Fly” is expected to have an average unit volume (AUV) of $2 million, amounting to roughly the same delivery and take-out revenue as a traditional 6,000-9,000 SF TGI Fridays.
Less is more:
It’s clear that A.I. and digital sales are major factors for QSRs to continue to meet customer demand in the face of an economic crisis. Smaller off-premises concepts are giving QSRs the ability to squeeze drive-thrus into tighter land dimensions within denser urban retail/populated areas, providing higher sales and visibility. Digital stores are allowing in-line or sit-down restaurants to operate out of 1,000-2,500 SF, instead of 6,000-7,000 SF, heavily reducing rent, taxes, and common area expenses in highly sought-after and competitive markets. It truly is hard to find the downside for QSR adopting these technological innovations.
Perhaps dealing with automation might become frustrating for humans, as it is now with recorded customer service agents. Perhaps system errors or repairs/maintenance cause drive-thru pileups, and congestion during peak hours. Whatever lies ahead, the QSR industry is banking on these technologies to continue to solve major industry issues, but more importantly, continue to provide a better consumer experience…and as we all know the customer is always right.