Can’t Touch This

A re-evaluation of Quick Service Retailers retail strategy.

Stop, Hammer time!

COVID-19 has upended supply chains and disrupted business models.

Vague, yes.

But the sweeping impact that this pandemic will have on our social and commercial behaviors (at least in the short-term) is impossible to dictate in particulars.

Well, at least in one sentence.

Smarter people than myself have dissected its consequences on various topics. Lerer Hippeau’s Tim Spencer does a great job examining the future of work in this post. Collaborative Fund’s Morgan Housel (who’s new book is available for pre-order here) discusses overlooked principals that the pandemic has revealed in this post.

Yet, almost all analysis on the matter focuses on one of two themes: things are going to change dramatically, or certain things are more important than we realize.

This, perhaps, is the 1st Law of COVID Economics — everything requires reevaluation.

Maybe spend a bit more effort on your evaluations than Michael Scott.

Quick Service Retailers (QSRs) have particularly been affected by the pandemic. For clarity, QSRs are your McDonalds, Starbucks and Subways of the world (mostly fast-food and fast-casual food & beverage brands). As McKinsey notes in a recent analysis, post-crisis spending on in-restaurant dining is expected to be lower than pre-crisis levels, primarily because of consumers aversion to densely populated spaces.

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McKinsey uses the change in spending in China as a proxy since physical-distance restrictions have already been loosened.

In fact, since COVID-19, 100,000 restaurants have closed, 99% of which do not have drive-thru systems.

However, it is important to dig deeper into this statistic. Most restaurant closures are small businesses (without drive-thrus), whereas most QSRs are large corporations with massive balance sheets that can withstand the crisis.

Yet, while conglomerates like McDonalds, RBI and Yum Brands are more protected, franchise units and franchisees are getting hurt. Starbucks and McDonalds have seen locations closed, specifically those without drive-thru, and Dunkin Donuts is closing 1,200 locations.

Consequently, we must adhere to the 1st Law of COVID Economics and reevaluate.

To put it plainly, traffic is going to move from indoors to outdoors. Consumers will drive restaurants to emphasize their takeout, delivery and drive-thru capacities. As a result, QSRs will need to transform their retail models and embrace a more automated customer experience that emphasizes contactless or contact-light consumption.

This post will focus on reevaluating QSRs’ retail model — particularly, the drive-thru system.

Slow, Slow, Slow Your Boat

Even before COVID-19, there was clear interest from QSR’s to upgrade their drive-thru businesses. In fact, in 2019 restaurants spent $250M to optimize this channel.

Their reason was clear: drive-thrus are too slow.

And this matters. A lot.

In fact, would you be surprised if I told you that every year your favorite fast-food chains compete for the title of having the fastest drive-thru?

Well, they do.

Burger King, Dunkin’ and Wendy’s have consistently been the perennial powerhouses — the fast-food equivalents of F1 Racing’s Mercedes, Red Bull and Ferarri teams. Burger King took home the title in 2018 with an average drive-thru time of 193.31 seconds.

Every QSRs’ dream.

Yet, drive thru-times have increased year-over-year across the industry for the last 5 years. The average industry speed in 2019 was 234.08 seconds, a significant drop from 2018’s 224.77 mark. Back in 2003, the national average was approximately 190 seconds.

The most successful brands seem to have blown a tire. McDonald’s average speed in 2018 was league worst 273.28 seconds (Chic-Fil-A was second slowest). And when you juxtapose this with the fact that in 2012 McDonald’s clocked in at 188.83 seconds, it is clear that something has gone amiss.

McDonald’s has taken notice. In Q1 2019, McDonald’s launched an incentive program where restaurants would compete against each other for best service times. According to former CEO Steve Easterbrook, the competition was effective — “it made a difference with lower service times while improving guest counts in many of our restaurants.”

Clearly, the speed of drive-thru service has become a focal point for QSRs retail strategy. And the causes of this slowdown aren’t necessarily going anywhere. Drive-thru speed has declined as QSRs improved technology and made their menus more complex — levers that they are not keen on pulling back.

But, speed is no longer the sole gear driving success. Safety is as important as ever.

Let’s (Not) Stay in Touch

The paradigm in the short-to-who-knows-when run will emphasize safety in the form of minimizing, or better yet eliminating contact.

This means QSRs have two options: delivery & pick-up.

The rapid growth of the delivery ecosystem over the past five years will continue to benefit from consumers focus on safety — the food delivery market size is projected to be $365 billion by the end of the decade. Yet, as the below chart indicates, delivery services charge substantial fees on top of total meal costs. For QSRs, the significant price premium for these services contradicts their core value proposition. This is amplified as COVID-19 decimates jobs and disposable income, and consumers increasingly look for value in their food consumption.

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Source: TechCrunch

As a result, pick-up — and more specifically drive-thru — proves to be the best channel for QSRs to optimize safety and profitability. To do so, they must re-imagine their drive-thru systems. This means expanding the number of lanes and increasing order velocity, as well as prioritizing contactless customer interaction.

New retail ‘infrastructure’ systems, such as Humdinner, will come to market with systems aimed to optimize this channel. Their contactless system, through a combination of gurney networks, UV-light sanitization, and negative air pressure, will safely and quickly delivers orders to customers. Plus, their multi-lane architecture, paired with a high-velocity, frictionless customer experience should increase delivery speed and reduces customer leakage.

This is how it works in greater detail.

The employee inside a restaurant will place the order inside a carrier. The carrier will travel up and outside into the drive-thru lane via a gantry system. While it travels, the order will be swept with UV lighting which will kill COVID-19 and other germs. The tunnel will have negative air pressure, so it sucks air through instead of blowing air out on either end. The gantry will then carry the order to a door that opens up in the drive-thru lane, where the customer will receive his/her order. The carrier will then return through the air pressure tunnel and be swept with UV-light once again.

A video rendition of this system can be found on Humdinner’s website.

While a big lift, the market is there. With substantial inventory of pre-built retail locations and over 14,000 new QSR locations built each year, there are opportunities to retrofit solutions and integrate new drive-thru systems alongside new construction. While the fixed market (retrofitting existing QSRs) is substantially larger, the impact of future development on the potential paradigm shift of retail strategy and location design cannot be understated.

How the market will react to contactless drive-thru systems.

In the long run, large QSR conglomerates like McDonalds and Yum brands may attempt to test their own systems, as could national grocery stores and warehouse clubs. To mitigate for this, these QSR ‘infrastructure’ start-ups should eventually consider shifting to a licensing model. This way, they can allow QSRs to have more control over their installation, maintenance and system architecture without the added costs of providing various customized systems for different QSRs. Consequently, they can prevent the fragmentation of the market, which I believe will be inevitable if they do not do so.

Ultimately, the question will be whether one system provides 10x value in terms of either efficiency, sanitization or profit optimization. If so, I believe it will be massively adopted.