I recently fell down a retail reading rabbit hole. A biography on Amazon.com entitled “The Everything Store” led me to “Sam Walton: Made in America,” the autobiography of the legendary Wal-Mart Stores founder, one of Amazon founder and CEO Jeff Bezos’ inspirations, perhaps not surprisingly. Walton explained the rise of shopping centers in small towns all across America and how these enabled Wal-Mart to compete against the big city department stores.
So when I sat in the audience of the “Fast casual strengths, weaknesses, threats and opportunities: Is there still time to get in on the game?” panel at the most recent Restaurant Finance and Development Conference and heard Darren Tristano, Frank Paci, Jim Mizes and Philip Friedman talk about their real estate woes, I better understood the origins of their predicament: a fight for end-caps, as Einstein-Noah Restaurant Group CEO Frank Paci explained. In these shopping centers, a restaurant can either take space in-line or on an end-cap (versus standalone real estate not connected to other stores in a center). Paci explained that all of the brands represented on the panel that day were in an ongoing real estate war over the best end-caps.
The common wisdom is that end-caps are far preferable to in-line locations. There are multiple reasons for this. First, end-caps are on the corner and therefore offer the ability for the restaurant to display its signage on two sides of the shopping center. Second, end-caps tend to have more outdoor space for patrons to sit in outdoor seating areas. Thirdly, these locations may offer the restaurant the potential to operate a drive-thru that an in-line concept would not.
I began to think about Michael Lewis’ book “Moneyball” about the 2002 Oakland Athletics (full disclosure: I am a die-hard A’s fan). The central premise of “Moneyball” is that there may be smart ways of identifying undervalued assets and realizing outsized gains from their utilization. In the book, the A’s front-office ignores the players that their competitors identify as most desirable and put together a rag-tag group of undervalued players to break the record for the longest consecutive winning streak in the American League.
Listening to the fast casual panel, I thought “what if there was a “Moneyball” approach to restaurant real estate: some way to ignore the end-caps and focus on squeezing value out of the in-line locations?” Paci then made another comment that pushed my thinking that there may be an opportunity to do just that: “There may be a marriage of online ordering and pickup windows in fast casual,” said Paci. Having witnessed the rise of the smartphone (we’re set to head into 2015 with 75% smartphone penetration) and the rise of off-premise transactions in the restaurant industry (coincidentally also 75% of restaurant industry transactions), as the founder and CEO of Olo.com, I agree with Paci’s prediction and see it as an opportunity to squeeze extra value from in-line locations.
According to Hudson Riehle, senior vice president of the research and knowledge group for the National Restaurant Association, 54% of consumers order takeout/delivery from restaurant branded sites and apps. That means that the two-sided signage of the end-cap locations may be decreasingly valuable, since customers are making the buying decision ahead of time through the websites and apps, not when they’re on-site as an impulse decision. And if 75% of the transactions are being consumed off-premise (i.e. drive-thru, takeout, delivery), then the outdoor seating of the end-cap locations may be decreasingly valuable as well.
That leaves the drive-thru advantage, which is already less of a factor for fast casual concepts because the average order takes significantly longer to prepare than the average fast food order. If Paci is correct, as I believe he is, digital ordering can be for fast casual restaurants what drive-thru is for fast food restaurants: a convenient way to expedite your food collection experience. In this world, does an end-cap location add significant value to the consumer experience or the in-store operations vs. an in-line location? While Paci’s imagined pickup window may work better in the end-cap location, both types of location can equally cater to curbside pickup customers, neutralizing the final advantage of the end-cap location over the in-line location.
As more customers order off-premise and eat off-premise, restaurant brands may gain an advantage over the competition by deploying digital ordering and squeezing the same revenue per square foot out of in-line locations with a far lower rent per square foot than end-cap locations. That’s “Moneyball” real estate.
Noah Glass is the founder and CEO of Olo. Since 2005, Olo has helped restaurant brands increase revenue per square foot by delivering faster, more accurate, and more personal service through digital ordering. Today, over 10 million consumers use the Olo platform to order ahead and Skip the Line® at the restaurants they love.
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