In or Out?

As a take-and-bake concept with no in-store seating, Papa Murphy's has long thrived as a take-out brand.
As a take-and-bake concept with no in-store seating, Papa Murphy's has long thrived as a take-out brand.
papa murphy’s

For decades, traditional quick-service restaurants have leaned heavily on selling food that’s ultimately consumed off-premise, whether it’s delivered through the drive-thru window or carried out from the counter.

But with the rise of fast-casual brands—which bank on a high-quality experience in which customers find value eating inside the stores—operators are weighing the merits of both on- and off-premise dining while also analyzing what the right balance is for their brand.

In recent years, traditional drive-thru-dependent fast-food brands have spent big bucks renovating their dining rooms, moving away from generic plastic furniture to comfortable leather chairs, fireplaces, and flat-screen TVs in attempts to entice customers wanting to eat onsite. Meanwhile, all manner of restaurants are experimenting with delivery, making it an option for far more than the old mainstays of Chinese food, pizza, and sandwiches. And fast-casual concepts, traditionally more dine-in-oriented, are increasingly adding drive-thru windows.

“I can see a day when Chipotle is making burritos in the drive thru,” says Darren Tristano, executive vice president of Chicago consultancy firm Technomic. “I think at some point, when they finally slow down in growth, they may have to think about late-night, breakfast, and the drive thru.”

So far, Chipotle has showed little interest in adding drive-thru windows. But in the increasingly competitive and fragmented restaurant business, many brands are looking to make inroads with customers by diversifying their on-premise and off-premise options.

Experts say that most concepts should strive to strike a balance of on-premise and off-premise dining offerings. Still, some say not every company can—or should—try to operate a drive thru. And for some brands, it doesn’t make sense to have a sizable dining room, or even a dining room at all. Generally speaking, restaurants with drive thrus do a majority of their business (about 70 percent) at the window, Tristano says, while those without drive thrus generally see a 50/50 split between on-premise and to-go orders.

“I think during the day, it tends to moderate from a dine-in perspective,” he says. “When you start with breakfast, it tends to be higher off-premise; lunch is a mix, and dinner tends to be more dine-in.”

Of course, what customers value in a dine-in experience and what they value in a to-go order can vary widely, Tristano says. Inside, they want fresh, great-tasting food, while they’re often more concerned about speed, convenience, and portability with drive-thru and carryout orders. Restaurants have more at stake with to-go orders, especially at the drive thru, where service times and face-to-face interactions are (ideally) lightning fast.

“I think your risk is much higher in the drive thru,” Tristano says, “because with in-store dining, you’ve got a better chance to fix a problem than you do with a customer that’s already pulled away and is down the road.”

While many brands are changing their strategies on both sides of the equation, restaurants are seeing the most growth in on-premise dining, according to market research from The NPD Group. In the year ending May 2015, industry-wide drive-thru and carryout traffic remained flat, while on-premise dining increased—driven largely by growth in the fast-casual segment, says Bonnie Riggs, an NPD restaurant analyst. Limited-service restaurants, which represent 78 percent of total industry traffic, increased dine-in visits by 5 percent last year, the biggest gain of all restaurant segments, NPD found. (While on-premise diners tend to spend more, Riggs says, they’re not necessarily loyal to certain brands.)

Across the restaurant industry, dine-in visits totaled $223.4 billion in annual sales, while off-premise visits reached $200.3 billion.

“All of the growth in on-premise is coming from the morning meal, whether it’s weekday or weekend. More people are eating breakfast on-premise at [quick-service] places,” Riggs says. “The real growth area has been breakfast, and it’s been that way for quite some time. The consumers beyond the Baby Boomers are now heavy users of restaurants. And they’ve got the time to spend to eat on-premise.”

Still, about 60 percent of quick-serve orders are eaten away from the restaurant, whether it’s bought at the drive thru, carryout counter, or delivered. Of 12 billion drive-thru visits annually, Riggs says, 62 percent come by the way of the hamburger segment, which has been on the decline for the last three years. She says traditional quick-service brands have overly complicated their drive-thru menus in attempts to compete with on-the-rise fast-casual concepts. And poor service and lackluster technology have turned some customers off, she says.

“Stick to your core business. Remember why people come to you,” Riggs says. “If you want to put on all those menu items where you’re trying to compete with fast casual, OK, do it in the restaurant. Don’t do it in the drive thru.”

While food-forward convenience stores, fast casuals, and, increasingly, the draw to cook at home have cut into the drive-thru business, Riggs says, some concepts are seeing growth at the window, including the Mexican, chicken, and coffee-and-doughnut segments. While she says the drive thru’s convenience factor will always give it a competitive advantage, more traditional brands are realizing the importance of the in-store experience. A sizable portion of the limited-service customer base wants to eat on-premise, and customers now expect comfortable seating, free WiFi, and contemporary stores.

“There was always the thinking that we didn’t want people in our restaurants who were sitting around using the WiFi and not ordering anything,” Riggs says. “But it sure has been successful for Starbucks, hasn’t it?”

Changing dynamics between food designed to be eaten on- and off-premise are evidenced with fast-casual pizza concepts like PizzaRev and Blaze Pizza, both of which recently partnered with Postmates, a third-party on-demand delivery service. Delivery has long been a hallmark of the pizza industry, but the fast-casual pizza category to date has thrived on dine-in traffic.

PizzaRev CMO Jeff Zuckerman says the brand’s recent addition of delivery wasn’t intended to be a huge sales generator. Rather, it was seen as an additional convenience for customers, who have long asked for a delivery option. The brand is testing the app-based technology at several Los Angeles–area stores.

“I think we’ll always be focused on the dine-in experience, but the technology for third-party delivery has taken such a giant leap forward in the last few years that we couldn’t ignore the tangible benefits and convenience to our guests,” he says. “When we really dug in to the details of in-house versus third-party delivery, and most importantly, when we had the opportunity to evaluate Postmates’ highly efficient model and their commitment to customer service and satisfaction, the decision was fairly straightforward.”

At first, most delivery orders came from Postmates users who were looking for pizza on their apps, Zuckerman says.

“But now that we’ve rolled out officially with Postmates, our fans are starting to download the app and are eager to give it a try,” Zuckerman says. “We think ultimately it will be a mixture of all different types of customers—some new, some current, some frequent.”

Meanwhile, Domino’s, long a king in delivery, has made big investments in updating the look and feel of its stores, which has included the addition of seating in some locations. Tim McIntyre, Domino’s vice president of communications, says the brand was originally focused on convenience, with the founder saying that all customers needed to know about Domino’s was its phone number. Things have definitely changed.

Domino’s, which has totally revamped its menu and technology offerings in recent years, is in the midst of updating all of its stores to a new “Pizza Theater” prototype. With the new design, the company has put the prep area out front, decorated with vibrant colors, and added seating to many stores. Stores are being built and relocated to prime retail spots. While customers almost always order off-premise—either over the phone or increasingly through mobile and online ordering—Domino’s executives realized the in-store experience was still important.

“Even though people were ordering off-premise, they were coming into our stores,” McIntyre says. “And what we wanted to provide them was an opportunity to see that their food is made fresh; we don’t make it until you order it. We use fresh dough. It’s not frozen. Our ingredients are fresh. We use real people.”

Most customers are still placing carryout or delivery orders, a long-lasting trend the company expects won’t significantly change. But in some rural markets, the dine-in option is proving popular.

“The stores are big and people are driving to them and enjoying lunch or dinner,” MyIntyre says. “In some markets, Domino’s has become a destination spot for family meals.”

So far, the growth of delivery in other segments of the industry hasn’t hit Domino’s bottom line, McIntyre says. And he’s not confident that delivery will catch on industry-wide. Delivery requires big investments in labor, technology, and other infrastructure. Many foods don’t hold up well to delivery, and customers have grown accustomed to fast delivery (Domino’s limits its delivery area to nine minutes away from a store to ensure speedy delivery times).

“Thanks to Domino’s, I think anything greater than 30-minute delivery from any company offering you delivery service is unacceptable to the American consumer,” McIntyre says. “We set the benchmark.”

For many years, the 43-year-old Smoothie King never had drive thrus; now, they’re central to the brand’s strategy, says Steve Shields, franchise development manager. Smoothie King stores with drive thrus generate more revenue than in-line or end-cap stores. Though the handheld product is perfect for on-the-go consumption, Shields says, customers still want options.

“Our consumer has spoken to us and said, ‘Most of the time we want to grab and go, whether it’s the drive thru or grab and go, but we want the option to sit down,’” Shields says.

With a fairly straightforward offering, Smoothie King stores don’t have the same challenges as other quick-service restaurants, which can sometimes struggle with juggling multiple menu items, getting them out on time and at the right temperatures. But every smoothie is custom-blended. For that reason, Smoothie King prefers a sizable stack area in the drive thru, with at least two to three cars between the point of order and the window. And, just like in any other restaurant with a drive thru, employees have to balance the needs of customers inside and out.

“Our challenge is to measure up to the Chick-fil-As of the world that are getting cars out in two minutes,” says Brad West, Smoothie King’s vice president of operations. “I think our challenge is making sure that our team members don’t put one priority over the other. They’ve got to treat every order in order.”

Aaron Allen, CEO of global restaurant consulting firm Aaron Allen & Associates, says many of the changes in the quick-service category seem to be reactive, specifically reacting to the growing popularity of fast-casual brands. He says many quick-service brands have strayed from their roots, overcomplicating their menus and, in the process, driving up service times.

“They should absolutely be focused on speed and convenience, and not just getting incrementally better at it,” he says. “They’re mimicking what they see as successful, rather than remembering when they were successful.”

Major brands like Starbucks, McDonald’s, and Taco Bell have either started dabbling in delivery or announced plans to test it. Whether people want low-cost fast food delivered to their door remains to be seen, Allen says. And demographics—specifically the tastes of younger diners—may make it hard for the major quick-serve brands to compete in the delivery world.

“If the technology is equal on both sides, it will go back to a demographic calculation,” Allen says. “If Wendy’s is the first one to come out with it, it’s going to benefit from it. If Chipotle and Wendy’s both have it, it’s going to come down to demographics.”

But not every brand wants or feels a need to change strategy when it comes to dining in versus dining out. Papa Murphy’s is sticking with its take-and-bake model of assembling unbaked pizzas in stores for customers to heat up later in their home ovens. The reason is simple: It works.

“We haven’t really considered moving away from that,” says chief development officer Jayson Tipp. “We have very, very high-loyalty stores. We’re highly rated among consumers. It doesn’t really seem to us that there’s a need to change the formula.”

Some customers have asked for a hot-and-ready pizza option, Tipp says, but often it’s first-time diners who are unfamiliar with the concept. For the most part, customers enjoy the option of a store-prepared dinner they can enjoy fresh from their own kitchen.

“It has served us very well in the period of time that this brand has been operating, and is really what this brand is about: providing that homemade meal, if you will, for moms and dads and families,” Tipp says.

Its unique model gives Papa Murphy’s many financial competitive advantages. Stores are smaller, open limited hours, and have no need for ovens—all of which leads to lower labor and utility costs. That allows the 1,500-unit brand to turn attention away from cooking and to invest energy in preparing fresh ingredients like hand-cut veggies and shredded cheeses.

While it’s an entirely different model, Papa Murphy’s success may mirror that of fast casuals that emphasize fresh ingredients while allowing customers to customize their meals from a visible array of meats, cheeses, and vegetables. Papa Murphy’s stores feature a glass-shielded assembly line where customers can pick their own toppings.

“You can create the pizza that you want tonight,” Tipp says. “We have a lot of recipe pizzas, but you can also go down the line and pick and choose the ingredients you want on your pizza. We’re not trying to hide our ingredients.”