The drive-thru boom

The future of casual dining might be veering away from the high street and towards the highway. Drive-thru services are nothing new; in fact the first McDonald’s drive-thru in Europe opened in Dublin 33 years ago, showing the concept’s remarkable staying power. But standalone restaurants are increasingly feeling the burden of rising overheads – evidenced by a torrent of closures in the dining sector – so businesses are expanding their roadside services with increasing aggression to drive sales, either through parent companies taking leaseholds, or via franchise operators. Expansive fast food operators McDonald’s and KFC have each launched requirements for more than 400 new drive-thru locations in the UK in recent months. The former is looking for standalone sites promising 5-6% yields on leases of up to 25 years, at retail and leisure parks as well as main arterial routes. Meanwhile, KFC’s remit extends to out-of-town locations, retail and leisure parks, and urban and transport hubs. Subway, Burger King, Canada-based Tim Hortons and US giant Taco Bell are also eying more grab-and-go sites across the country. Coffee chains such as Costa and Starbucks are on major drives to multiply their kerbside outlets. Additionally, more offbeat food operators such as Greggs and Krispy Kreme have been increasing their site numbers across the UK and Ireland – although unprecedented popularity at the latter forced Krispy Kreme to close their 24-hour operations in Dublin earlier this month. Outside the box In the US, drive-thru services for flu vaccines and polling stations are among the more subversive services that have been tested. While the UK is not nearly as romantic with the concept, the sector could feasibly open up to new versions beyond food and beverage, as retailers continue to explore different formats outside of the tough high street. The more unconventional types of operators are dabbling in roadside retailing in the UK include WW (formerly Weight Watchers), which ran a one-day pop-up in January. Benefit Cosmetics piloted a two-day beauty pop-up in June 2017 for Glastonbury festival-goers, and Debenhams ran a Valentine’s Day initiative in February last year. Meanwhile, Metro Bank opened its third UK drive-thru in Luton last October in a move that sets it apart from its retail banking rivals, while Boots has operated drive-through pharmacies in the UK for a decade. For Metro Bank, which is scouting for more locations of up to 5,000 sq ft, the rationale is clear. “We are designed around the customer and convenience”, says Iain Kirkpatrick, managing director of retail banking at Metro Bank. “There is a feeling of safety in being able to drive up, park outside and walk in. Business customers with their takings don’t want to leave their vehicles; we also have customers with mobility issues, and often parents with young children who don’t want to get them out of their cars when they’re banking. There is a whole range of people using our drive-thrus and they are growing in popularity.” Soaring rents While non-F&B drive-thrus have yet to gain popularity in a more meaningful or permanent way, the market continues to be driven by customer demand for time-efficient solutions that are not dampened by rising product and service costs. Notwithstanding the pressures of operating in such constrained spaces, demand has led to a reduction in supply of prime, visible sites near roads with high traffic volumes. As a result of these factors, rents are understood to be surpassing £80 per sq ft in some regions. Ashley Blake, chief executive of Otium Real Estate and chairman of the Leisure Property Forum, notes that average rents often tally £30-£35 per sq ft and upwards, well above the average £20-25 per sq ft for many restaurants across towns in the UK. He says: “The British seem to have an enduring love affair with drive-thrus. Operators are paying big money to secure sites and rents are increasing, despite what is happening in the restaurant sector.  “This is because of strong demand, and the fact that there is a shortage of sites that have the right access and space to build one. Some operators have been closing town-centre sites to open in drive-thru formats.” Signposting the current heights of private investor demand, Morrisons sold its Costa Coffee drive-thru in Leamington Spa for £1m at the Acuitus auction last month. Six of the nine drive-through outlets it has sold since 2012 – with covenants including McDonald’s and KFC – have achieved sub-6% yields. Driving returns LondonMetric Property is among the landlords that have seized the opportunity to capitalise on this burgeoning market. It recently made its debut in the drive-thru sector with a circa £12m investment.  The sites are let on 24-year leases with annual uplifts of 2.25%. The two largest assets in the portfolio are located in Bicester, accounting for the majority of the deal value. Andrew Jones, chief executive of LondonMetric, says that the REIT has been looking at the sector because it offers a compelling proposition. “Being able to access a roadside service, be it a coffee or food offer, will be increasingly attractive to the consumer. And as an investment, we like the credits, lease lengths and the intrinsic value of the locations. “We expect them to evolve with more offers on a single site including the likes of Premier Inn or Travelodge, for example.” The gains Letting sites to ‘master franchisees’ also holds particular appeal, since some licence operators can fill multiple sites in one location to create “more of a destination”. The REIT can also benefit from trends brought about by the growing electric car market, with the opportunity to install charging points at some of the properties. Dwell times and spending could increase at sites as a result of the increased use of electric vehicles, since some take 30 minutes or more to charge. The convenience aspect – one of the more resilient retail sectors this year, as evidenced by Aldi and Lidl’s rapid expansion and Tesco’s launch of discount chain Jack’s – is also driving investor demand. “We think that alongside the convenience sector, [roadside services are] the only part of retail where there is real reversion to capture,” says Jones. “Some of the opportunities we have been looking at promise significant uplifts. It is a fragmented market but one with a lot of opportunities.” Here to stay The drive-thru concept might seem dated, in a time when food delivery services are booming and awareness around both health and environment is rising. But even though it is fuelled by an unhealthy industry, it will remain a surprisingly profitable segment of the F&B sector for both occupiers and landlords as long as demand for speed and convenience stays prevalent. To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette