On my first day of Restaurant Management School, the professor adamantly explained that there is nothing more important than managing prime costs. For those who have never operated a restaurant, prime costs comprise of two components: labor and food/beverage costs, making up approximately 65% of all costs for a full-service restaurant. However, this lesson is obviously no secret to operators, and all operators put maximum effort into keeping these costs as low as possible. As to be expected, good ideas (such as kiosk ordering, which I wrote about week) catch on quickly and no longer become differentiators.
As of this week, Wendy’s is fully leaning into restaurant design to stand out among competition. On Tuesday, Wendy’s announced it is overhauling its kitchens that have the highest customer demand. This is the beginning of their initiative Global Next Gen, which unlocks “400 times the capacity of digital orders”, according to Wendy’s President Abigail Pringle. "We know that digital is part of the future and has been continuing to grow even before the pandemic around delivery [and] mobile. I think that is the way that you have to think about it from a design standpoint.”
Wendy’s new kitchens have a few distinct features including self-order kiosks, parking and shelving for mobile pickups, and dedicated delivery windows. As of Q2 2023, Wendy’s digital sales increased 25% YoY as well as U.S. same-store growth of 4.9%. With locations now open in Kansas and Oklahoma, Wendy’s plans to open 200 more of these Next Gen kitchens through 2024.
But Wendy’s isn’t the only brand adapting their design to the modern age. In the end of 2022, McDonald’s launched its first fully automated test restaurant in Fort Worth Texas. According to BTIG analyst Peter Saleh, McDonald’s test restaurant is considerably smaller than a traditional McDonald’s restaurant in the U.S. “The features – inside and outside – are geared toward customers who are planning to dine at home or on the go. There's only a very small percentage that's actually being consumed in the restaurant in the US… so why would you build restaurants with a lot of seating?"
It seems like a reasonable position Wendy’s and McDonald’s are taking. Saleh claims more than 85% to 90% of consumers take meals to go, compared to 70% pre-pandemic. Morningstar analyst Sean Dunlop adds that restaurant updates “create a little bit of an unlock, historically correlated with a mid to high single-digit increase in traffic at that store. The store is more inviting, it looks more modern, consumers might be more comfortable spending time there.”
Even if it does not involve a complete overhaul, small operational changes can result in significant differences on a balance sheet. Earlier this year, Chipotle announced its plans to recreate kitchens with a new double-sided grill that will cut chicken cook times by 300% and steak cook times by 400%. This allows for less labor needed before the store opens and more importantly, shorter wait time for customers.
Whether it is completing overhauling design to accommodate an increase in digital ordering or something smaller like a double-sided grill, big brands continue to look for any type of competitive advantage. It is important to note that a more efficient restaurant truly only matters if consumer demand matches the supply. In other words, making more food, faster, only helps the bottom line if it leads to a substantial increase in sales. As the fast food and fast casual landscape continues to expand, these investments could prove to be pivotal in differentiating brands in both the eyes of the consumer and investors.