Drive-Thrus Driving Profits
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
American’s are always in a hurry. We’re a nation of busy people that don’t have time for frivolities. We’re all about speed - we want things now, and we want it fast. We want fast cars, fast cash, we even want fast food. We can’t be bothered to get out of our cars to go get our food. Please! We need someone to hand food into our cars because we’ve got things to do, places to be, people to see for gosh sake!
It’s a mindset that can’t be ignored, and what McDonald's (NYSE: MCD) and other fast-food chains have capitalized on for years. Some companies don’t even bother with traditional restaurants, and focus completely on drive-thru only locations. The concept has plenty of advantages – higher customer turnover, not having to clean up after customers, and lower real estate and furniture expenses to name a few. That’s why I was happy to hear Starbucks (NASDAQ: SBUX) CEO Howard Schultz announce on the company's most recent earnings call plans that 60% of the 1500 new stores opened in the United States in the next five years will have drive-thru windows.
While Starbucks drive-thru locations may seem like a relatively new concept to some, the fact is the company has operated drive-thru locations since 1994 – the same year of the epic McDonald's Coffee Case. Since then, McDonald's has stepped up the drive-thru coffee competition with the introduction of its own McCafe line five years ago in an effort to attract early morning coffee drinking commuters. Other fast food companies like Burger King (NYSE: BKW), looking to compete, started offering their own coffee options on their drive-thru menus. In fact, Burger King partnered with Starbucks’ Seattle’s Best brand to serve the coffee crowd and put a recognized coffee brand behind its offering.
The question is, can Starbucks continue to justify its pricing premium in the face of competition from inexpensive drive-thru coffee outlets? Howard Schultz originally envisioned Starbucks coffee shops as an experience – a third place in between home and the office where people could feel comfortable. The drive-thru format strips Starbucks of a lot of its charm.
With the beefed up (pun absolutely intended) coffee products from McDonald's and Burger King, Starbucks will have a much tougher time justifying twice the price for practically the same coffee experience. Indeed, fast food coffee has become more of a threat to Starbucks as of late, but Starbucks hasn’t changed the pricing on its drive-thru menus relative to its traditional café menu prices. Instead, the company is able to rely on its strong brand and continuous innovation to keep customers driving through.
Driving (through) profits
The numbers don’t lie. In 2012, drive-thru locations accounted for one-third of all Starbucks restaurants in the U.S., but contributed 45% of the chain’s operating profit. This implies that drive-thru locations are 1.6 times more profitable than traditional restaurants in the United States. Drive-thru locations accomplish such a feat through two means: increased margins and increased revenue.
Margins are improved for several reasons including those listed in the introduction to this article. The biggest advantage that jumps out to me is that drive-thrus can get by with smaller real estate footprints. First, the building can be smaller because there’s no need to seat customers or have a nice big counter for taking orders. Second, there’s no need to build a big parking lot, as cars simply circle around the building. As a result, real-estate expenditures take up a much smaller part of the location’s costs.
According to Schultz, drive-thrus create incremental revenue compared to traditional stores. This is partially because drive-thru locations naturally lend themselves to higher customer turnover, as employees work hard to get orders out and customers on their ways. It’s also because drive-thru locations are much more attractive to today’s American coffee drinker who’s perpetually in a hurry. While the company doesn’t split out drive-thru locations’s revenues, I wouldn’t be surprised to see that incremental revenue at drive-thrus are due to higher ticket volume compared to traditional stores.
The next five years
The last five years have been great for coffee drinkers on the go. I imagine, with a focus on drive-thru locations by the coffee king, we’ll see even more innovation in the area in the near future. With plans for 900 new drive-thru Starbucks stores in the next five years, the company ought to see profits continue to grow quite nicely if the past performance of the format is any indication.
I have a strong belief that Starbucks will be able to continue charging its premium price even at drive-thru only locations. Headquarters is filled with marketing geniuses that will continue to differentiate Starbucks from the competition, and perhaps even bring more of the Starbucks experience to your car.
adamlevy owns shares of Starbucks. The Motley Fool recommends Burger King Worldwide, McDonald's, and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!