With suburbs full, fast-food goes downtown

Arby's new downtown location in Pittsburgh, which opened late last year.
Arby's new downtown location in Pittsburgh, which opened late last year.

In the not-too-distant future, Chick-fil-A and Arby’s fans won’t need to trek to the suburbs to get some waffle fries or a roast beef sandwich in the city that never sleeps — New York.

Both Atlanta chains are joining a growing list of fast-food operators that see gold in opening stores in pricey, densely populated cities that focus on customers who come in on foot more often than by car.

The move comes with some caveats. Going urban means stores can’t depend on lucrative drive-thru traffic, which on average drives between 60 percent and 65 percent of fast-food sales, experts say. And when the weather turns cold or storms move in, sales fall from diminished foot traffic.

“Customers are also in even more of a rush,” said Ryan Holmes, Chick-fil-A’s urban strategy consultant. “Everybody’s always late.”

The urban focus comes with fast-food sales under pressure. Concerns over health, rising commodity prices and the stretched paychecks of the middle class and the working poor have made it tougher for chains, including category leader McDonald’s, to meet sales expectations.

Millennials, the biggest consumer group behind baby boomers, also prefer living in town — often without a car — making it easier to operate stores without a drive-thru.

Fast-casual restaurants like Chipotle Mexican Grill and Atlanta-based Moe’s Southwest Grill also have wooed more leisurely customers by focusing on the dining experience over speed, further eroding fast-food market share and forcing the industry to rethink its strategies, said Harry Balzer, a food retail analyst for NPD Group.

“This (moving into urban areas) is showing that fast-food can be more than what it has been,” he said.

Expensive strategy

The shift will be expensive. Chick-fil-A will open its first New York location this summer with a 5,000-square-foot store at 1000 Sixth Avenue in Herald Square. The three-story location includes a basement for catering operations, a second-floor dining room and about 10 cash registers, the most for any Chick-fil-A location.

The cost: about $450 a square foot. That compares to about $20 a square foot that a fast-food chain would typically pay in a shopping center in an American suburb, experts said.

“Chick-fil-A is the best fast-food brand out there for landlords,” Bob Wordes, chief operating officer for the Shopping Center Group, said. “The parking doesn’t matter. For the kind of foot traffic they’ll get … the store will essentially be a drive-thru.”

Arby’s CEO Paul Brown agreed. Foot traffic at the chain’s Liberty Avenue store in downtown Pittsburgh — opened last December — outperformed expectations, with sales 40 percent higher than an average store, he said. The roast beef giant is negotiating to bring the chain to Midtown Manhattan, downtown Washington D.C. and will open a store near the George State University campus in downtown Atlanta in 2016.

Brown said another factor driving the boost in downtown locations is a shift in real estate development toward urban developments that focus on foot traffic, even in suburban projects such as Avalon in North Fulton.

“A lot of the most innovative developments have a friendly urban feel,” said Brown.

To balance the rent costs, Arby’s “urban” stores will have a smaller, 1,800-square-foot store footprint (the average is about 2,200 square feet) and streamlined food preparation space, Brown said. The initial stores will be company operated to work out any kinks before seeking franchises.

“We obviously want to prove the concept,” he said.

While urban stores are new to some chains, the concept of operating without a drive-thru is not. Most chains have stores on college campus, in airports and in malls where the car is not the central sales driver. But those locations have a more captive audience and are not on the hook for seating, which is generally borne by the host facility.

Tony Moralejo, chief development officer for Atlanta-based Church’s Chicken, said the move to urban stores doesn’t mean chains can cut corners. Church’s, which has had downtown stores without drive-thru for years, said customers expect the same experience they would get out in the suburbs.

Service a key

“The staff has to be friendly and fast,” said Moralejo. “You don’t want to reduce the size of your menu. You don’t want to disappoint customers just because you don’t have a drive-thru.”

Franchising expert Leslie Kuban said urban growth also offers opportunities to franchisees looking for new options after hitting a ceiling in suburban expansion.

“This is not risk free for a franchisee if the franchiser hasn’t figured everything out,” she said. “But they can analyze the cost versus the customer volume and see the benefits.”

Chick-fil-A has seen it work. The company has opened two stores in Chicago — one on the city’s Magnificent Mile in 2011 and the other next to the historic Chicago Theater in 2013 — with much success, said Holmes, the company’s urban strategy consultant.

“We had never gone into an area that dense and didn’t know what to expect,” Holmes said.

Since then the chain has opened stores in Washington, D.C., Baltimore’s Inner Harbor and several Atlanta locations, including Terminus in Buckhead.

Chick-fil-A CEO Dan Cathy has said how the New York store performs will help determine if international destinations like London are in the chain’s future.

“It’s definitely one of the highest profile locations we have,” Holmes said of the Sixth Avenue store. “We are definitely excited about it.”