Few topics dominated industry discussions in recent years like convenience retailing’s shift toward foodservice. Moving beyond outdated notions of “gas station food,” leading brands had gained national attention for their cravable, destination-worthy meals.

From the 10-year period between 2009 to 2018, foodservice as a percentage of inside sales increased from 16.0% to 22.6%, according to NACS State of the Industry data. In 2019, it jumped further to 25.4%. Although this change was driven primarily by top-quartile retailers, it offered a compelling picture of how the industry might continue to evolve in this new decade.

But it was clear that the quick-service and fast-casual brands were not going to cede ground without a fight. Last year’s $300 million acquisition of Dynamic Yield by McDonald’s indicated that technology and drive-thru efficiency would be a major priority for the brand in the near future. Starbucks also ended November 2019 with more than 17.5 million members in Starbucks Rewards—one of the country’s most successful loyalty programs.

At the same time, established consumer packaged goods companies began attempting to embrace the direct-to-consumer (D2C) approach of their digitally native competitors. Given the advantage convenience retailers have over QSRs through their beverage and snack selection, what would it mean if leading brands began to bypass the channel altogether?

As with many trends, much has happened in recent months amid the COVID-19 pandemic. Let’s take a closer look.

Quick-Service Restaurants and Fast Casuals

It goes without saying that the pandemic has been catastrophic for restaurants. According to the National Restaurant Association, the sector is likely to see $240 billion in lost sales and the closure of nearly 100,000 locations this year. In comparison, a typical year might see the closure of 50,000 restaurants and the opening of 60,000.

We’re working with a client on a drive-thru with four lanes. They’re devoting 100% of their real estate to both drive-thru and pickup.

Lurking beneath the headlines, however, is a story of bifurcation: Many quick-service chains are thriving, while local favorites are going out of business. On Yelp, three-quarters of the nearly 22,000 restaurants that closed between March 1 and September 10 had fewer than five locations.

“Compared to other restaurants, QSR chains are more likely to be doing well,” said Cliff Albert, a longtime packaging executive who operates The Shares, a popular newsletter about the restaurant industry. “When you talk about brands that have made the systematic shift toward off-premise, they were ahead of it. The ones who were always going to struggle were the independents.”

With the closure of dining rooms and lingering health concerns after their reopening, the pandemic inadvertently rewarded brands that had already invested in drive-thrus and other off-premise solutions. Indeed, Domino’s saw same-store sales rise 17.9% in its third quarter. McDonald’s saw an increase of 4.6% in its third quarter, along with a rise in the low double digits during September—its best monthly performance in nearly a decade.

National brands that lacked off-premise solutions—including many in the casual and fine dining space—now find themselves in similar positions to the independents. Ruby Tuesday filed for Chapter 11 bankruptcy protection in October, closing 185 locations.

“The problem facing these brands is that off-premise was never the core of their business,” said Howland Blackiston, principal at consulting firm King-Casey. “They were suddenly at a disadvantage and had to scramble to adjust. The easy solution for casual dining brands was delivery, but that’s the least profitable due to the fees. You can squeak by, but it’s not desirable.”

According to Blackiston, many QSRs are now using this momentum to double down even further on drive-thrus. The challenge is that many are finding their current systems overwhelmed with demand. According to an annual study by SeeLevel HX, average wait times have increased by nearly 30 seconds—costing brands around $64 million in lost revenue.

“I think everyone feels that drive-thru usage is here to stay. Even before COVID-19, QSR brands were doing 50% to 70% of their business that way,” said Blackiston. “The challenge is that for many years, the drive-thru hadn’t really changed much in terms of the basic strategy and design. The new solutions coming out are much different. We’re working with a client on a drive-thru with four lanes. They’re devoting 100% of their real estate to both drive-thru and pickup.”

Chipotle is benefitting from having made investments in off-premise solutions. In 2019, the company began introducing “Chipotlanes” where customers pick up orders placed via app or website without having to leave their cars. Digital sales in the second quarter of 2020 grew 216.3%, accounting for 60.7% of total sales.

Baird analyst David Tarantino recently told Yahoo! News that he views Chipotle as second compared to Starbucks in digital engagement, describing the ability at his local stores to order on an app and simply stand in a line for curbside pickup. “Why have the dining room at all?” he asked. In fact, Chipotle announced the opening of its first digital-only store in November in Highlands, N.Y.

There are always exceptions to these trends. Despite the success of national QSR brands, many consumers have become even more invested in their communities amid the pandemic. The desire to shop local is especially strong. “Where our company is located in South Dakota, the local businesses are thriving,” said Gina Kuck, director of national accounts at Daktronics.

“Our local ice-cream shop has a small dining experience, but this year only the drive-thru is open,” said Jess Bern, who manages strategic marketing for on-premise at Daktronics. “Cars are now backed up into the road just waiting to get ice cream. It’s like we want to treat ourselves, and we’re willing to wait for something special.”

Starbucks

It’s no secret that Starbucks has presented a challenge to convenience retailers in recent years—especially during the morning daypart. Indeed, the inspiration for Tennessee-based Twice Daily’s White Bison coffee program was partially due to an observation that customers would drive across the street to Starbucks after refueling.

But Starbucks has had a tough year. By July, sales were down $3.1 billion compared with the prior year. Although same-store sales improved from negative 40% in the third quarter to negative 11% in August, recovery will surely continue to be slow.

As we see customer visits shifting from urban cafés to suburban drive-thrus, customers are also purchasing multiple beverages and food items on a single order, essentially a group order.

One reason is that many of the company’s locations are designed around the in-store experience and reliant upon now-empty offices. Although 60% of Starbucks locations have a drive-thru, 40% lack that critical lifeline. A third of that 40% are located in urban business districts.

Remote work presents a significant challenge for many brands. Estimates vary, but between 1 in 5 and 1 in 6 workers are projected to continue with remote work arrangements in the near-future. Yet in a strange twist of fate, this shift seems to have benefitted brands like Folgers. Parent company J.M. Smucker Co. has seen its coffee products enter 1.3 million new homes during a three-month period, and Folgers is leading the way. Some of this may be due to stock-up behavior, but there’s no denying that remote work has changed the habits and buying patterns of many consumers.

There’s a silver lining for Starbucks as the number of local coffee shops is shrinking for the first time in nine years. The U.S. will have 25,307 locations specializing in coffee or tea by the end of 2020—down 7.3% from a year earlier, according to Euromonitor. Not only does this help Starbucks, but it rewards brands like McDonald’s and Dunkin’ that aggressively target coffee customers.

Shifting away from on-premise consumption will be a key priority for Starbucks. Almost 90% of sales volumes flowed through a combination of drive-thrus and mobile orders during the company’s third quarter. Delivery transactions tripled. Starbucks Rewards also continues to perform strong, representing 46% of tender—an increase in four percentage points from a year ago. Mobile orders are at 22% of total transactions and also up six percentage points.

“Although our digital platform continues to be a source of strength, disruption to the weekday morning routines, notably commuting to work and school, is a headwind we are focused on across the U.S. as we continue to recover our business,” CEO Kevin Johnston said in the company’s third-quarter earnings call. “We continue to see improvements in the morning peak period as well as some customer occasions shifting to later in the morning daypart. As we see customer visits shifting from urban cafés to suburban drive-thrus, customers are also purchasing multiple beverages and food items on a single order, essentially a group order.”

Starbucks’ earnings call also flagged three areas for potential growth and differentiation: new store formats, digital customer engagement and plant-based menu items. Development of 50 new pickup stores will arrive in urban markets that don’t support a drive-thru. Several hundred are planned for the next three to five years. Starbucks Rewards also will shift to provide members with the ability to earn rewards for paying directly—thereby removing the need for pre-loading.

“I think Starbucks will be all right,” said Neil Saunders, managing director of GlobalData. “But there’s a little bit more distress in their situation because some people will cut back. It’s one of those things you can cut out spending on, as it can get quite expensive. There’s also a longer recovery period for channels that relied very heavily on the work commute.”

Direct-to-Consumer CPG

The direct-to-consumer (D2C) shift has been difficult to ignore in recent years. Many American consumers likely own Warby Parker glasses, Away luggage, or perhaps bedding from Casper or Tuft & Needle. A few may even have a subscription for Quip brushes and toothpaste.

If you control your distribution, you control your destiny.

This has raised the question of whether the major CPG companies might find success with the D2C model—and what it would mean for retailers if those brands were less reliant on their stores. In the apparel industry, for example, Nike is currently on track to have digital sales represent 50% of total revenue.

“The accelerated consumer shift toward digital is here to stay,” said the shoe brand’s CEO John Donahue in a recent statement to CNBC. “Digital is fueling how we create the future of retail.”

Nike is an outlier, and shoes are different than soda and chips. Still, it’s not hard to see that a similar situation might play out for brands that are strong enough to drive a trip to a convenience store. Incentives might feasibly line up for a consumer to shift spend to a subscription model for a preferred energy drink. It’s also hard to ignore the success of digitally native brands like GFUEL that sell directly through their website. Fans of GFUEL even join waitlists for limited edition drops.

“I think a lot of CPG companies are really looking for ways to enhance their own margins,” said Saunders. “They see more consumers buying things online, and they like the idea of having that relationship. They also like subscription models because when you lock consumers into a subscription, they no longer think about buying that product. They’re not lured away by promotions or special offers. The churn rate of the brand drops down significantly.”

The challenge for brands that aren’t digitally native, however, is how do you work backward?

“Would an impulse buy for a bag of chips push a consumer to make an online purchase directly through Frito-Lay? Probably not,” said Joshua Schall, owner and president of J. Schall Consulting. “Those items don’t scale well with individual D2C experiences.”

Schall points to companies like PepsiCo that have the added advantage of many brands within their portfolio. Working backward to make a D2C shift is easier due to their ability to bundle. In May, Pepsi rolled out Snacks.com and PantryShop.com to facilitate D2C sales of more than 100 Frito-Lay products. Specialized bundles with top-selling items were designed with affinity research and targeted at groups like remote workers and homeschoolers. The company reported that e-commerce sales had nearly doubled for its third quarter.

“If you control your distribution, you control your destiny,” said Schall. “Whether this is D2C or owning retail locations, you at least have control of that even if the world around you is crumbling. A website for a CPG company is national scale. Even if your products are out of stock at a retailer, you still have a way to get them to your customers. That’s invaluable.”

While it’s tempting to view D2C as more an emerging trend, Schall cautions that while the shift may appear comparatively small, many of the brands with under $100 million in revenue are growing at more than 10 times the rate of their larger competitors.

“It’s a death by one-thousand cuts scenario,” said Schall. “It’s important for CPG brands to focus right now on being where consumers’ attention is directed, even if it doesn’t appear to show profitability parity to existing physical retail channels. Looking at D2C as purely a profit center today is the wrong way to think about it, instead it’s a land grab within the future of retail.”

This is the final article in a three-part series on how the pandemic is shaping 10 key trends in the convenience and fuel retailing industry.