Current Trends in Retail Development - Part 2

As we previously discussed in part 1 of our exploration of the current trends in retail development, as the landscape of retail development continues to evolve, tenants need to continue to adjust their efforts to meet the needs of the average consumer. These effects have had a significant impact on big-box retailers and other brick-and-mortar retailers, and some of the fastest and most prominent changes have been in the restaurant industry. Initially transformed by the COVID-19 pandemic, then changes in the dining preferences of the average customer, and recently impacted by local ordinances meant to benefit residents, many restaurant concepts have found that they need to become increasingly creative in order to be successful in today’s market.  

Local Regulations Limiting Expansion Efforts

The Current Legislative Landscape

The rapid expansion of QSRs has become a contentious issue in some areas of the country, particularly in the face of city ordinances aimed at regulating their growth. These ordinances, which often vary significantly from city to city, have been implemented for a variety of reasons, including concerns about traffic congestion, public health, and preserving the character of local neighborhoods.

A prime example is the recent Mesa ordinance that changed the zoning code and restricted where drive-thru restaurants could operate. This specific ordinance places limitations on the development of new QSRs in certain designated areas, with the intent of managing urban sprawl or maintaining the aesthetic and cultural identity of a neighborhood. While well-intentioned, these regulations can sometimes be at odds with evolving market dynamics and shifting consumer demands.

The Change in Consumer Dining Habits

The modern consumer's preference for convenience, particularly in the realm of dining, was sharply accentuated by the COVID-19 pandemic. The preference of the average consumer has seen a notable shift towards QSRs, which are often perceived as quick, affordable, and efficient dining options. The pandemic and the resulting lockdown, with its restrictions on dine-in services and heightened health concerns, intensified this shift, with many consumers opting for takeout or delivery over traditional sit-down restaurant experiences.

While there's a clear trend towards the convenience and speed offered by the drive-thru, there does remain a considerable public appetite for traditional sit-down dining experiences. Many people still cherish the ambiance, leisurely pace, and social aspects of sit-down restaurants and have been calling for more of these types of restaurants to be brought to Mesa in new developments. However, the current market conditions leading to climbing rents and elevated construction costs make operating these types of restaurants a tall order in present conditions. In order to make a profit, a traditional sit-down concept would need to raise its prices and also be operating at capacity from opening day to be successful under these conditions. In the current market, that means only the most highly visited, more expensive upscale dining concepts will be able to succeed.  

This leaves landowners, developers, and businesses in a difficult position. All want to provide the public with restaurants that will meet their needs and be successful. While most people will generally agree that they would like to see more sit-down restaurants in their community, they will not be able to regularly and consistently patronize those same businesses. The combination of the speed, convenience, and reasonable pricing offered by QSRs means that the average consumer selects these restaurants for their meals more often. This is also why drive-thru restaurants keep expanding in these neighborhoods; the businesses want to better serve the average consumer. 

Market Polarization

The combined effect of these factors is leading to a greater polarization in the dining market at large. On one end of the spectrum are the convenience-focused QSRs and pick-up-only concepts, thriving on efficiency and affordability. These establishments have become highly popular due to their emphasis on efficiency and affordability, meeting the modern consumer's demand for quick, accessible, and budget-friendly dining options. The success of these models is further propelled by the integration of technology, enabling mobile ordering, contactless payments, and streamlined service delivery, which resonates with the fast-paced lifestyle of many consumers. 

On the opposite end of the spectrum, there are high-end, sit-down dining experiences. These establishments cater to a different segment of the market, where consumers seek more than just sustenance; they are looking for a leisurely dining experience, often in a more upscale or unique setting. These restaurants focus on providing premium food offerings, an ambient atmosphere, and attentive service. They appeal to those who value the experience of dining out as a social or luxury activity, often associated with higher spending.

This polarization, however, is leaving a widening gap in the market for mid-range dining options. Traditional, mid-priced restaurants, which typically offer a sit-down experience without the premium pricing of high-end establishments, are finding it increasingly challenging to compete. These restaurants are often squeezed by the high operational costs inherent to their business models, such as staffing, real estate, and food costs. At the same time, they are facing growing competition from QSRs and pick-up-only models, which are capturing a significant portion of the consumer market due to their convenience and speed. They need to find a balance between maintaining the quality and ambiance that differentiate them from QSRs while also adapting to the changing consumer demands for speed, convenience, and value. This might involve rethinking their service models, incorporating technology to streamline operations, or revisiting menu options to offer a more competitive and appealing proposition to customers who are increasingly gravitating towards either end of the dining spectrum. The key for these mid-range restaurants lies in differentiating themselves through unique dining experiences, quality of food, and, potentially, a hybrid model that incorporates elements of convenience and affordability.

These recent trends highlight the necessity for adaptability, innovation, and strategic foresight during retail development across multiple use cases. As the landscape continues to evolve, developers and tenants must stay agile and responsive to remain competitive. Future success in retail, and especially dining, will hinge on the ability to balance operational efficiency, customer experience, and adaptability to market changes effectively. The ongoing evolution of these industries will be a testament to the resilience and ingenuity of those who navigate these dynamic challenges and opportunities.