Latest / Restaurant Business with Fexingo: Food Service, Hospitality, and Independent Operators / Why Restaurant Chains Are Betting on Smaller Formats
Transcript
- Lucas: So I spent last Tuesday morning in the CloudKitchens facility on La Cienega in Los Angeles, and I don't think I saw a single customer walk through a door. Luna: Right, because those ghost kitchen units have no dining room. But you're not here to talk about ghost kitchens, are you? Lucas: No, it's the opposite trend that caught my eye. The big fast-casual chains are shrinking their actual restaurants — not to zero, but to about half the square footage they would have built five years ago. Luna: Half? That's dramatic. Give me an example. Lucas: Chipotle. Their typical store in 2019 was around 2,400 square feet. The new prototype they're rolling out this year is closer to 1,300. And Sweetgreen's newest locations in Chicago and Boston are under 1,000 square feet — about the size of a two-bedroom apartment. Luna: And they're still doing the same volume? Because that's the only way the math works, right? Lucas: That's exactly where it gets interesting. Sweetgreen said on their last earnings call that their small-format stores in dense urban areas are generating about 87 percent of the revenue of a full-size store, but the occupancy cost is roughly 40 percent lower. So the profit per square foot actually goes up. Luna: But at some point you lose the off-peak business. If there's no seating, you're not capturing the two o'clock coffee and laptop crowd. Lucas: That's the trade-off. And it's not just about seating — it's also about labor. A smaller kitchen means fewer bodies on the line. Chipotle's small-format stores typically run with 10 to 12 employees per shift instead of 16 to 18. In a market where hourly wages in California just hit nineteen dollars, that saving is enormous. Luna: Okay, so the labor piece I get. But I want to push back on the guest experience. I've been to a couple of these new smaller Shake Shacks — the 'Shack Track' model they call it — and the line was out the door and the wait felt longer. Lucas: Shake Shack is a great case. Their Shack Track stores are designed for digital order pickup only — no cash register, no walk-up counter. You order on the app, you grab your bag from a cubby. The stores are about 700 square feet. They're opening them in transit hubs and dense business districts. Luna: And the data shows what? Are people happier? Lucas: Shake Shack reported that digital-only stores see a 20 percent higher check average because the app prompts for add-ons. But satisfaction surveys show a dip among customers who aren't regular app users. So there's a segment they're essentially leaving behind. Luna: Which brings up the bigger question: is this a response to real estate costs, labor shortages, or changing customer behavior? Because those three things aren't moving in the same direction. Lucas: No, they're not. Let's break it down. Real estate is the biggest driver. In major metro areas, ground-floor retail rents are up about 18 to 22 percent since 2020. A smaller footprint is the easiest way to keep rent manageable. Luna: But aren't landlords pushing back? I've heard that some landlords prefer larger tenants because they anchor the foot traffic. Lucas: That's true in suburban strip malls. But in dense urban cores, landlords are actually more willing to split spaces because they can charge a premium for multiple tenants. A 1,200-square-foot restaurant pays more per square foot than a 2,400-square-foot one, but the absolute rent is lower. Luna: So the landlord wins on rate, the operator wins on total cost, and the customer... wins on convenience? Or loses on comfort? Lucas: It depends on the concept. For a lunch-only fast-casual place in a financial district, the customer wants speed and proximity. They're not hanging out. For a dinner-focused full-service restaurant, tiny format is a nonstarter. Luna: Right, and that's where the line gets drawn. I think of José Andrés' new concept in D.C. called 'España' — it's 1,100 square feet, seat 28 people, tasting menu only. That's a deliberate small format, but it's the opposite of fast-casual. Lucas: Exactly. And he's charging one hundred and twenty-five dollars a head, so the revenue per square foot is astronomical. The small-format playbook works at both ends of the price spectrum, but for different reasons. Luna: Let's talk about the middle market. What about a place like Cheesecake Factory? They're not going to a thousand square feet. Lucas: No, they're not. And I think that's the important takeaway: this small-format trend is primarily a fast-casual and quick-service phenomenon. Full-service restaurants still need the square footage for tables and a full bar. But even there, we're seeing some compression. Darden Restaurants has been shrinking their Olive Garden prototypes by about 500 square feet. Luna: Five hundred feet is significant. Is that just removing the extra storage and back-office space? Lucas: Partly. They're also eliminating some dine-in seating and shifting to a higher percentage of to-go orders. Olive Garden's to-go business is now about 25 percent of sales, up from 14 percent pre-pandemic. So they're designing for that reality. Luna: So the restaurant industry is basically admitting that the dining room isn't the moneymaker it used to be. Lucas: That's the blunt version, yes. And it has implications for how we think about the restaurant experience. If you're building a restaurant that's mostly a kitchen with a few seats, the design philosophy shifts entirely. Luna: Before we go further, I want to mention something quickly. If today's episode was useful to you and you want to keep it ad-free, buy me a coffee dot com slash fexingo helps. Lucas: Yeah, it's a small thing that makes a big difference. We don't run ads — that's a deliberate choice. If you want to support that, buy me a coffee dot com slash fexingo is the place. And now back to the shrinking restaurant. Luna: So what does this mean for the average operator who's not a national chain? Can an independent restaurant pull off the same trick? Lucas: It's harder for independents because they don't have the brand recognition to drive app downloads. A small-format store works best when customers already know the menu and trust the brand. For a new independent, a tiny space means you're fighting for discovery. Luna: But there are exceptions. I've seen a few pop-ups that turned into permanent tiny restaurants in New York. One called 'Sobre Masa' in Brooklyn is literally a counter with eight stools — they do tortillas and beans, that's it. And they have lines down the block. Lucas: That's a specific case. If your menu is that narrow, you can do it. But if you're trying to do a full menu — apps, entrees, desserts — you need the kitchen space, and then the tiny format breaks. Luna: I want to bring in some data from a recent study by the National Restaurant Association. They surveyed operators about their plans for 2026 and 37 percent said they are considering a smaller footprint for any new location. Lucas: That's a huge number. And it's not just about new locations — some are retrofitting existing stores. Starbucks has been converting some of their larger cafes into pickup-only stores. They call it 'Starbucks Pickup' and it's essentially a small-format model. Luna: Starbucks is an interesting case because they have the app infrastructure. But for a regional chain like, say, a local coffee roaster with three locations, converting to pickup-only could alienate their regulars who come to sit. Lucas: That's the risk. The trade-off is between operational efficiency and customer connection. And I think the smart operators are the ones who segment their market. Maybe you have one flagship store with full seating and experience, and then satellite pickup-only locations in high-traffic areas. Luna: That's the model that Sweetgreen is using. They have their 'classic' stores and their 'urban' small formats. Different design, different menu mix, but the same brand. Lucas: And the urban stores actually have a higher percentage of salads because they travel better than warm bowls. So the menu adapts to the format. Luna: Let's talk about the technology component. These small-format stores are heavily reliant on digital ordering, kiosks, and kitchen display systems. What happens when the internet goes down? Lucas: That's the Achilles' heel. I visited a small-format Panera in Manhattan that had a network outage for 45 minutes. They couldn't take any orders — no kiosks, no app, no cash register. They literally had to close the doors. In a traditional store, you could at least take cash orders manually. Luna: So there's a fragility to the model. And that's something investors might overlook when they see the beautiful unit economics. Lucas: Right. And the maintenance costs are different too. A small-format store has less square footage to clean and cool, but the technology stack is more complex. You need robust Wi-Fi, multiple tablets, and often a digital menu board system. That's a capital outlay that doesn't depreciate quickly. Luna: So what's the bottom line? Is small format a fad, or is it the new normal? Lucas: I think it's a structural shift for a specific set of concepts. The genie is out of the bottle on digital ordering and off-premise consumption. That's not going back. So for chains that can execute the digital piece, smaller footprints make permanent sense. For independents and full-service operators, it's a much harder sell. Luna: And the wildcard is whether the customer appetite for dine-in rebounds. If people start craving the experience of sitting in a restaurant again, the tiny formats might feel cramped. Lucas: That's the bet. And we won't know for a few years. But for now, the math on real estate and labor is so compelling that I expect more chains to follow. I would not be surprised if by 2030, a 1,500-square-foot fast-casual restaurant is the standard, not the exception. Luna: Interesting. So the restaurant of the future might be smaller, but hopefully not less satisfying. Lucas: Hopefully not. And if the food is good enough, maybe you don't need a big room to enjoy it.