Franchising | May 2010 | By Jordan Melnick

Grow Town

Detroit’s economy won’t rebound for a couple of years, but the city that so many wrote off might actually be a land of opportunity for quick serves.

Detroit might be a reasonable location for quick serves to open up.
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It is not uncommon for someone to liken the economic situation in Detroit to the aftermath of a natural disaster.

“To me, it’s like Katrina,” says Jeffery Elsworth, an associate professor at the School of Hospitality Business at Michigan State University. In Louisiana, “they lost over 200,000 people, too.”

Elsworth is referring to the problem of emigration in Michigan, which saw 278,000 people flee its borders between 2006 and 2009, many of them young and well-educated.

More than 62,000 residents left the six-county Detroit metropolitan area from 2007 to 2008, while Wayne County, which encompasses the city of Detroit, lost 41,140 residents to emigration during the same period.

Although the exodus might have alleviated another major problem—unemployment—by leaving a slew of job openings in its wake, local demographer Kurt Metzger says that hasn’t happened, making matters worse.

“More people have to leave the city to work than come into the city to work,” he says.

In October last year, Detroit’s official unemployment rate was 27 percent, about 17 percentage points more than the national average at the time. But that isn’t the whole story. Factor in the underemployed, part-time workers who want to be working full-time, and discouraged workers—people who want jobs but have given up looking for them—and even Mayor Dave Bing puts Detroit’s unofficial unemployment rate closer to 50 percent—meaning one out of two Detroiters can’t find enough work.

And there are other worrisome issues. For example, the 40 square miles of vacant land—a swath amounting to 30 percent of the city’s area—where houses and people used to be. In an inspired instance of turning lemons into lemonade, Detroiters have begun cultivating the empty space as gardens and farmland, and in time this grassroots agriculture movement may assume a significant role in the city’s economy. For now, however, nearly a third of the urban landscape is deserted, and harvest time seems a long way off.

But this side of the Detroit story is well-known. The demise of the Big Three car companies, not only the city’s biggest employers but practically its raison d’être, made Detroit the recession’s enduring symbol for many across the country. But there is another side of the story, and it centers on why, with Detroit in such bad shape, so many in the Motor City’s quick-service sector are talking about opportunity.

One reason, of course, is that opportunity usually implies less-than-ideal circumstances, which would be a generous characterization of the situation in Detroit. Consider an anecdote from the Michigan Restaurant Association’s Andy Deloney:

“I had a conversation in the summer with the founder and CEO of a Michigan-based regional restaurant chain, and I asked him how’s he doing. He said, ‘You know what, I’m doing fantastic.’ I asked him to quantify that. He said, ‘My sales are 1 percent lower than last year.’

“That to him was doing fantastic. Doing 1 percent lower in sales than the prior year was great news.”

It is against this backdrop that the watchword opportunity must be understood. It is not that Detroit is poised to make a comeback anytime soon. Hardly anyone interviewed for this article expected 2010 to be a booming year, and even forecasting much of an uptick in 2011 seemed a stretch. Still, that didn’t stop many of them from expressing an intention to take root or expand in the area, in no small part because real estate prices are too good to ignore.

“Phenomenal lease rates,” says Michael Ansley, president and CEO of Southfield, Michigan–based Diversified Restaurant Holdings, which operates 11 Buffalo Wild Wings locations statewide. “I’m talking nine bucks a square foot, 12 bucks a square foot, 13 bucks—it’s unheard of.”

Ansley says he doesn’t expect any growth in the Detroit market until at least 2012 and is projecting for his restaurants there to break even this year, as they did in 2009. Nonetheless, he says he is focused on getting “A-plus sites,” and eventually wants to open a location in the city’s downtown area.

Besides the low real estate prices, Ansley says he is drawn by the combination of relatively low competition—“There’s not many players in the market,” he says—and high population.

“I keep reiterating, and people forget, there are 4.5 million people in Detroit,” he says. “It’s the second largest city in the Midwest and, despite its problems, there’s still a lot of people there.”

But Ansley’s restrained optimism is rooted in more than just raw numbers. Since all of his restaurants are either in Michigan or Florida, another state hit especially hard by the recession, he is able to compare Detroit with other hard-up markets. After a trip to Tampa, Florida, early this year, he came away calling the dire assessments of Detroit “overblown.”

“You go over to St. Petersburg and certain parts of Tampa and there’s three, four, five casual-dining restaurants closed,” Ansley says. “I don’t see that in Detroit.”

What Ansley does see is other chains taking advantage of the city’s cost-cutting opportunities.

“Five Guys is building stores in Detroit like it’s going out of style,” he says. “The Panera Breads, the Chipotles—those places seem to be doing well.”