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.
Bookmark/Share this post with:
Email this story Email this story
Printer-friendly versionPrinter-friendly version

Read More About

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.”

So, despite the naysayers, Ansley says he is planning “to pull the trigger on a couple of more” locations in the Detroit market.

“It’s kind of a contrarian view point,” he says, “but it’s like Warren Buffett says: Be greedy when everyone else is fearful and fearful when everybody else is greedy.”

Ansley isn’t the only one planning to bring the Sage of Omaha’s famous principle to bear in the market. Craig LeMieux, the Detroit-area developer for Tropical Smoothie Café, whose closest location to the city is 16 miles away in Livonia, Michigan, says he is “currently looking for prospective franchisees” and “absolutely” committed to moving into the Motor City.

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

“There’s one thing about a down economy, it creates opportunity,” LeMieux says. “We’ve never seen the opportunities that are available right now in real estate and the cost of lease space and the negotiations that landlords are doing right now to get tenants in there. So, it’s absolutely the right time now to be doing business.”

And then, like Ansley, he paraphrases Buffett: “I think the greatest success stories often come from times of bad economic conditions because people act at the right time. This is when opportunities are made.”

While Tropical Smoothie Café is hell-bent on opening in Detroit, it doesn’t even have one Detroit store opening in the works. And that’s the irony in the Buffett principle, particularly as it pertains to a franchise chain. A franchisor can embrace greed in scary times and not find any franchisees willing to join in throwing caution to the wind.

“The economy has scared a lot of people into holding their money, and I think they need to start seeing some changes in the economy for them to make that leap,” LeMieux says.

But after seeing his franchise leads triple year over year in January, LeMieux senses that, slowly but surely, more people are getting ready to jump.

“We’re on the crest of being able to pull out of the recession and grow quite a bit in the very near future,” he says.

And like many other players that have weathered the economic storm in Michigan—which most Detroiters will tell you first descended on the city about eight years ago—LeMieux puts much stock in a motto Buffett did not coin: Whatever doesn’t kill you makes you stronger.

“I’ve seen other concepts closing up during these times,” he says. “Concepts that were on the edge didn’t make it. It’s kind of a cleansing of the system. The strong concepts come out of this even stronger, and the weaker ones kind of fall away.”

Still, even for those who have survived the recession, the battle is only beginning. For one thing, there is still Detroit’s emigration problem, which John Brodersen, a Popeyes Louisiana Kitchen franchisee with 11 stores in the city, calls more “dramatic than in any city in the U.S.”

“The problem in Detroit is that even if you’re growing 2–3 percent per year, the population is losing 2–3 percent, and you’re not going to show sales growth,” he says. “In other words, you’re flat in sales even if you’re doing well.”

So even as the recession cleansed the market and ostensibly gave surviving restaurants more breathing room, emigration forces restaurant operators to do whatever it takes to attract a shrinking customer base.

“It’s kind of a scary thing for a lot of operators used to doing business in the suburbs where they don’t have to meet any growth demands—they just wait for the population to move into their towns,” Brodersen says. “They don’t have to steal customers from their competitors … to get growth.”

Despite all of the obstacles, Brodersen is also talking opportunity. He estimates that the costs of opening and operating a restaurant in Detroit are down 40 percent and is eager to take advantage of the cut rates.

“Three years from now you’ll look back and say ‘I’m glad I bought,’” he says. “In our lifetime this will be the cheapest asset.”

He, too, channels his inner Buffett: “It’s the guys with the guts and the gumption that do it now that will be making money later.”

Of course, not all of the guys with the guts and gumption to venture into the Detroit restaurant market are chain operators—or guys.

Torya Blanchard is the owner of Good Girls Go To Paris, a crêperie in Midtown that opened in July 2008. A Detroit native, she’s defensive when it comes to her hometown’s beleaguered reputation.

“When we read negative stories about Detroit we say, ‘OK, whatever,’ and we keep going on,” Blanchard says, speaking on behalf of her fellow residents. “Yes, there’s a lot of unemployment and, okay, we’ve been battered this year—but we’re not going to just give up and move out.”

Blanchard says business is good—she recently relocated to a bigger location—and that, while much of Detroit lies vacant and desolate, Midtown is thriving, helped by loyal customers and several large cultural institutions nearby.

A couple of miles away, in the Eastern Market, is Supino Pizzeria, which opened in June of 2008, just before the world economy lost the wind in its sails.

“It was unbelievable, like boom, things just started to go downhill on a daily basis,” says owner David Mancini, a self-described Detroit loyalist.

Nonetheless, Supino Pizzeria is also doing well as it benefits from customers trading down and a best-pizza nod from the Detroit Free Press last August, which Mancini says increased his business “exponentially.”

As young, homegrown entrepreneurs, Blanchard and Mancini represent yet another side of the Detroit story. They don’t just plan to stick it out in the Motor City—there’s nowhere else they’d rather be.

“The thing about Detroit is we don’t care what outsiders think,” Blanchard says. “We go on with our lives and we create. We’re resourceful and very resilient. In the end, we just keeping it moving.”

And Detroit is now moving, however slowly, in the right direction, Mancini says.

“As dire a situation as it was, I think it’s getting better,” he says. “Specifically in the city of Detroit itself, you see a lot of loyalty. It’s kind of a big city with a small-town mentality. That’s going to help.”

And with that, Mancini uses another O-word that many wouldn’t think to associate with Detroit.

“I’m optimistic,” he says.