Growth | July 2011 | By Sam Oches

Succeeding in a Vanishing Market

On paper, the state of West Virginia does not look like a must-have quick-serve market. But a distinct personality gives operators there reason to be optimistic.

West Virginia offers restaurant owners a unique market to operate in.
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Route 2 in West Virginia rolls south along the slow-moving Ohio River, bobbing up and down above the river’s bank and along the slopes of the foothills of the Appalachian Mountains. Houses are few and far between, dotting the long stretches between quiet industrial river towns, and each of the few roadside businesses looks like it might have closed decades ago.

The hotdog stand sneaks up on you, and you’ll likely miss it if you aren’t looking for it. Tucked against a ridge and partially hidden by a row of trees, the small operation stares out over the mighty Ohio, which on this day is filled to the brim with April rain showers. A U-shaped gravel parking lot offers two entrances but no discernible parking spots, and junk crowds every corner of the quick serve’s outer vicinity.

The scene might seem grim, and while it really isn’t (more on that later), this rural setting stands as a snapshot of much of America’s vast territory. Census data shows that suburban and urban regions of the U.S. continue to grow faster than the rest of the country and earn a larger share of the U.S. population, leaving much of the rural countryside desolate and abandoned.

According to the 2010 U.S. Census, metropolitan statistical areas, defined as geographic entities with core urban-area populations of at least 50,000, grew 10.8 percent between 2000 and 2010. And micropolitan statistical areas, with between 10,000 and 50,000 people, grew 5.9 percent. Together, metropolitan and micropolitan statistical areas contain 83.7 percent of the total U.S. population.

Meanwhile, geographic entities outside the “Core Based Statistical Areas”—or with fewer than 10,000 residents—grew only 1.8 percent, significantly less than the national growth rate of 9.7 percent.

While the quiet riverside scene could provide a stark look into dozens of towns across the Midwest and Northeast—the South and West continue to grow fastest among U.S. regions as manufacturing towns slowly fade—it seems particularly appropriate in the state of West Virginia.

The Mountain State is something of a statistical anomaly on the East Coast. Bordered by economic giants like Ohio (population 11.5 million), Pennsylvania (12.7 million), Virginia (8 million), Kentucky (4.3 million), and Maryland (5.8 million), West Virginia has a modest population of 1.8 million people and grew a mere 2.5 percent between 2000 and 2010, worse than all but five states. The largely rural and mountainous state—the only one entirely within the Appalachian region—has only five cities with more than 20,000 residents; for comparison’s sake, there are seven cities in California starting with the letter V that have 20,000 or more residents.

For the quick-serve industry, one that uses complex algorithms and careful trend mapping to plot new-unit expansion, West Virginia doesn’t come across as a must-have market.

Dewey Guida, owner/operator of two casual-dining chains in Weirton, West Virginia, and a board member with the West Virginia Hospitality and Travel Association, says West Virginia has been hit especially hard by the declining manufacturing and natural-energy industries.

West Virginia has been hit especially hard by the declining manufacturing and natural-energy industries.

“When you have basically lost much of your main core industries, such as your steel mills, some of your chemical plants—and coal is always under fire, very hard to get permits and all of that kind of stuff—people are moving from West Virginia across into the border states,” Guida says. “One of the problems I think we’re confronted with is many of our cities are older, so the infrastructures are old and with the general economy as it is, we don’t see any retailers coming in like they did in the bigger boxes to generate more chain activity.”

In fact, all of the restaurant activity in West Virginia seems to be quiet. According to the National Restaurant Association’s (NRA) 2011 Forecast, restaurant sales in the state are projected to grow just 1.9 percent in 2011—dead last among all 50 states, and a half percentage point behind three states tied for second-to-last.

Further, no West Virginia market made it onto QSR’s 2011 Growth 40 list of hot restaurant markets. The state, it seems, is struggling to drum up any kind of restaurant excitement.

Hudson Riehle, senior vice president of the Research and Knowledge Group for the NRA, says a number of factors go into future restaurant sales projections, including “demand for convenience, growth in real disposable and personal income, growth in employment, growth in population, and the proportion of the food dollar that’s spent away from home.”

All of these factors, Riehle says, are important to gauge when determining where to grow a restaurant company.

“From an operator’s perspective, there’s really no substitute for doing due diligence about what the demographics are of a potential site area, as well as understanding what the local employment forces are,” Riehle says.

The unemployment rate in West Virginia, at time of press, stood at 9.1 percent, slightly worse than the national rate of 8.8 percent. According to the NRA, the state’s total employment is projected to grow 1.5 percent in 2011, while total population is expected to grow 0.2 percent.

Real disposable income, meanwhile, is projected to grow 2.7 percent in 2011, worse than all but nine states, according to the NRA.

Dennis Denman, a Domino’s franchisee who owns 15 stores in West Virginia, says the income levels in West Virginia present the biggest challenge to his stores.

“West Virginia has one of the lowest average household incomes in the United States, and the discretionary income that used to be there for eating out, whether you go to a restaurant or you order in, is now being used for things such as gas and groceries and the day-to-day living expenses,” Denman says.

Indeed, West Virginia’s median household income level, $40,627, is third worst in the nation, ahead of only Mississippi and Arkansas, according to the U.S. Census Bureau.

But things aren’t all doom-and-gloom for West Virginia, despite what the numbers might suggest. Much like the city of Detroit, a market written off by many, the Mountain State has much to invest hope in and offers reasons for quick serves to be optimistic.

For starters, it’s a beautiful state, one that’s popular for outdoor activities, with ample skiing, hiking, and white-water rafting opportunities. These kinds of activities helped the state to $4.38 billion in travel spending by overnight and day visitors in 2008, the last year with available data, according to the West Virginia Department of Commerce.

“It’s a gorgeous state, and the kind of state where I think that tourism has yet still to hit its growth potentials,” Guida says. “We then also have to rely on the fact that we can get people here easy. We’re looking at that one-tank tourism—if you can get here with one tank of gas, then we’re going to draw you.”

If Guida’s theory holds—which could prove difficult this year as a tank of gas has climbed to about $50—West Virginia is in luck; the state is roughly a tank of gas away from major metropolitans, including Philadelphia, Washington, D.C., and even New York City.

And as the economy improves, albeit slowly, the restaurant industry stands to benefit from consumers’ increased interest in traveling.

“Roughly one out of every three [restaurant sales] dollars is travel and tourism related,” Riehle says. “Tourism is an important driver of restaurant industry sales growth. The tourism trends and the ability to attract and have a very solid marketing plan to attract and retain tourism is an important component of driving economic growth. It’s become much more widely recognized.”

Lisa Strader, communications director with the Southern West Virginia Convention & Visitor’s Bureau, says the tourism industry in the state “definitely keeps the doors open on a lot of our restaurants, especially the entrepreneurs.”

Still, Strader says there is a lot of work to be done to raise awareness about the state and to shed its “hillbilly” image. She recalls seeing a study a few years ago pointing to the hurdles the state faced in regards to its reputation.

“It was really funny because it came back saying that there were a lot of people where there wasn’t necessarily a bad perception, there just wasn’t any perception,” Strader says. “A lot of people [thought] we’re just western Virginia. We’ve worked really hard to change that … that we’re a different state, we have a lot of different things to offer. We don’t have the beach, but we do have our rivers, that type of thing.”

Sharie McGarry, left, and Sonny Knight own Hillbilly Hot Dogs, which has become a West Virginia destination.

There are other reasons for optimism, too. Strader says a new Boy Scout camp and golf resort in Southern West Virginia should draw hundreds of thousands of visitors annually, boosting the area economy and lending a hand to local retail operators.

Riehle says that, in a restaurant industry that includes about 70 segments, a depressed economy should not necessarily hold an operator back from entering a particular market.

“Because the industry is so large and has the hallmarks of being extremely flexible and quick to respond to rapidly evolving changes in consumers’ incomes and tastes and preferences, certain operators can end up quite successful even in an environment whereby the overall economic infrastructure may not be that vibrant,” Riehle says.

In West Virginia, that may be no more evident than in that little hotdog stand perched beside the Ohio River. Despite the rural setting and seemingly dormant business environment, Hillbilly Hot Dogs is in fact a bona fide, world-renowned quick-serve sensation.

The economy hurts, gas hurts, but it’s the quality of the service and the food that will keep people still going out.”

Owned by husband-and-wife duo Sonny Knight and Sharie McGarry, Hillbilly Hot Dogs confronts West Virginia’s poor, rural stereotypes head-on, playing on its namesake image in a very tongue-in-cheek manner. The two school buses parked beside the kitchen? Those are dining rooms. The speedboat sitting on top of the buses? A good excuse for marketing, with the operation’s name spray-painted across it.

And all of that junk crowded around the hotdog stand? Well, that’s just for effect.

Hillbilly Hot Dogs was founded 12 years ago when McGarry, who is originally from Los Angeles, and Knight moved from California back to Knight’s hometown of Lesage, West Virginia, outside of Huntington. McGarry says the business succeeded mostly by word of mouth for several years, selling its premium hot dogs mostly to locals and curious passers-by. Customers helped the couple collect hundreds of useless artifacts that make up the restaurant’s décor, which McGarry describes as “a grandmother’s basement.”

And then, in 2008, things took off. Hillbilly Hot Dogs was featured on the Food Network’s Diners, Drive-Ins and Dives show hosted by celebrity chef Guy Fieri. It’s since been featured multiple times on both the Food Network and the Travel Channel, and was even spotlighted on Jamie Oliver’s Food Revolution show on ABC last year.

“[Now], unquestionably, it’s nothing but tourists,” McGarry says. “We have now made national recognition thanks to the Food Network, and because of that—that show is seen all over the world—we’ve had people come from China that actually don’t even speak English.”

On a rainy day in April, McGarry’s statement proves true. A lunch rush crowd—at 11 a.m. on a Friday—gushes over McGarry and Knight and brags about how far they’ve come to visit the hotdog stand, prompting Knight to ask: “Is anyone here actually from West Virginia?”

Nobody raises a hand.

With the kind of fun McGarry and Knight put on at Hillbilly Hot Dogs, it’s not surprising to learn of the distance people travel to eat at their establishment. They sing a “Weenie Song” dozens of times every day as loud as they can, they interact with each customer who walks in the door, and they carefully—and tastefully—maintain a humorous location that forces everybody to leave their prejudices at the door.

All of it proves that success in the quick-service business isn’t necessarily dependent on the market you’re in; sometimes, it’s all about the experience you create.

“I’ve talked to several other restaurant owners in the area, and everyone, including ourselves, have dropped … down,” McGarry says. “The economy hurts, gas hurts; but it’s the quality of the service and the food that will keep people still going out. Families today still want that one night, whether it’s once a month or once a week, they still want that ‘Let’s go out and do something’ [night].”