Heated Growth
The hottest markets for quick-serve restaurants in the Midwest might not be the big cities
we’re all familiar with—Chicago, Indianapolis, Minneapolis.
Instead, think South Bend, Indiana, or
Springfield, Missouri.
Come again?
In a part of the country that isn’t rapidly
growing, the cities can be tough to crack. But the small towns, whose
residents still remember the year they got their first McDonald’s,
are often low-hanging fruit for the right kind of quick-serve.
“We’ve found the highest level of success
is really in the outlier markets,’’ says Michael Sherpardson of
Trustreet Partners, a large franchise finance and leasing company in
Orlando.
If you don’t believe him, consider the headlines:
“Burger King franchisee in Chicago files for bankruptcy in
2002,” versus “Burger King franchisee in Mishawaka, Indiana, is
a Restaurant Finance Monitor Top 25 performer.” Get the picture now?
“These are five, 10, 15 thousand-person towns
that chains wouldn’t go into in the past. But Hardee’s started
the trend, and they’ve done well,’’ says Dennis Monroe, a
Minneapolis attorney who works with restaurant investors.
Because a restaurant site selector won’t be able
to use the typical demographic tools to locate these towns, as they
aren’t growing rapidly and aren’t overrun with tourists, Monroe
recommends looking for a spot on the main drag in a town that doesn’t
have much in the way of direct competition from other quick-serves in the
same niche. Just don’t get bamboozled by the town’s economic
development person’s talk about that revitalized historic downtown
district. Restaurants that have gotten drawn into such areas “have
had to relocate,’’ Monroe says.
Another way to find the right big town or small city:
Look for situations in which the established quick-serve in a similar niche
is struggling. If the concept is burgers, and the dominant burger
quick-serve has tired, rundown stores, “Put in a new box, a new
concept,’’ Shepardson suggests.
Labor is easier to locate in small towns, and the
local zoning officials aren’t likely to hassle a quick-serve about a
drive-thru. You might even get a story in the local newspaper. Try getting
that to happen in downtown Chicago.
And when it comes to food, small Midwestern towns are
open to more than burgers and fries. Quick-casual chains are
succeeding with a downsized restaurant plan for small towns, and the tastes
don’t need to be bland or beefy. Taco Bell has won over plenty of
customers in small-town Middle America.
There is, of course, a hitch. Trying to grow a chain
one small town at a time could stretch management, supply chain, and
franchisee resources thin. Penetrating a city with a dozen or more sites
builds on economies of scale and brand awareness.
When you are looking in a city with a more stable
population, you’ve got to be quick on your feet to get into that one
new development or a hot gentrification project. “[In] a place like
Columbus,you have to wait and get in the right project,’’ Buffalo Wild Wings Vice President Lee Sanders says.
In fact, consultants consider Columbus, Ohio a great
test market. “It’s a vibrant, strong market’’
Shepardson says. As home to the Wendy’s hamburger chain as well as
others, Columbus is a good place for other quick-serves as well. Typically,
a hometown chain’s restaurants are well run, which gives customers a
positive attitude toward eating at quick-serves, consultants say. It also
means there is also the possibility of managerial talent and investors with
restaurant expertise—and cash—to help start franchises.
“It’s a great fast-food town,’’ Monroe says.
But since most of these Midwestern cities aren’t
exploding with new growth, getting the right location in a particular city
is even more critical than it might be in a Phoenix or Vegas. One way is to
follow the trendsetters. For an upscale quick-serve, Michael Beyard, senior
retail fellow at the Urban Land Institute, says to watch where Whole Foods
builds new supermarkets. “Sometimes they choose neighborhoods that
look pretty ragged, but the store’s presence changes the nature of
the neighborhood,” he says. “They are a huge marker of future
growth.’’
Or look for hot quick-service concepts. Those taking
the Midwest and South Central by storm now are concepts like Potbelly
Sandwiches out of Chicago, Culver’s hamburgers and frozen custard
from Prairie du Sac, Wisconsin, and McAllister’s Gourmet Deli of
Ridgeland, Mississippi. “If you don’t have sophisticated site
modeling, look at where those restaurants are going,’’ Lombardi
says.
And listen to your developer. Strong developers are
often out doing legwork in cities you hadn’t thought to go into, and
they tend to have relationships with the hottest restaurant
concepts—both quick-serve and traditional. If a quick-serve
doesn’t have that relationship or isn’t considered upscale or
novel enough, its backers should look for adjacent real estate to take
advantage of the spillover, restaurant consultants say.
Rainforest Café’s Steve Schussler
initially dismissed RED Development’s suggestion that he look at
Kansas City. But after checking into it carefully, he’s decided to
put his first T-Rex “edutainment” restaurant at a RED
Development site near the Kansas Speedway in the Village West Tourism
District. If there is no room at the hottest development in town, find
something on the path to the development. “You can mooch off its
reputation,’’ Beyard says.
Wherever a quick-serve chooses to locate the decision
stretches beyond just population density, growth, or income. It can
literally come down to being on the right side of the intersection. — Catherine Traugot