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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