The South has risen.
With 20 entries on QSR’s Growth 40 report, an annual listing of the 40 U.S. markets best positioned for quick-service restaurant expansion, the South’s dominance shines from Florida to Texas and up to the Mason-Dixon line in markets big and small.
“The South is really driven by population growth, and more population breeds more restaurant traffic,” says Michael Manning, research sciences manager with The NPD Group, QSR’s analytics partner for this year’s Growth 40.
In compiling the Growth 40, NPD analyzed a host of variables. This year, the Growth 40 is ranked according to a proprietary “Score” that takes into account the quick-service restaurant density in a market, as well as the difference between the traffic growth and population growth.
The results spotlight the South’s massive opportunities for quick-service brands, as well as scattered promise in the nation’s Central, West, and Northeast regions.
The South’s dominance extends across large, mid-sized, and small markets. Among the Growth 40’s 10 large markets, the South swept positions three through eight, led by three Florida markets—Tampa-St. Petersburg, Orlando, and Miami—and a pair of North Carolina metros: Raleigh-Durham and Charlotte. The South also grabbed eight of the 15 medium-market slots, including the first position, the energy industry–dominated Harlingen-Weslaco-Brownsville-McAllen, Texas, DMA, and six of the 15 small-market spots, led by the one-two punch of Mississippi markets Meridian and Greenwood-Greenville. Harlingen’s projected 14 percent gain in quick-service traffic led the entire Growth 40 list.
“A lot of Southern metros have had outsized population growth for many years, and that prompts growth of all types of businesses, including restaurants,” says Jim Greco, chief operating officer of Newk’s Eatery, a 72-unit chain headquartered in Jackson, Mississippi.
In Texas, Florida, and North Carolina, the South holds three of the states with the nation’s highest domestic migration gains, which delivers compelling development opportunities for established Northern players, in particular.
Take Carvel as an example. Already claiming a 40-year presence in Florida, the ice cream chain is doubling down on the Sunshine State. Carvel president Scott Colwell says the brand will open at least five Florida units in 2015 to join the 30 it already has in the state, including a new store prototype that debuted in Royal Palm Beach last February.
“There are a lot of growing markets in Florida and many areas with transplants from the Northeast who know our brand,” Colwell says, adding that Florida’s warm weather brings less seasonality and strong tourism traffic.
While the rising population tide captures the attention of many restaurant development folks, there’s more to the South’s story. Greco says Southern governments are generally more receptive to development and are less bureaucratic, making Southern markets easier places to build and grow a business. The South also benefits from more accessible land and lower labor costs. Save Florida, which saw its minimum wage jump to $8.05 per hour in January, none of the Southern states have a minimum wage higher than the federal government’s.
“You might start by following the people, but there are a number of attributes that make the South attractive, not the least of which is a more favorable business climate,” Greco says.
Salsarita’s Fresh Cantina CEO Phil Friedman, whose Charlotte-based fast casual includes 78 units, also touts the South’s advantageous political climate.
“The Southern environment is one in which the states want to make things happen,” Friedman says, adding that more business-friendly environments generally propel return on investment for restaurateurs.
And though the South has historically trailed other regions in economic stability, that narrative continues to evolve. Transportation networks have strengthened and manufacturing continues to migrate south, prompted in large part by those pro-business governments.
“As the economic underpinnings have improved, so, too, has spending and family income, which is a real positive for restaurants,” Friedman says.
Wienerschnitzel director of real estate and franchise development Geoff Ingles believes something else is at play as well, namely a consumer base more receptive to quick-service cuisine.
“Generally, I think fast food is more a way of life in the South,” says Ingles, adding that Wienerschnitzel’s 40 units in Texas report results that are 10–15 percent above averages elsewhere across the California-based chain’s 350-unit system.
As Southern markets have become more attractive, however, some benefits have weakened. Real estate costs, though still quite reasonable in many markets, are rising, as is competition for top-notch crewmembers and franchise partners.
“Progress always comes with a price, doesn’t it?” Greco says.
In the Western U.S., Salt Lake City is the clear shining star, with a projected quick-service traffic growth rate of 13 percent and population expected to increase 7 percent by 2019.
This year, Moe’s Southwest Grill will make its debut in the Salt Lake City DMA with the opening of a unit in nearby Layton. An additional five Salt Lake City units are in Moe’s development pipeline, vice president of franchise sales Steve Corp says.
Though Utah is a new state for Moe’s, which has more than 570 units spread across 35 states, Corp is convinced that the Beehive State’s active population and higher incomes, bolstered in large part by an unemployment rate under 4 percent, will spur results.
“It’s a longer learning curve and sales cycle for both operators and consumers [when you enter a new market], but we believe there’s interest in the concept and our food,” Corp says. He adds that Chipotle’s investment in Utah stores gives him confidence the Moe’s brand will succeed there.
Arizona is another top performer out West. Phoenix is the ninth-rated large market, while Tucson and Yuma claimed top-three spots among medium and small markets, respectively. Tucson is expected to see its population grow 6 percent by 2019, residential growth that is expected to push quick-service traffic up nearly 9 percent. Yuma, meanwhile, a 400,000-resident town on the Arizona-California border, also projects a 6 percent leap in population. The blue-collar Yuma market claims the lowest unit density figure among all Growth 40 markets, with about 78 units per 100,000 residents.
According to the Tax Foundation’s 2015 State Business Tax Climate report, the West contains five of the 10 most business-friendly states: Montana, Wyoming, Utah, Nevada, and Alaska. Unfortunately, those five states have vast land areas, meaning weaker population density. The West’s most populous states, in fact, have some stifling elements, such as minimum wages at or above $9 in California, Washington, and Oregon.
Still, little is stopping growing brands from following American writer Horace Greeley’s advice to “Go West, young man.” Bill Chemero, executive vice president for Connecticut-based Wayback Burgers, a chain pursuing expansion on the Pacific Coast, feels the West is more receptive to new concepts, thereby making it easier for an upstart brand to earn trial.
“By and large, the demographics out West are very pro-franchise,” Chemero says.
It’s a sentiment shared by Pieology founder and CEO Carl Chang, who notes that the West Coast tends to be ground zero for many trends.
“The West is filled with a demographic eager to experience new things,” says Chang, whose fast-casual pizza concept took root in California.
The challenge, of course, is the competitive environment those trailblazing concepts breed.
“It can be tough to break through to consumers when you’re around some established names and other hot, emerging concepts,” says Juice It Up! vice president of business development Laina Sullivan.
The Central region appears on the Growth 40 report 10 times, highlighted by Minneapolis-St. Paul’s position atop the large-market list.
Though the Twin Cities’ forecasted 3 percent jump in population is modest, its existing quick-service unit density of 90.78 is well below any other large market, a nod to the development opportunity in a metro area where NPD pegs quick-service traffic growth at nearly 6 percent.
“That lower density [of quick-service restaurants] drives opportunity for development in the Twin Cities,” NPD’s Manning says.
Pieology’s Chang, who spent many of his formative years in the Twin Cities, says the area features a growing and increasingly young population, as well as underlying economic metrics, including low unemployment and high incomes, that trump the area’s perceived negatives, namely harsh weather and Minnesota’s notoriously high taxes.
“The great thing about Minnesota is that it is filled with savvy people aware of quality and value and appreciative of that,” Chang says.
While the Twin Cities were the Central’s lone large-market presence, the region had a strong presence on the Growth 40’s small-market list, spotlighting plenty of compelling opportunities for brands willing to dip into the heartland’s secondary and tertiary markets.
Alpena, Michigan, secured the highest projected quick-service traffic growth among small markets at 12.4 percent, while Minot, North Dakota, settled just behind at 11.8 percent. Energy-rich Minot also claimed the highest projected population growth rate among all Growth 40 markets; at 15 percent, Minot’s tally was nearly double that of its closest rival, El Paso, Texas. Meanwhile, Des Moines, Iowa’s projected 8.9 percent growth in quick-service traffic trailed only Harlingen among the mid-sized markets.
Salsarita’s Friedman cautions against overlooking the promise of these smaller markets, particularly those with a big-box retail area, a regional hospital, or other traffic-driving presence.
“When you go to a smaller market, you generally find lower real estate costs and less competition,” Friedman says. (For more on growth in small markets, flip to Page 52.)
Though Minnesota, Wisconsin, Iowa, and Ohio all rate among the 10 worst states on the Tax Foundation’s Tax Climate report, the Midwest does have some of the nation’s lowest unemployment rates, according to October 2014 U.S. Bureau of Labor Statistics data. With North Dakota’s paltry 2.8 percent unemployment leading the charge, South Dakota, Nebraska, and Minnesota also sit in the top five.
And while some view the Central region’s winter weather as a negative, Maui Wowi Hawaiian CEO Mike Weinberger offers a contrarian view. In the Twin Cities, where Maui Wowi runs five brick-and-mortar shops alongside mobile units, January and February are two of the smoothie chain’s top-performing months.
“Customers appreciate that you can give them a taste of Hawaii during the coldest months,” he says. “You can’t overlook the opportunity to provide an escape.”
The Northeast found little love in 2015’s Growth 40 report, as Pittsburgh and Buffalo barely cracked the large- and medium-market lists, respectively, while only two Northeastern markets—Presque Isle, Maine, and Erie, Pennsylvania—found a place among the 15 small markets.
Though hosting some of the nation’s most densely populated DMAs, projected population growth in the Northeast remains slim and the competition heavy, as many markets in the Northeast hold quick-service unit densities well above the national average. Intense competition arrives from national chains, as well as established independent restaurants and regional chains.
“In the Northeast, there’s a lot of loyalty to restaurants because of generational issues, and that can produce some struggles for newer brands looking to make headway,” Wayback Burgers’ Chemero says.
For established Northeastern brands like Wayback Burgers and Dunkin’ Donuts, however, development in the region remains a priority. With a strong presence in the Northeast’s major metropolitan markets, Dunkin’ Brands senior director of franchising Steve Rafferty says, Dunkin’ Donuts is now extending its presence into secondary trade areas to raise its sales levels and capitalize on robust brand awareness. Likewise, Wayback Burgers continues to pursue growth in Northeastern markets, believing its existing brand awareness and the region’s population density are too good to ignore.
For quick serves, the Northeast’s most pressing challenges remain real estate—“All the best corners are taken,” Rafferty says—and burdensome tax systems. According to the Tax Foundation, New York, Rhode Island, Connecticut, and New Jersey are some of the nation’s most inhospitable states for business.
Many chains are choosing to counter those hefty real estate and operational costs with unique development strategies. For instance, Chemero sees cobranded units, particularly those that have synergy in menu and dayparts, as an effective play in many of the Northeast’s largest markets.
“Cobranding gives you economies of scale and more pull with guests,” he says, adding that having a presence in marquee markets like New York City and Boston is often more about marketing and brand awareness than profit.