Growth | February 2015 | By Sam Oches

Diamonds in the Rough

If the Growth 40 is any indication, operators might want to include some smaller, less-known U.S. markets in their expansion plans.
Quick service restaurant companies grow in small American cities with hungry population.
A boom in the area’s energy industry is driving remarkable growth in Bismarck, North Dakota. flicker / Andrew Filer

The fast-casual renaissance that has taken over the restaurant industry in the last decade has lately infused excitement and momentum into the broader limited-service sector. Market research firm Mintel found that sales at fast-casual restaurants grew 10.5 percent last year, compared with 6.1 percent growth from quick-service restaurants.

But that renaissance has so far been mostly confined to major U.S. markets. Cities like Washington, D.C., Chicago, San Francisco, and Denver have proved to be hotbeds for fast-casual development, while other mid-sized and large cities have become the default destination for brands’ expansion plans, both corporate and franchise. The reason for that, of course, is plain: the bigger the city, the more potential customers, especially customers with more dollars to spend.

This year’s Growth 40, however, suggests smaller markets deserve to be just as much a part of any growing brand’s strategy, despite having much smaller consumer bases and sometimes being in locations previously considered off the beaten path. Several of the top small markets on this year’s list are in parts of the country generally considered flyover territory; some are even in areas that aren’t economically strong.

Take Mississippi as an example. The state is consistently at or near the bottom of many economic metrics; this year, the Magnolia State had the worst unemployment at 8 percent and lowest annual wages at $36,451, according to the Bureau of Labor Statistics, while it also had the lowest gross domestic product per capita at $32,421, according to the Bureau of Economic Analysis. But those barriers didn’t prevent the state from being home to the top two small markets on the Growth 40: Meridian and Greenwood-Greenville. Each designated market area (DMA) is only expected to grow in population by 1 percent between 2014 and 2019, but each has favorable quick-service traffic growth and unit density that make them attractive potential for any company hoping to corner a market.

What Small-Market Franchisees Have to Say:

“Things are starting to come around. Mississippi is doing fine. Mississippi was just a good area, and I knew the market here. We always look for middle-class people in bedroom communities where they’re working-class people. In my areas, there’s a lot of growth.”

– Bill Pitts, Marco’s Pizza, MS

“More and more, there aren’t major markets; everything is small market with social media. Word of mouth makes such a big difference. We still move the needle when we have television ads, we still move the needle with traditional advertising, but word of mouth is just so impactful in small markets.”

– Dale Mulvey, McAlister’s Deli & Dunkin’ Donuts, GA, SC, & TX

“I’ve seen so many people come into our area and open up businesses in the last 15 years, and they make it a year, sometimes two, then they shut down. Those people are never out there doing stuff with the community, or involved with any of our events.”

– Pam Leseman, Pita Pit, WA

“You still get customers who come in and care about locally owned and like to see the owners involved. They hear the family story … and they get excited about that. Even though the Toppers brand is polished and corporate looking, they still feel it’s a small-town thing, a smaller business, a David-vs.-Goliath type thing. They root for you.”

– Keith Allen, Toppers Pizza, MN

“In a smaller market, you don’t tend to get lost. In a bigger market like Boston, you’re just another one in the crowd. I think being in a smaller market … you can put a name out there, put your brand out there, promote it, and get the name out to everybody.”

– Mike Turpin, Tropical Smoothie Café, NH & ME

And right now, with much of the country a blank canvas for upstart brands, that potential could be too good to pass up.

“Large markets are largely developed. Available real estate is a challenge and is highly competitive; everybody’s looking for the same corners or similar locations within a market,” says Mike Gallagher, vice president of development and franchising for Sonic Drive-In. “It’s one of the advantages that smaller markets give, is

that there may be more available real estate. Also, the real estate tends to be less costly in these smaller markets, which really helps the unit-level economics.”

Oklahoma City–based Sonic is a national brand, but considers the middle part of the country—particularly Texas, Oklahoma, Arkansas, and New Mexico—its prime territory. Gallagher says Sonic, which aims to add 1,000 new stores in the next 10 years, is pursuing markets large and small, but adds that the small towns in these states offer both more affordable real estate and more of an opportunity to stand out as a de facto community center for the area.

“When you look at small towns or small markets, the way people use fast food or restaurants in general may be a little bit different than the way they do it in a big market,” Gallagher says. “For example, in a smaller town, we become more of a town center, a gathering place for community events, for football games, for after-church social activities. We want to give the customers in the area a place to stay and talk, so we’ll see people linger longer than maybe you’ll see in a more urban market.”

There are several other advantages to growing into smaller markets, whether the city has 20,000 or 200,000 people. Franchisees and franchise experts interviewed for this story all say costs are generally lower, whether it’s real estate, employee wages, or marketing dollars. Visibility is generally better, too; finding a location that is easily accessible to most of the market is not as difficult as in urban centers. And for franchisees in particular, smaller markets allow them the opportunity to be the only operator in the area, eliminating the need for a franchise co-op, thereby easing the decision-making process.

One of the biggest strengths to a small market, however, is competitive advantage.

“I’ve heard a lot of stories over the years of franchisees in very small markets that have high-volume units because of the supply and demand,” says Dan Rowe, founder and CEO of Fransmart, which helped develop Five Guys and Qdoba into major national brands. “Even though there are less customers in a market, there’s relatively fewer [brands] going after those customers. You’re going to end up having higher-than-usual sales, because you have fewer people competing for the dollar.”

Lynette McKee, managing partner of the consultancy Mc-KeeCo Services and a former franchise executive with concepts such as Dunkin’ Donuts and Checkers/Rally’s, says brands moving into smaller markets can be the “big fish in a little sea,” often with an easier path to securing real estate, gaining media exposure, and building a customer base.

“A lot of times, depending on what your industry category is, you might be the only one in that category that’s coming in, so you really look at those markets as not having to have a share of the consumer base,” she says. “Then you can control the market through a lot of different areas, from the messaging to the marketing.”


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