Continue to Site

    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.

    flicker / Andrew Filer
    A boom in the area’s energy industry is driving remarkable growth in Bismarck, North Dakota.

    Finding strong franchisees or operating partners in these smaller markets is key, McKee says, adding that even the best market in the world won’t live up to its potential if the franchisee isn’t prepared to operate the business. That franchisee could be a large multiunit operator with the resources and know-how to run small-market locations within its portfolio, or a local resident with the right experience and connections to the community.

    Fred Stauber, president of Carisch Inc., an Arby’s franchisee with locations across the Midwest and in Florida, is an example of the former. Minnesota-based Carisch opened its first Arby’s location in the 1980s in a mall food court in Minot, North Dakota, and now has 70 locations, both in smaller locations like Minot and nearby Bismarck and Dickinson—the three cities’ collective DMA ranks No. 6 on the Growth 40’s small-market chart—as well as in large cities like Milwaukee.

    Stauber has expanding into smaller markets down to something of a science. He says Carisch makes growth decisions based on traffic counts, visibility, household income, proximity to the nearest Arby’s, and other factors. There can be a standalone Arby’s for roughly every 33,000 people, he says, and site selection generally depends on where most of the traffic in town flows.

    15 Things to Look for in a Market

    Any operator hoping to grow into a small market should do their due diligence by looking for these 15 things, says Lynette McKee.

    1. Attractiveness of the brand to the consumer
    2. Demographics that match the core brand consumer
    3. Population shifts within the market
    4. New growth within market, like sports teams, college expansions, or housing developments
    5. Media friendliness and opportunities within the market
    6. Availability and cost of real estate
    7. Development restrictions, costs, and timeliness
    8. Brand absorption and opportunity to grow
    9. Employment availability
    10. Competition and historical performance
    11. Distribution costs
    12. Franchising laws and local government regulations
    13. Cost of travel to and from market for training and support
    14. Local-store marketing opportunities
    15. Profitability projections based on competition

    “Where’s the Super Walmart? Where are the big boxes?” he says. “The reason you do that is there’s a lot of people on the outskirts of that small market that are drawn to those big boxes and shopping, and you would like that visibility for your brand so they pass by you when they go into these go-to areas.”

    He adds that the best part of operating in small markets like these is maintaining a personal relationship with the customer base. “The conversation at the counter is more about local events, what’s happening in town, and each other’s kids than it is about what’s new on the menu,” he says.

    Bill Richmond, a Wienerschnitzel franchisee with five units in the Corpus Christi, Texas, DMA, is an example of a franchisee who lives in the same community as his restaurants. He finds that his stance as a member of the local community helps his operation, as it helps him hire stronger employees—he has some hourly employees who have worked for him for 20 years—create word-of-mouth marketing, and be a devoted member of customers’ everyday lives.

    “Smaller communities, you have more of a personal relationship with your banker, the guy selling you your produce, your neighbor next door who comes over to you and says, ‘Hey, can you sponsor my son’s baseball team?’” Richmond says. He estimates that his Wienerschnitzel units have given away 150,000 hot dogs in the last two years to charitable events.

    Smaller markets aren’t, however, for everyone. Rowe says concepts that elevate standard American items—concepts like those in the better-burger, better-pizza, or better-sandwich categories, for example—stand a better shot at thriving in a smaller market than niche brands.

    “If you’re talking about new food, like a hummus bar from New York City … I don’t know that you could blow that out in every city, small markets around the country. Or Indian; I think there’s a lot more people willing to try Indian in the bigger markets. I’m not confident that you could scale an Indian concept in markets with 50,000 or 80,000 people.”

    There are also several operating challenges associated with smaller markets that might prevent expansion or require adjustments for brands more accustomed to doing business in a large city. Stauber says staffing can be particularly difficult because the workforce pool is smaller than in a larger market and talented management potential often goes to larger cities for work. Other challenges include bringing in training and support services—those people are sometimes several hours away—and purchasing TV advertising, due to the fact that some markets’ TV affiliates are either far away or divided between two nearby cities.

    Paul Segreto, CEO of franchise consultant Franchise Foundry, says geographic location plays a big role in whether or not a smaller market can thrive. The town shouldn’t be too far away from the corporate office, he says, because there’s a higher probability of it failing, which looks bad for a young brand’s Franchise Disclosure Documents. He suggests brands follow a hub-and-spoke expansion strategy, in which they establish a hub in a major market and then grow outward like spokes into smaller and mid-sized cities.

    The right smaller markets to move into might be college towns, cities at the convergence of major interstates, tourist destinations, or markets that are geographically near a larger population base, Segreto says.

    “If you really look at the small markets, I think the key here is there are some smaller markets that are just out there by themselves and there are some small markets that are almost destination markets,” he says. “Maybe it’s the county seat, and there’s not a big population at the county seat but when you look at the tiny area towns all around it, you might have 16 or 20 towns fading into this one place that they do a lot of their business [there].”

    McKee says operators must do their due diligence for every market before signing on the dotted line, no matter how much potential the area might have. There are several things the operator should look into, she says, including demographics that line up to the brand core, population shifts within the market, an available workforce pool, and any regulations that might exist in the area.

    “Just because it has potential doesn’t mean you shouldn’t research it and really develop an action plan of how you’re going to make that happen,” she says. “That due diligence is so important, going back to doing a pro and con list, making sure the pros outweigh the cons.”

    Operators interested in moving into certain cities should obtain sales information for brands already in the market to get a sense of how successful they’ve been, Rowe says. He adds that it’s even worth calling those operators to discuss the market and what kinds of challenges the operator faces.

    “You’re talking about a business that’s going to cost a quarter of a million or a half million or a million dollars; it’s worth a few phone calls and a few meetings,” he says. “Once you pick a bad location, if you sign a lease, you can’t move it. You’re stuck.”