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.”
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.
- Attractiveness of the brand to the consumer
- Demographics that match the core brand consumer
- Population shifts within the market
- New growth within market, like sports teams, college expansions, or housing developments
- Media friendliness and opportunities within the market
- Availability and cost of real estate
- Development restrictions, costs, and timeliness
- Brand absorption and opportunity to grow
- Employment availability
- Competition and historical performance
- Distribution costs
- Franchising laws and local government regulations
- Cost of travel to and from market for training and support
- Local-store marketing opportunities
- 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.”