Despite a down economy, now is the time for mature quick-service chains to expand in the Northeast, according to a recent study.
Historically, expansion in the region has been difficult because of high real estate prices and a dearth of prime locations, many of which were snagged long ago by mom-and-pop operations with deep local roots. But according to a study, conducted by Fort Worth, Texas-based customer analytics firm Buxton Co., fallen real estate prices and business closures have created an opportunity for lower-priced restaurants in several northeastern urban areas.
“The ones that are really starting to win in this market are the dollar-menu types,” says Charles Wetzel, Buxton’s president and chief operating officer. “If I was the head of McDonald’s or a Carl’s Jr., I would look at those markets as ones that I may have overlooked in the past.”
Home to some of the country’s oldest cities, the Northeast has little undeveloped land and incoming retailers often have to retrofit existing buildings—an inconvenience that keeps some away. But with commercial rents down as much as 20 percent from two years ago, it “makes sense” for restaurants to rethink their strategy in the region, says Adam Mancinone, a senior associate at New Haven, Connecticut–based Marcus & Millichap Real Estate Investment Services.
“Landlords are giving better deals because there are so few retail tenants looking to expand,” Mancinone says.
But the Northeast isn’t the only place to find cheap rents and prime locations.
“There’s no question that nationwide the cost of commercial sites … has dropped and the availability of sites has gone up,” says Dennis Lombardi, executive vice president of foodservice strategies for WD Partners. But he agrees there is a unique opportunity in the Northeast, where the unemployment rates are not as high as other regions.
“They certainly are not in the dire economic straits that high-stress markets” like Detroit and Southern California are in, he says.
To identify underserved markets, Buxton looked at various metrics—including households per restaurant, sales per restaurant, and percent of disposable income spent on restaurants per household—in urban centers across the country. Nine of the 10 most underserved markets are in the Northeast, the study found, and one is in California. Connecticut has four, the most of any state.
Of all restaurant categories, quick-service “was the only one in growth mode where the markets and a specific region jumped out at you,” Wetzel says.
One reason is that the economy is forcing consumers to tighten spending.
“We found that the average consumer traded down, meaning they went [less often] to high-end restaurants,” Wetzel says. “On the quick-serve side, they picked up a lot of the frugal consumers.”
Fluctuating gas prices are also a factor.
“People aren’t willing to drive as far anymore and they’re going to stay closer to home or closer to work—and what is around there are quick-serves,” Wetzel says.
One brand looking to increase its presence in the Northeast is Subway, a Buxton client which opened 125 locations in the region this year.
“We’re looking to expand everywhere, but the Northeast has always been a goal of ours to have more of a market share,” says Subway spokesman Les Winograd.
Winograd described how earlier this year a competitor in Norwalk, Connecticut—the sixth most underserved market—vacated a high-traffic location in a shopping center. Subway decided to move in from a poorly situated stand-alone building down the street.
The opportunity in the Northeast, according to Wetzel, should last 12 to 15 months.