A Portillo's Beef bus in Kissimmee, Florida.
Source: Portillos
When based in Chicago Portillos enters a new market, it sends out its “Beef Bus” in advance, slinging its hot dogs and Italian beef sandwiches to new customers for weeks, introducing them to the brand and whetting their appetites before finally opening a new restaurant.
The Beef Bus has been making a lot of trips to the Sun Belt lately.
“Texas on its own has grown more people in the last decade than eight Midwestern states we have a presence in combined,” Portillo CEO Michael Osanloo told CNBC. “So it's a no-brainer to go where the growth is.”
The chain's sales are “much stronger” in Texas, Arizona and Florida than in Texas, Arizona and Florida Midwestern states such as Indiana and Wisconsin, according to Osanloo. Portillo's opened its first location in Texas just over a year ago. In its first twelve months, the venue generated $13 million in revenue, making it a $1 billion box office hit.
Although the exact states in the Sun Belt may vary, the name refers to the southern third of the US known for its sunny weather. In recent years, the region has experienced tremendous population growth, setting it apart from the Northeast and Midwest. The trend accelerated during the Covid-19 pandemic as consumers sought more space, warmer weather, fewer government restrictions and cheaper housing in cities like Charlotte and Phoenix, which along with Texas cities like Houston and Dallas are among the most populous of the USA belong. .
Because of that population shift, restaurants are now looking to the region to boost sales. Smaller chains are more likely to expand into the Sun Belt, rather than the Midwest or Northeast. For more mature companies such as McDonald'sthis means accelerating the growth of new restaurants in areas where it is currently underrepresented.
“We always say that retail follows the rooftops, so when you have a lot of people moving into an area, there's a lot of demand,” said Justin Greider, senior vice president of Florida Retail for real estate firm JLL. “Combined with the overall increase in consumer spending on restaurants that we've seen, this is kind of a perfect storm to create a really ripe environment for a lot of restaurant groups that want to be here.”
It's not just restaurants looking to the Sun Belt for revenue growth. Based in Fort Worth US airlines is updating its routes to reflect the population shift, executives said Monday at an investor event. Macy's has opened smaller stores in suburban malls, starting in the Dallas and Atlanta areas. Real estate investment trusts such as Phillips Edison & Company, which previously invested in the region, have seen southern migration boost their shopping centers.
Golden arches meet golden rays
As the third-largest restaurant chain in the U.S. by number of stores, McDonald's can't be accused of ignoring the Sun Belt, but it has been slower to pick up the trend and saturate those growing markets.
“In our U.S. markets, the number of stores has grown much slower than the population in the fastest-growing areas,” McDonald's Global Chief Customer Officer Manu Steijaert said at the company's investor day in December. “We have a significant opportunity to right-size that ratio.”
McDonald's aims to open 900 new restaurants in the US by 2027. Most of these locations will be concentrated in Florida, Texas, Arizona, Georgia and North Carolina, according to JPMorgan.
“What we've seen is because of the size they already have. That adjustment to growth in the Southeast hasn't been as proactive,” Greider said, speaking of McDonald's.
But other chains were quicker to see the opportunity in the Sun Belt. Greider mentioned chicken chain Raising Cane's, Chipotle Mexican Grill And Starbucks as three companies that have been focused on growing their footprint in the Sun Belt even before the pandemic.
In addition to well-known chains, Greider also has that also saw restaurants with chef-driven brand awareness traveling south from New York and Chicago.
“In the back half of [the pandemic] and post-Covid we saw a number of full-service and chef-driven restaurant groups that have really made an effort to penetrate the Sun Belt because they've seen that not only is there great growth opportunity, but also where their existing customers are been. moved,” said Greider.
For example, New York City celebrity hotspot Carbone, owned by Major Food Group, opened a location in Miami in 2021 and another in Dallas in 2022.
Chains see opportunities in warm weather
For regional chains looking to expand nationally, the Sun Belt also offers an opportunity to grow their footprint with customers who already know the brand.
For example, the 89-year-old Friendly's chain has largely remained in the Northeast since its founding in Massachusetts in 1935. Under new ownership, the chain is finally looking to expand beyond the Mississippi River.
Brix Holdings acquired Friendly's in 2021, just months after the company filed for Chapter 11 bankruptcy protection. At the time, Friendly's had more than 100 locations, down significantly from the 850 restaurants in its heyday.
According to Sherif Mityas, CEO of Brix Holdings, the chain's sales are growing again, making this a good time to expand Friendly's footprint.
“More strategically, we want to move west from a growth perspective,” Mityas said.
Many Friendly customers grew up with the brand in the Northeast before moving to the Sun Belt. Additionally, the chain is best known for its ice cream, making warmer climates a better business climate than the Midwest.
So is warmer weather one reason why coffee chain Dutch Brothers. bet on the Sun Belt.
“More than 80% of our turnover is cold [drinks]so we're seeing warmer markets do better – but that doesn't mean we wouldn't do well in Minneapolis, the Great Lakes region or the Northeast, but we're staying out of that for now,” said Dutch Bros. CEO. Christine Barone told CNBC in an interview in January.
The chain plans to open 150 locations this year, most of them in Texas and Southern California. Over the next 10 to 15 years, the company plans to operate at least 4,000 locations, with a footprint that resembles a smiley face across the U.S., starting in California, moving down to Texas and back to Virginia.
Better for business?
The region's reputation as business-friendly has also played a role in its rise. Seven of the top 10 states in CNBC's America's Top States for Business in 2023 were in the Sun Belt.
While there are some notable exceptions, such as California with its upcoming fast-food wage hike, states like Texas and Florida have touted their lower taxes and lax regulations to lure businesses. For two consecutive years, Texas has been home to the most Fortune 500 companies, displacing California and New York.
“In addition to population growth dynamics, many states in the Sun Belt region have a 'friendlier' business environment that is also attractive to restaurant operators,” said Kevin Schimpf, director of industry research at Technomic. “[That means] things like fewer restrictions on franchising, lower labor costs and less administrative burden on new commercial developments.”
That's part of the appeal of Friendly's, which wants franchisees to run the new locations.
“From an entrepreneurial perspective and a business perspective, the Sun Belt is really growing faster than the rest of the country,” Mityas said.