Fast-casual and QSR chains are looking to smaller markets as part of their growth strategy.

Recent movements in the Quick-Service Restaurant (QSR) industry highlight an interesting shift in strategy. More businesses are eyeing smaller towns and markets for their expansion plans. As Nation’s Restaurant News and the Wall Street Journey recently reported, the growth strategy of Chipotle is a powerful example of this emerging trend and its potential implications for the industry.

For decades, the growth trajectory of QSRs has followed the mantra, “bigger is better,” with metro areas being the primary targets for expansion. Chipotle, however, is writing a different story. The company strategically focuses on smaller markets, towns with populations from 7,600 to 35,000, and college towns, where the competition is less saturated and the consumer base is stable.

Analyzing Chipotle’s Expansion Plan Gives Valuable Insights

Their plan to open 700 to 800 new locations in these smaller markets is not a blind gamble but a strategic move based on careful evaluation of previous ventures in similar markets. By opening stores in towns like Camden, Del., Staunton, Va., and Battle Ground, Wash., Chipotle has validated this approach.

The chain has adjusted its traditional city-based model to fit these smaller markets, demonstrating the importance of flexible business models when tapping into new territories. It’s not merely about replicating an established model in a new location; it’s about tailoring the approach to fit the market dynamics.

However, moving into smaller markets is challenging. QSRs like Chipotle face the task of drawing customers away from well-established brands. Nevertheless, the performance of Chipotle’s outlets in these smaller markets demonstrates the potential for success. It suggests that customers in these areas may be ready for fresh offerings, thus opening up opportunities for other QSRs.

As the WSJ reported: “When Madison, Miss., surveyed residents several years ago about the businesses they would most like to see in town, Chipotle came in first. “I think the kids got together and voted, they wanted that Chipotle so bad,” said Mary Hawkins Butler, mayor of the city of around 28,000.”

This shift paints a broader picture for the QSR industry. It suggests an evolving industry landscape where growth is no longer based on targeting large metro areas. It underscores the potential for tapping into smaller markets that offer steady customer bases and lower competition.

Pros and Cons of QSR’s Expansion into Smaller Markets

• Pros:
  • Untapped Market Potential: Smaller markets often represent unexplored opportunities with limited competition. This lack of market saturation can benefit businesses seeking to establish a strong presence.
  • Stable Customer Base: Smaller towns often have stable, loyal customer bases. These customers can provide a steady stream of income and can be easier to target due to a more homogeneous demographic.
  • Lower Operating Costs: Rent, wages, and other operating costs can be significantly lower in smaller markets compared to large markets, leading to potential cost savings.
  • Community Impact: Establishing businesses in smaller markets can significantly impact local economies, potentially earning goodwill and fostering customer loyalty.
  • Flexibility: Smaller markets can allow for greater experimentation and adjustment of business models based on unique local factors.

• Cons:
  • Lower Foot Traffic: Smaller markets may not bring in the same level of foot traffic as urban areas. This can result in lower sales volumes compared to locations in larger cities.
  • Brand Recognition: Brand recognition may be less in smaller markets, especially if the business is relatively new or less established.
  • Logistical Challenges: Building out a cost-efficient supply chain and logistics can be challenging in less-populated areas, potentially increasing costs and affecting service quality.
  • Customer Expectations: Customers in smaller markets may have different expectations for products, services, and prices, requiring alterations to the standard business model.
  • Competition from Local Businesses: While competition from other QSRs may be less intense, competition from long-established local businesses could present a significant challenge.
  • Economic Stability: Smaller markets can have greater exposure to economic downturns, as they often lack a diversified economic base. This can lead to more volatile sales patterns.

QSRs can Capitalize on New Opportunities

The performance of Chipotle’s outlets in these smaller markets demonstrates the potential for success. It suggests that customers in these areas may be ready for fresh offerings, thus opening up opportunities for other QSRs.

But of course, this trend is not confined to Chipotle. Other US-based fast-casual chains like Sweetgreen, Cava, and Portillo’s are pushing into new, less densely populated communities. It indicates that smaller markets’ untapped potential is attracting attention from industry giants.

This shift paints a broader picture for the QSR industry. It suggests an evolving market where growth doesn’t solely equate to targeting large metropolitan areas. It underscores the potential for tapping into smaller markets that offer steady customer bases and lower competition.

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