Restaurant Operators Find Opportunities

Growth opportunities for restaurant operators have faced unique challenges in recent years. After a rebound from COVID-19 in 2021, a record profitability year for many, the industry faced a parade of unprecedented challenges. Labor shortages and supply chain disruptions led to a surge in prime cost inflation that hampered profitability in 2022.

Restaurant operators raised menu prices to catch up with input cost inflation. For example, food away from home—a measure of inflation by the U.S. government—rose 6% in 2021, 8.3% in 2022, 5.2% in 2023, and 3.6% in 2024. For the most part, year-over-year profitability improved throughout 2023 and 2024. At the same time, however, inflationary pressures have weighed on the consumer, with annual same-store traffic in the restaurant industry declining 2.6% in 2022, 1.4% in 2023 and 2.8% in 2024, according to Black Box Intelligence. This has set the stage for a fiercely competitive market environment in 2025.

"The story of 2024 was an industry-wide fight for traffic by focusing on value—whether through discounting, delivering on crave ability through menu innovation, customer experience, or otherwise," says Jeff Poe, Managing Director, Head of Restaurant and Franchise at Fifth Third Bank. Poe notes these headwinds, along with higher interest rates, elevated development costs and economic uncertainty, slowed M&A activity, and challenged organic growth returns, making growth in any form more complicated. "From pro forma assumptions on opening a new restaurant, to the level of diligence around an acquisition, every investment has been scrutinized more closely."

A deeper dive into performance data suggests that in the quick serve restaurant (QSR) space, at least some of the decline in same-store traffic is being driven by growth in restaurant supply—more units competing for market share—rather than a dampening of consumer demand.

For example, the number of limited-service restaurant chain units has risen by around 12% since 2019, according to a recent State of the Restaurant Industry webinar by Black Box Intelligence . At the same time, the amount U.S. consumers are spending on food away from home has exceeded the money spent on food at home each year since 2014, with the exception of 2020, according to the U.S. Department of Agriculture Economic Research Services. That means that while restaurant demand in a given market may be healthy and growing, the number of locations vying for that traffic is likely growing as well, and at a faster pace.

The Benefits of Local Market Data

This confluence of factors suggests restaurant operators should be especially diligent in evaluating their growth strategies. "Operators need to dig deeper to ensure whatever expansion initiative they are underwriting, they have a high degree of certainty as the margin for error is narrower than in the past," says Poe. Analyzing local market data to understand customer demographics such as income levels, discretionary spending, workforce productivity, population growth, and GDP trends can help operators make informed decisions on expansion opportunities.

Insights from Fifth Third Bank and the University of North Carolina’s Kenan Institute of Private Enterprise’s Empowering American Cities initiative can serve as a useful complement to the tools restaurant and franchise operators already use to gauge growth potential in specific U.S. markets. The Kenan Institute created Extended Metropolitan Areas (EMAs) as a designation for U.S. urban areas connected in economically meaningful ways and chose to study the 150 most populous EMAs, which account for nearly 90% of the U.S. economy.

The Key Statistics for Growth

The Empowering American Cities research project measures what’s known as embedded local growth characteristics (ELGC), or the elements that influence an extended metropolitan area’s potential for economic growth. EGLC is a statistical measure based on structural components that drive productivity, industry, and demographic shifts such as an economy’s industry mix, workforce skill level, and net migration.

EMAs with favorable ELGCs tend to have highly productive economies and exhibit stronger historical and projected economic growth. Conversely, those with weak ELGCs have lower growth potential. (ELGC data on metropolitan areas can be found here.)

"The ELGC data is another powerful tool owners and operators can consider as they evaluate markets for organic growth and potential M&A," says Poe. He adds that "rather than a singular homogeneous economy, the U.S. is a patchwork of microeconomies with varying economic trends, industries, and consumer behavior that are distinct from one EMA to another. While certainly the competitive dynamics of an EMA, such as the existing restaurant supply in a market and other factors that need to be considered when making the decision to expand into a market, ELGC data provides additional insights to evaluate how an EMA scores on things like the strength of its labor force or if it is experiencing healthy population growth. These are factors that can drive economic expansion and potentially provide insight into how a new location may perform over time."

Why Macroeconomic Data Is Not Sufficient

Focusing solely on macroeconomic trends may lead franchisees and brands to miss out on lucrative opportunities in local markets, or inadvertently expand into a contracting market that doesn’t mirror national trends. Alternatively, drawing on ELGC data to factor in local variations in each market’s economic environment can play a role in franchise expansion decision-making and strategic planning. Because the Empowering American Cities data more closely mirrors what’s happening in local economies across the country, it can help identify trends that shape business decisions to drive sustainable future growth.

"Whether you’re planning organic growth or growth through acquisitions, choosing a high-growth emerging market if the competitive dynamics of that market also makes sense, is generally going to be advantageous," explains Poe. "You can realize the benefits of a strong labor force that will likely have more disposable income and can also enable you to provide higher customer satisfaction." The data shows when a restaurant scores highly across these characteristics, revenue is typically higher and profit margins are typically better.

Consider Industry Dynamics in the Market

While ELGC data and other tools need to be considered when evaluating growth opportunities in a specific market, the competitive landscape in the market also needs to be evaluated. Even if a market’s ELGC data is off the charts, if the market is oversaturated with competition for a particular segment or concept, it may not be the right opportunity.

At a time when both sizing up and diversifying are prevailing industry trends, accessing data that can help improve expansion initiative outcomes can be a game-changer. According to Franchise Times, of the top 200 restaurant franchisees in the U.S., 112 are in multiple brands. Out of the approximately 526,000 restaurants in the U.S. as of 2023, over 30% are restaurant chains with $1 billion in annual revenue and over 12% are limited-service burger/sandwich restaurants in chains with more than $1 billion in annual revenue. At the same time, less than 4% are limited-service chicken restaurants in chains with more than $1 billion in annual revenue, and less than 6% are coffee-focused restaurants in chains with more than $1 billion annual revenue. This perhaps explains why the limited-service chicken and coffee categories have seen nearly double the percentage of unit growth over the last 10 years.

Three Key Considerations When Evaluating Growth Markets

1. Look for locations with high ELGC statistics. As reported in the Empowering American Cities report, The Secret Sauce in Local Economies: Why Some Cities Grow Faster Than Others, metrics such as a large "prime working age" population (ages 25-54) and overall population growth (both birth rates outpacing death rates and healthy migration into the area), are among the key local indicators considered favorable demographic trends.
   
   For example, Nashville, Tennessee ranks fifth in population growth over the past decade, attracting new residents with job opportunities and a lower cost of living than other major economic hubs. In 2023, the Nashville area grew by 26,582 people, or about 73 newcomers every day. Targeting downtown and/or adjacent areas with strong household income gains for new locations or acquisition opportunities may therefore help franchise operators boost their chances of a successful expansion initiative. The Nashville EMA extends beyond Nashville’s Davidson country and includes 15 adjacent counties to consider for potential expansion. These counties are economically tied to Nashville.
2. Seek the presence of high-productivity industries. Regions with high-productivity industries such as tech, finance, and manufacturing often host populations with higher disposable incomes, which translates into greater demand for dining-out options. Areas with strong growth also tend to have a diverse industry mix and a prevalence of high-productivity industries with a large amount of output per worker relative to other industries.
   
   For example, Texas cities like Austin and Dallas, with booming tech and corporate sectors, attract high-income individuals, making those cities and surrounding suburbs ideal targets for premium and fast-casual restaurant franchises.
3. Identify adjacent counties tied to fast-growing urban markets. Fast-growing urban centers often spur spillover growth into nearby suburban or rural counties. By looking at adjacent areas tied to major metropolitan markets, franchise owners can capture new demand with lower real estate costs.
   
   For example, counties adjacent to rapidly growing Florida cities may present opportunities for new franchise locations to benefit from urban growth without the high competition of city centers. Areas neighboring Miami and Orlando, such as Palm Beach or Osceola, are likely to benefit from being in their economic orbit.

Fifth Third Bank’s restaurant and franchise industry specialists understand the unique challenges for growth. The combination of local economic data along with the bank’s Corporate and Investment Banking expertise in debt capital markets, M&A advisory, treasury management, cash management, and currency processing solutions can help you achieve your operational and strategic financing objectives. For more information, contact Jeff Poe at 312-517-3256. Learn about our Consumer & Retail Banking services.

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