McDonald’s and other restaurant chains look to the Sun Belt for growth as population soars

KEY POINTS

• As the population of the Sun Belt climbs, restaurant chains such as McDonald’s and Portillo’s are looking to those states for future sales growth.
• Customers have moved from the Midwest and Northeast to states such as Texas, Florida and North Carolina.
• The Sun Belt states largely have reputations for being more friendly to businesses.

When Chicago-based Portillo’s enters a new market, it sends its “Beef Bus” ahead of time, slinging its hot dogs and Italian beef sandwiches to new customers for weeks, introducing them to the brand and whetting their appetites before a new restaurant finally opens.

Recently, the Beef Bus has been making a lot of trips to the Sun Belt.

“Texas, by itself, has grown more people in the last decade than eight midwestern states that we have a presence in combined,” Portillo’s CEO Michael Osanloo told CNBC. “So it’s kind of a no brainer to go where the growth is.”

The chain’s sales are “way stronger” in Texas, Arizona and Florida than in midwestern states such as Indiana and Wisconsin, according to Osanloo. Portillo’s opened its first location in Texas a little more than a year ago. In its first 12 months, the location generated $13 million in sales, the restaurant equivalent to a $1 billion box-office hit.

While the exact states included in the Sun Belt can vary, the name refers to the southern third of the U.S. known for its sunny weather. In recent years, the region has seen booming 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 such as Charlotte and Phoenix, which count among the most populous in the U.S. along with Texas cities such as Houston and Dallas.

Due to that shift in population, restaurants are now looking to the region to drive sales. Smaller chains are expanding into the Sun Belt earlier, rather than the Midwest or Northeast. For more mature companies such as McDonald’s, it means accelerating new restaurant growth in areas where it’s now underrepresented.

“We always say that retail follows rooftops, so when you’ve got lots and lots of people moving to an area, there’s lots of demand,” said Justin Greider, senior vice president of Florida retail for real estate firm JLL. “Combined with the overall increase in consumer spending towards restaurants we’ve seen, it’s sort of the perfect storm to create a really ripe environment from a lot of restaurant groups who want to be here.”

It isn’t just restaurants looking to the Sun Belt for sales growth. Fort Worth-based American Airlines is updating its routes to reflect the population shift, executives said Monday at an investor event. Macy’s has been opening smaller stores in suburban strip malls, starting in the Dallas and Atlanta areas. Real estate investment trusts such as Phillips Edison & Company that invested in the region earlier have seen the 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, our store counts have grown much slower than the population in the fastest-growing areas,” McDonald’s Global Chief Customer Officer Manu Steijaert said during the company’s investor day in December. “We do have a significant opportunity to right-size that ratio.”

McDonald’s is aiming to open 900 new restaurants through 2027 in the U.S. Most of those locations will be concentrated in Florida, Texas, Arizona, Georgia and North Carolina, according to JPMorgan.

“What we’ve seen is because of the scale that they already have. That adaptation to grow in the Southeast has not been quite as proactive,” Greider said, speaking about McDonald’s.

But other chains have been quicker to see the opportunity in the Sun Belt. Greider named chicken chain Raising Cane’s, Chipotle Mexican Grill and Starbucks as three companies that have been focused on growing their footprints in the Sun Belt even before the pandemic.

In addition to well-known chains, Greider has also seen restaurants with chef-driven name recognition 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 pushed hard into the Sun Belt, because they’ve seen that’s not just where there’s great opportunities for growth, but where their existing customers have been relocated,” Greider said.

For example, New York City’s celebrity hotspot Carbone, owned by Major Food Group, opened a location in Miami in 2021 and another in Dallas in 2022.

Chains see opportunity in warm weather

For regional chains looking to expand nationwide, the Sun Belt also presents an opportunity to grow their footprint with customers who already know the brand.

For example, 89-year-old chain Friendly’s has largely stuck to the Northeast since its founding in Massachusetts in 1935. Under a new owner, the chain is finally looking to expand beyond the Mississippi River. 

Brix Holdings acquired Friendly’s in 2021, several months after the company filed for Chapter 11 bankruptcy protection. At the time, Friendly’s had more than 100 locations, down significantly from its footprint of 850 restaurants in its heyday.

The chain’s sales are growing again, according to Brix Holdings CEO Sherif Mityas, making it an opportune time to expand Friendly’s footprint.

“More strategically, from a growth perspective, we want to start moving west,” Mityas said.

Many of Friendly’s customers grew up with the brand in the Northeast before moving down to the Sun Belt. Plus, the chain is best known for its ice cream, making warmer climates a better business environment than the Midwest.

Warmer weather is also one reason why coffee chain Dutch Bros. is betting on the Sun Belt.

“More than 80% of our business is cold [drinks], so we find that warmer markets do better — but that doesn’t mean we wouldn’t do well in Minneapolis or the Great Lakes region or the northeast, but we’re just staying out of those for now,” Dutch Bros. CEO Christine Barone told CNBC in a January interview.

The chain is planning to open 150 locations this year, most of which will be in Texas and Southern California. In the next 10 to 15 years, the company aims to operate at least 4,000 locations, with a footprint that looks like a smiley face across the U.S., starting in California, dipping down to Texas and back up to Virginia.

Better for business?

The region’s reputation as friendly to businesses 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.

Although there are some notable exceptions, such as California with its upcoming hike on fast-food wages, states such as Texas and Florida have touted their lower taxes and lax regulation to lure companies. For two consecutive years, Texas has been home to the most Fortune 500 companies, supplanting California and New York.

“In addition to the population growth dynamics, many states in the Sun Belt region have ‘friendlier’ business environments that are also appealing 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 red tape on new commercial developments.”

That’s part of the appeal for Friendly’s, which wants franchisees to run the new locations.

“From an entrepreneur perspective, and a business perspective, the Sun Belt is really growing faster than the rest of the country,” Mityas said.