What South Dakota’s Economic Outlook Means for Franchisors

This month, 1851 is taking an in-depth look at ALEC-Laffer’s 16th annual “Rich States, Poor States” Economic Competitiveness Index and how it can be useful to franchisors as they expand their footprints. The report ranks all 50 states based on two criteria: 1) Economic Outlook, a state’s current standing in 15 state policy variables; 2) Economic Performance, a retrospective measure based on a state’s performance over the past 10 years.

For the state of South Dakota, these rankings reveal a lot about where the state economy is going and where there is opportunity for their economy to grow. 

• 2023 Economic Outlook Ranking: 14
• 2023 Economic Performance Ranking: 16

The State

South Dakota experienced a decline in its gross domestic product (GDP) by 4.3% from the third quarter of 2022 to the fourth quarter of 2022, as reported by the Bureau of Economic Analysis (BEA). South Dakota was one of just three states with a decline. And although the state has seen increases in personal income, this growth has not matched the pace observed in other states. The evaluation of personal income and other factors contributes to assessing the overall economic health of South Dakota.

According to the BEA, personal income in South Dakota grew by 4.1% from 2020 to 2021 and by 3.3% from the third quarter to the fourth quarter of 2022. The Federal Reserve of St. Louis reported that the state's personal income reached $65,806 in 2022, compared to $64,405 in 2021. In contrast, the Census Bureau noted that the median income in South Dakota for 2021 was $63,920. 

South Dakota's population has been experiencing a slow recovery. In 1990, it finally reached the level it was at in 1930. And in recent years, the state witnessed significant population growth, surpassing 900,000 people in 2022. Between July 2021 and July 2022, South Dakota's population grew by a rate of 1.52%, ranking it fifth in the nation after Florida, Idaho, South Carolina and Texas.

Meanwhile, South Dakota's May 2023 labor force of 480,600 increased compared to May 2022 when it reached a level of 476,100. The level of employed workers increased by 5,000 (1.1%), while the level of unemployed decreased by 500 persons (5.3%), and the unemployment rate decreased 0.1% to 1.9%.

Making Sense of the Data

What does this mean for South Dakota’s economy? To start with the Economic Performance report, the index shows that within the past 10 years, South Dakota has been outperformed by 15 other state economies. 

The performance index is based broadly on a state’s performance within state GDP, absolute domestic migration and non-farm payroll employment. South Dakota has seen an absolute domestic migration of 17,441, the 22nd highest number in the country. 

The Economic Outlook tells another story about South Dakota’s economy. The ranking is based on a state’s current standing in 15 state policy variables. Each of these factors, ranging from sales tax burden to state minimum wage, is influenced directly by state lawmakers through the legislative process. In this ranking, South Dakota appears at No. 14, with a top marginal personal income tax rate of 0% and a top marginal corporate income tax rate of 0%.

The report indicates that, generally speaking, states that spend and tax less experience higher growth rates than states that spend and tax more. While this is an important finding for entrepreneurs looking to start their own businesses, it shouldn’t discourage them from investing in their dream franchises if they're in a market with a slower growth rate. 

Franchise Growth Plans

So what should franchisors do with this information? When it comes to deciding where franchisors should develop their brand, it’s always important to look at the complete picture of what the region has to offer. Though most franchisors take a shotgun approach — meaning wherever a prospect franchisee inquires, the franchisor will typically entertain that marketplace — the strategy of looking at these overall policies can help them scale their business at a more efficient rate. With that said, findings within the report should not be the deciding measure for franchisors, but they should play a role in the decision. 

Fazoli’s

• Current units in state: 2
• Growth capacity in state: N/A
• Total jobs created at max growth capacity: 80 per location
• Total unit count: 200+
• Investment range:  $784,000 - $2,300,000

In January, quick-service franchise Fazoli’s revealed it was opening its second location in Sioux Falls, South Dakota. And according to the brand’s website, it still has territories available in the state, though capacity is limited. 

“Sioux Falls has proven that it’s full of Fazoli’s fans for life, and we’re thrilled to open our second location,” said SD Fazoli's VP of Operations Christina Thoms. “We look forward to making our craveable Italian dishes and signature hot breadsticks even more available to the community.” 

Dae Gee Korean BBQ

• Current units in state: 0
• Growth capacity in state: N/A
• Total jobs created at max growth capacity: N/A
• Total unit count: 5
• Investment range: $380,875 to $954,125

Earlier this year, Dae Gee Korean BBQ announced that it signed four franchise development deals that will bring locations to several states, including South Dakota, by year's end.

Franchise Brands Headquartered in South Dakota:

• Howard Johnson by Wyndham
• Kitchen Tune-Up
• Apartment Movers