Why it feels like so many restaurants are declaring bankruptcy
Why it feels like so many restaurants are declaring bankruptcy
Popeye’s. TGI Fridays. Roti. Buca di Beppo. And of course Red Lobster. These are just a few of more than a dozen high-profile restaurant chains that have declared bankruptcy in 2024.
On one level, what we’re seeing is some restaurants buckle under the intense pressures the past two years have brought. There were the shortages, inflation, and rising labor costs.
“We had weird fingerling potato shortages, there were issues with limes tripling in costs,” said Kelly Bush, co-owner of the Union Tavern and Marshall Street Bar and Grill in Rochester, New York. “People’s patterns and behaviors have changed.”
Restaurant foot traffic has declined in the U.S. by 3%-3.5%, “which is huge,” said BDO managing director Gregg Thomas.
It’s all been one punch after another. “For a lot of us, our expenses have doubled, if not tripled,” said Bush, “so that profit margin that was already really slim in the restaurant industry is just getting slimmer and slimmer, if it exists at all.”
Hanging over these new challenges, is an older one: Debt.
“People don’t always realize the amount of debt we had to take on just to get through the first two years of the pandemic,” said Bush. That was on top of the debt taken on by one of Bush’s restaurants as it opened, just before the pandemic.
Debt — even pre-pandemic debt — has been a major issue for many of the high profile restaurant groups that have gone bankrupt this year.
Before the pandemic, “as they were growing, they were taking on debt to fuel the growth, there was a lot of private equity in our space that came in,” said Thomas. “And you know, when we hit COVID, that debt didn’t disappear.”
And then, of course, interest rates rose, which made some of that debt more expensive.
Meanwhile, for some vulnerable chains in particular, sales were hurting because their clientele was hurting. “The preponderance of their customers are low to middle income, and it’s having a major impact on them,” said Thomas.
The boom in the restaurant business later in the pandemic allowed many to paper over their financial issues. But now with the pile of challenges facing them, “they were exposed,” said Joe Pawlak, a managing principal at restaurant advisory firm Technomic, “and that’s why we’re starting to see right now a fair amount of these bankruptcies that are coming through.”
Pawlak said he expects the parade of Chapter 11s to continue into 2025.
Toast, a payments service for restaurants, surveyed its clients and found restaurants optimism varied by size. Kelly Esten, chief marketing officer at Toast, said “the largest restaurant groups, in particular quick service restaurants, have the highest increase in optimism, and the smallest ones they’re really dealing with challenges around guest foot traffic.”
The restaurants that are surviving have been nimble. When most of Espartaco Borga’s restaurants in Dallas, Texas, had to close during and after lockdown (his landlord wanted to tear down the lot and build a high rise) he reinvented them as what he calls smart cafés — fully automated robotic kiosks that store and heat up meals previously prepared at his and other restaurants.
“Where people can just come, grab these foods and eat it there, warm it up and take it home, or send an Uber guy to heat it up for them and bring it, or take it home cold and heat it up themselves,” he said.
The technology knows when a customer removes something or puts it back, and knows how to reheat the particular dish.
This kind of innovation is essential, he said. “Without it, we would be getting out of hospitality. Because we just can’t find the staff. And to make things worse, real estate is stupid expensive these days,” he added.
In Rochester, at Union Tavern, Kelly Bush has also had to transform her business model, “doing paint nights, doing more wine tastings, we have a large non-alcoholic program, we are also are in a spooky old tavern from the 1800’s so we did 22 events in October, 18 of them sold out.”
But this kind of nonstop adapting is exhausting.
“We continue to pivot and pivot and pivot and I think people are just getting tired,” she said. Tired of having to figure this industry out all over again, again and again.
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