In “Empty Tables and Rising Costs Push More Restaurants Into Bankruptcy,” WSJ reporter Heather Haddon highlights a problem that I was only marginally aware existed.
Americans love fish tacos, but not enough to keep Rubio’s Coastal Grill from joining one of 2024’s biggest food trends: the bankrupt restaurant chain.
The California chain founded around 41 years ago by a surfer hung on through the Covid-19 pandemic, and sales had been improving. But business never came all the way back, and as expenses climbed and customers grew fed up with the rising cost of eating out, Rubio’s filed for bankruptcy protection in June.
“You have locations that just aren’t viable. You have the Covid hangover, labor costs. There’s multiple problems,” said Jeff Crivello, president of Trew Capital Management, an investment firm that bought Rubio’s out of bankruptcy in August.
Restaurant chains and operators this year are on track to declare the most bankruptcies in decades outside of 2020, when the global pandemic upended the industry’s operations, according to an analysis of BankruptcyData.com records. The firm tracked chapter 11 filings of restaurants that are publicly traded, along with companies holding more than $10 million in liabilities.
Restaurants declaring bankruptcy this year include sit-down chains Red Lobster and Hawkers Asian Street Food, along with a string of fast-casual operations such as Tijuana Flats and Roti. More eateries on the edge are likely to file for bankruptcy in the coming year, according to restaurant executives, attorneys and lenders.
Nearly five years since the pandemic hit the more than $1 trillion U.S. restaurant industry, the sector’s health has improved on many fronts. Hiring is robust and an average of 3,700 new restaurants are opening monthly this year, according to market-research firm Datassential.
But some chains are still struggling because customers have pulled back on dining out, and high interest rates have hurt companies that gave priority to growth over profit.
Same-store sales traffic at U.S. restaurants was down by 3.3% this year through Oct. 6 versus the same period in 2023, according to market-research firm Black Box Intelligence. Visits to casual-dining restaurants fell 4.5%.
“These are things that have been bubbling under the surface for the last 15 years,” said Brett Schulman, chief executive of fast-casual chain Cava. Schulman said he has had more than a dozen distressed restaurant companies pitched to him to buy or invest in the past year.
Chains with fewer than 50 locations that can’t benefit from the scale advantages of bigger companies are considered the most vulnerable, industry officials said. Older sit-down chains struggling to cater to today’s consumers are also in tough positions.
I had noticed Red Lobster’s bankruptcy filing a while back but was unaware it was part of a larger trend.
An August Bloomberg Law report by Alex Wolf (“Casual Dining Chain Bankruptcies Highlight Industry in Flux“) adds more context:
America’s casual dining chain restaurants, struggling with operational costs and changing consumer habits, are rapidly going bankrupt in last-ditch efforts to rightsize or sell themselves to opportunistic investors.
The Chapter 11 filing in May by Red Lobster may be the most spectacular restaurant collapse of 2024, but the iconic seafood chain is just one of several brands forced into bankruptcy this year due to unsustainable debt and bloated operations. The trend continued earlier this month as Italian eatery Buca di Beppo and craft-beer focused chain World of Beer sought refuge in bankruptcy.
For many, the goal is to use the debt payment breathing spell afforded by Chapter 11 to close unprofitable locations and rework a number of vendor contracts to save money. Several are also using bankruptcy to finalize a changeover in ownership or solicit offers to buy the business at a discount.
In court filings, the bankrupt brands all say they’ve failed to make ends meet in the face of industrywide difficulties, including rising costs for food and labor and shrinking consumer demand. The Covid-19 pandemic is often cited as the genesis of despair, as many restaurants have struggled to adapt to changing consumer behavior, like spikes in delivery or takeout orders and diminished weekday lunch crowds.
Plus, pandemic-era guardrails have been removed and price-conscious consumers have shunned dining out due to higher costs. Even fast food brands are deploying value meal deals to reel customers back amid inflationary pressures.
“There’s an impending bust that’s on the way,” said restaurant industry consultant Aaron Allen, head of Aaron Allen & Associates. “We’re getting more and more calls these days for folks who need turnarounds.”
The cases illustrate not only how a global event affected a consumer market, but also how an entire industry is reckoning with broad, lasting changes.
“This is kind of a convergence of things,” Allen said. “There’s going to be a reconfiguration of the industry that will emerge out of this in the next two or three years.”
Pushed to the brink, restaurateurs like Mod Pizza—a fast casual chain with more than 500 locations across the country—have inked buyout deals before ending up in bankruptcy court. In other cases, Chapter 11 is being used to facilitate a business handoff to investment firms that acquired substantial amounts of the company’s secured debt.
[…]
A number of large restaurant brands like California Pizza Kitchen and Le Pain Quotidien filed for bankruptcy at the height of the pandemic, but the vast majority limped along hoping that business would return to normal before government relief dried up.
With the backing of landlords that couldn’t quickly find new tenants and lenders that didn’t want to take over their businesses, operators were largely spared.
“Some companies filed during Covid but there was definitely a trend of kicking the can down the road,” said Mette H. Kurth, chair of Culhane PLLC’s bankruptcy practice. “Mid-Covid nobody was going to buy it.”
Government assistance and creditor patience has since waned. Consumer demand in many respects has also not returned.
One Table noted upon filing for Chapter 11 in July that the ripple effects of the pandemic have devastated its businesses, “as they no longer enjoy the same volume of lunch-time workers as they did pre-pandemic.”
The operator of New York-area restaurant chain Sticky’s Finger Joint told a Delaware bankruptcy judge in April that it has similarly seen reduced workday lunch crowds and has had trouble adjusting to “the ‘new normal’ of shorter work weeks for employees who previously commuted to work in New York City five days a week.”
Kurth, who last year guided fast casual chain Corner Bakery into Chapter 11 and through a bankruptcy sale process to SSCP Management, said rising debts and interest rates—coupled with inflationary effects on food prices and worker wage costs—have made it “very difficult for these companies to keep their doors open.”
The problems are acute in California, which in April raised the minimum wage for fast food workers to $20 an hour.
“The restaurants have record levels of debt,” Allen said. “We expect to see an acceleration of bankruptcies in the fourth quarter and into 2025.”
Our family dining patterns haven’t changed radically since COVID but we’re more affluent than most and were already largely eschewing weekday lunch out and fast casual dining. We get takeout for the family two or three times a month, and my wife and I go out for Saturday “date night” every couple of weeks. But, for example, I’ve largely quit grabbing a late lunch at Five Guys when I’ve neglected to pack leftovers because I find the $20+ price tag ridiculous. Can I afford it? Yes. But, come on.
Checking the archives to see whether I’d posted about Red Lobster (I had not), I stumbled on a post from way back in February 2014 titled “Middle Class Shopping Less at Lousy Stores, Eating Less at Lousy Restaurants.” Even then, Red Lobster was struggling—as were other middlebrow restaurant chains (Olive Garden, Longhorn Steak House) and department stores (Sears, J.C. Penney, etc.).
Certainly, the pandemic and post-pandemic economic shakeup were impactful. People discovered that, if it was simply food and not a dining experience one was after, getting the food to go and eating at home was considerably cheaper and more convenient. And the combination of rising prices and staff shortages has made dining out considerably less attractive; you’re literally paying more for less.
Restaurant-like establishments have been with us for centuries, although the variety that would be recognizable to modern consumers is roughly the same age as the United States. I don’t see them going away, as they serve a legitimate need. But it may well be that those outside the most affluent will revert to dining out less frequently rather than on the routine basis that had evolved in the last quarter century or so.
