Restaurant companies may have depended too much on easy-to-borrow money to back aggressive expansion plans, industry experts say – a move that may lead to more bankrupt chains and fewer new eateries opening in the months to come.
The gloomy outlook comes in the wake of the filing for bankruptcy protection on Tuesday by S&A Restaurant Corp., the parent company of Bennigan's and Steak & Ale restaurants. S&A is owned by Metromedia Restaurant Group, a part of billionaire John Kluge's empire. Franchised locations will remain open and are not included in the filing. There are no Bennigan's restaurants or Steak & Ales in the Charlotte area.
S&A is seeking to liquidate its assets and stop operations – a step usually taken in only the most dire financial circumstances. And although Bennigan's may be the highest-profile chain to have filed for bankruptcy protection, it is far from the first this year.
Privately owned Vicorp Restaurants Inc., which operates the Village Inn and Bakers Square chains, cited “substantial debt obligations” when it filed in April for Chapter 11, which lets a company reorganize and remain open. Roadhouse Grill Inc. filed in October, intending to reorganize, but the private company converted to a liquidation proceeding in May.
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At least four other chains have filed for bankruptcy protection since the start of the year. That compares with about two during all of 2007 and six in 2004, estimated Ron Paul, president of consumer research company Technomic Inc.
Paul said the number of restaurant bankruptcies this year “could easily surpass” the 2004 number.
The reason is the sharp change in balance between supply and demand, he said.
In the early 2000s, Paul said, credit was easy to come by and many restaurant companies – particularly in the highly competitive bar-and-grill and casual dining segments – took advantage of that by financing ambitious expansion programs.
According to Technomic, the top 20 casual dining chains increased the number of their locations by 45 percent during the past five years. Restaurant sales, meanwhile, rose just 31 percent.
“The lenders were very aggressive in making loans they probably shouldn't have made in financing restaurant expansion,” Paul said. Now, particularly as consumers cut back on eating out, “there's just not enough customers to go around.”
When the economy hit the brakes, consumers followed suit. High gas prices, the weak housing market and inflation have led to far slower consumer spending, especially on indulgences such as a dinner out.
Meanwhile, restaurants have had to face far higher ingredient costs due to spiking commodity prices, which has put more pressure on profits.
Given the consumer spending slowdown and the higher costs, several restaurant chains have scaled back their expansion plans, said Standard & Poor's restaurant analyst Mark Basham.
With sales declining and some locations beginning to underperform, “all the bodies are floating to the surface, so to speak,” Basham said.
One company that has cut back on its openings is Ruby Tuesday Inc. – another popular family restaurant that has seen sales and profits slide.
In fiscal 2007, the company either opened or bought 73 locations, not including those owned and operated by franchises. In the first nine months of fiscal 2008, meanwhile, Ruby Tuesday has opened or acquired 51 locations and plans to open just four more by the end of the year.
Deutsche Bank North America analyst Jason West said in a note to investors that he believes the restaurant industry is at the “beginning of a store rationalization process” marked by restaurant closings and slower growth.
But, he said, that process could take several more quarters – if not many more years – before the cuts turn into profits.