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Study: At Risk Restaurants to Put Bigger Squeeze on Suppliers

The survey of 110 chain restaurants showed U.S. restaurants are four times more likely to fail than they were a year ago, and as many as 40 percent may face a “severe” cash shortage within the next 12 months.

Andy Eversbusch, a managing director at AlixPartners and leader of the firm's Restaurant and Food Services Practice, said, "While certainly there are healthy companies in every restaurant category, our analysis suggests that, without aggressive intervention, up to 40% of chains face the possibility of a severe liquidity crisis, which could mean failure, within a year. And if things worsen in the economy, that timeline could shrink to just a few months for many chains. Overall, we found declining growth rates and declining same-store sales in all four sectors, as well as declining EBITDA in three of the four sectors, with only quick-service restaurants bucking that latter trend.

"Moreover," continued Eversbusch, "our research suggests that fine-dining and casual restaurants in particular are likely to experience a further and potentially dramatic drop in earnings, cash and returns this year, as they find themselves caught in the vice of a recessionary economy and rising labor prices due to hikes in the minimum wage rate. As the survey part of our study shows, when it comes to dining out these days, Americans are saying either, 'Let's eat at home instead' or 'Let's eat cheap' -- or at least, 'Let's get a lot more value for the money that we are willing to spend.'"

The survey data showed that the debt-to-equity ratio among restaurants has jumped to 1.38, up from 0.68 in 2006, leaving the industry little headroom to handle the current recession. It also shows that while overall industry cash levels have been dropping, operating cash flows have also been flat or declining in all sectors except quick-service -- and even in that category on-hand cash has dropped precipitously since 2005. In terms of returns, it found that while fine dining has for some time endured the lowest return on capital employed (ROCE) among the four sectors, casual establishments are also lagging behind. Meantime, it found that while quick-service restaurants are enjoying the highest ROCE today, fast-casual restaurants have, since 2004, seen much greater sales growth.

The company suggests that applying “lean” principles to restaurant operations, an approach first pioneered in manufacturing industries, may provide a lifeline for any player in this space. Said Eversbusch: "While it's still the case that you can't 'save your way to prosperity' in the restaurant business, that ultimately consumer traffic makes or breaks a company, aggressively leaning-out costs at every level, including in the supply chain, can definitely help restaurants deal with this current environment."

Adam Fless, co-author of the study, noted that restaurants traditionally have focused on the customer experience – the quality of food, its presentation, the environment in which it’s served. But in today’s environment, he said, the meal needs to be rethought. “It needs to be looked at not just as a consumer experience but also very much as a product, a product that needs to be optimally produced, sourced and delivered.”

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