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After the fast-casual gold rush

Challenges have hit onetime growth chains such as Taylor Gourmet, LYFE Kitchen and Noon Mediterranean, says RB’s The Bottom Line.
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the bottom line

Over the weekend, Taylor Gourmet closed all 19 of its restaurants, a shocking event for a chain that, not long ago, was one of the hottest growth concepts in the U.S.

But maybe it shouldn’t be so shocking. The Washington, D.C., sandwich chain was among a large generation of restaurants that emerged during the fast-casual gold rush between 2012 and 2016. While some of those brands have done well, more than a few have struggled and some have shut down entirely.

Just last week, for instance, Carlisle Corp. opted to sell LYFE Kitchen, the fast-casual chain it hoped to turn into a healthy McDonald’s.

Last month, the onetime growth concept Noon Mediterranean, formerly known as VertsKebap, filed for bankruptcy protection.

A year ago, meanwhile, Chipotle Mexican Grill shut down its ShopHouse Southeast Asian Kitchen. And My Fit Foods, which received millions, closed all 50 of its locations. Tava Indian Kitchen, which received investment funds when it had just three units, closed all three of those restaurants and was sold to a rival.

(As a side note, the complete closure of Taylor Gourmet is the fourth complete brand shutdown in less than two years; such events used to be a lot less common than that, as brand names on their own are usually worth something.)

To be sure, investing is a risky business. When private-equity firms and restaurant companies decided to pump millions into small fast-casual chains, all in a bid to find the “next Chipotle” (a phrase that always made me a little ill), they were taking a risk that they might lose that investment.

After all, a restaurant chain with 10 units is a lot less proven, and therefore much riskier, than a chain with 100 or 1,000 or 10,000.

But the fervor with which investors were throwing money at anybody with counter service, industrial decor and tattooed chief executives during those days was insane.

Between 2012 and 2016, for instance, companies made early-stage investments in 62 restaurant chains. Two-thirds of those were fast-casual concepts.

The vast majority of the chains that received funds have done fine, and a few have performed spectacularly. There’s Shake Shack, arguably the most financially successful of all of those chains thanks to its well-received 2015 IPO. MOD Pizza is one of the fastest-growing restaurant chains in the U.S. Sweetgreen has nearly quadrupled in size.

Indeed, of the 28 fast-casual chains that received funds from 2012 through 2015, 20 of them have more units than they had when they received their investment. Size isn’t everything, of course, and just because a concept is adding units doesn’t necessarily mean it’s doing well and vice versa.

In addition, it isn’t as if investors have stopped putting money into restaurant chains, as we covered recently.

Yet the recent failures, including the rare complete closures, are indicative of the challenges in the fast-casual sector of late.

According to the Technomic Chain Restaurant Index, average traffic in the fast-casual sector has risen just 1.2% over the past year. That’s not a strong number considering that the business still represents a big portion of overall industry unit growth. And sales have slowed from their 10%-plus peak.

In addition, fast-casual chains grew so much that they helped drive up lease rates in many markets. And of course we have labor challenges that are common throughout the industry driving up costs, especially in high-dollar markets like, say, Washington, D.C.

“There were a lot of big dollars forked over to a number of these companies,” said Craig Weichmann, vice president with Pinnacle Commercial Capital, “and then they hit the wall.”

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