Are the good times over for chains?

Chain restaurants’ slowing growth reveals a saturated industry that could lose funding in the future.
Restaurant Business
Jonathan Maze

The five years from 2011 through 2015 were some of the best in the restaurant industry’s history. Investors pumped money into restaurants that were among the safest bets in the consumer economy. They bought public company stock. They paid millions to upstart fast-casual chains. Legacy chains remodeled units even as they sold company locations to franchisees and started adding consumer-facing technology for the first time. 

New chains, and even sectors, were founded and grew to hundreds upon hundreds of units. Executives pushed new unit development to satisfy investors. Entrepreneurs found new ways to devise concepts around menu items. 

The results could be seen among the country’s largest restaurant chains. Sales generated by Technomic’s Top 500 restaurants grew an average of 4.4% a year over that time period. The number of locations they operated grew by 23,000. 

But then came the spring of 2016. Same-store sales began stumbling, according to industry indexes such as Black Box Intelligence. Traffic was worse and has now fallen almost every month for nearly three years. 

Chain sales last year grew by 3.1%, the slowest rate since 2010. Unit count, meanwhile, grew by 1.2%, the slowest since 2011, perhaps demonstrating that executives are seeing the sense in shutting underperforming units and slowing development. 

This is the inevitable result of an industry that is clearly saturated. Restaurants’ rapid expansion in the post-recession era has resulted in an economy that has too many restaurants and not enough diners to visit them—or workers to staff them, for that matter. 

To be sure, read our presentation of Technomic’s Top 500 on these pages, and you will find plenty of examples of chains that are performing well in sectors that are more in tune with consumers’ demand for convenient, higher-quality fare. That includes fast-casual concepts such as MOD Pizza and Blaze Pizza; giant stalwarts such as McDonald’s, Chick-fil-A and Domino’s; and breakfast-centric chains such as First Watch.

Meanwhile, strong performance among upstart chains toward the bottom of the ranking, such as Bartaco and Naf Naf Grill, demonstrate that restaurateurs, more than other entrepreneurs, can find growth with an interesting concept, even in a saturated market. There is always room for a new restaurant chain that promises something different. And, at least for the moment, there are investors willing to back such ideas.

But the industry’s total supply growth can only continue for so long before it ultimately causes problems. That’s what happened last year.

Bankruptcy filings at Joe’s Crab Shack, for instance, and significant problems at concepts such as Ruby Tuesday, led to a 1.5% decline in unit count among casual-dining chains in the Top 500. The year before, casual-dining unit count grew by 0.8%. Meanwhile, from 2008 through 2016, the number of casual-dining restaurants in the Top 500 grew by an average of 2% per year. 

In saturated markets, any growth has to come at the expense of other companies. Because restaurants are so fragmented, and entrepreneurship and investment hasn’t really stopped, the newer upstarts have pushed out older concepts that no longer fit consumers’ demands. 

As such, growing fast-casual chains, upscale concepts or breakfast-and-lunch-only diners are taking away from bar and grill concepts and buffet restaurants that have struggled to hold on to consumer attention. And those concepts are falling off quickly. 

Ultimately, the question becomes whether investors that have pumped so much money into this industry since 2011 will start holding off, which has been the case on Wall Street, where it’s now been three years since the most recent traditional IPO. 

Because at some point, a saturated market becomes too difficult for investors to consider, even if they don’t have many places to put their money. When that happens, the funding spigot that has fueled this industry for so long will dry up. And then the entrepreneurship that has driven so much of the Top 500 will find it harder to get new ideas off the ground. 

Top 500

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