Earlier this month, a 59-unit Carl’s Jr. franchisee filed for bankruptcy. Harshad Dharod, the owner of the operation, blamed the problem on a combination of California’s $20 fast-food wage and Carl’s Jr.’s lack of sales.
It’s the latest, however, in a string of such filings. Just this year, we’ve seen bankruptcy filings by a 53-unit Applebee’s operator, an 11-unit Firehouse Subs franchisee, a 130-unit Popeyes operator and a 43-unit Subway franchisee.
Late last year, there was the termination of the 77-unit Hardee’s franchisee Arc Burger, which opted to close its locations and walk away. In November M&M Custard, which at one point owned 42 Freddy’s locations, filed for bankruptcy. Before that, we saw multiple cases in which franchisees filed for bankruptcy after taking out merchant cash advance loans.
We’re beginning to sense a pattern.
To be sure, many bankruptcies are due to poor economic decisions, such as excessive debt or sale-leaseback financing or poor operations or some combination of the above. A weak environment often reveals financial problems as much as it creates them.
But it’s also true that the bulk of bankruptcies over the past couple of years have been restaurant operating companies, including a number of often large-scale franchisees. Running restaurants is as difficult today as it has ever been.
Consumers are cutting back on dining, which has forced companies to discount their menu items to generate traffic. But restaurants’ own costs have been going up, and sometimes at epic levels.
A discount war paired with higher costs is a tough combination.
Let’s look at the example of Sun Gir. It operates Carl’s Jr. locations, which have generated slow unit-volume growth for years. The chain generates $1.4 million average-unit volumes, which have increased 8.8% over the past decade. Those locations would make another $400,000 per year in sales if they simply kept pace with inflation.
That’s important. Sales drive profits. Brands that struggle for a long time put their franchisees in danger like this. In most cases the brands don’t have a bunch of franchisees file for bankruptcy. Instead, operators simply close their stores when leases and franchise agreements run out.
The weak Carl’s Jr. sales left Sun Gir with poor profitability when California raised the pay rate for fast-food chain restaurants to $20 an hour.
Restaurant companies are facing a lot of other issues right now, too. Burger chains are watching their beef costs go up. At Burger King, for instance, the price of beef soared 20% last year. That hurt franchisee profits for that chain. We can only imagine that Carl’s beef costs have gone up at similar rates.
Now pair those higher beef costs with high labor costs and sales that have not kept pace with inflation for a decade. And add in a large-scale discount war to boot. Or add large amounts of debt and leased locations.
Then there’s technology fees and remodel costs. And these days we have third-party delivery and its charges, which have changed the economics of operating a restaurant, particularly compared with a decade ago.
The simple fact is, it’s difficult to operate restaurants in 2026, so a lot of restaurant operators are filing for bankruptcy. And given the way the economy is going, you can expect more of that.