The recent bankruptcy filings by Friendly’s, Studio Movie Grill and Rubio’s add to a growing list of restaurant chain insolvency proceedings.
All told, some 21 restaurant chains and at least four major franchisees have sought federal debt protection, all but one of them a Chapter 11 restructuring that will keep them in business, albeit smaller and probably with new owners.
They won’t be the last by a long shot. The restaurant industry remains in worse financial shape coming out of the pandemic. The winter is expected to be a tough one. Without some financial stimulus it could push others to seek out court-enforced debt renegotiations.
“Without a significant and rapid return of guests, it becomes problematic very quickly,” said Adam Werner, global co-leader of the restaurants, hospitality and leisure practice at the consulting firm AlixPartners. “There’s more distress in this industry than we’ve seen in a long time.”
Restaurants built up a lot of debt to survive the pandemic. According to a recent study by the consulting firm AlixPartners, for instance, debt among limited-service restaurants is up over 8.1% over the past year. For full-service restaurants it is up 15.7%.
This came on top of a decade-long debt binge for much of the industry. Debt among limited service restaurants is more than four times what it was at the start of the Great Recession in 2007. For full-service restaurants debt is up more than 50%.
What’s more, according to AlixPartners, more than 60% of full-service restaurants are reporting negative earnings before interest, taxes, depreciation and amortization, or EBITDA.
Full-service restaurants in particular are in “dire need” of a significant turnaround in sales in the coming months, at a time when outdoor dining could be problematic. “Delivery by itself isn’t going to be enough for them,” Werner said.
Restaurant chains had to take on more debt to survive the pandemic. But they also renegotiated their leases. In many cases, these leases have balloon payments coming due around the end of the year.
“They certainly have kicked the can down the road,” Werner said.
The industry has spent much of the past decade unloading assets. They sold real estate to investors and leased it back. They also borrowed more money. The result: As the pandemic hit, the restaurants had few levers to pull, outside of more debt and hoping landlords give them a break.
With a lot of these payments coming due, restaurants will need some profitability. While some major chains have found it, many have not. The result? More bankruptcy filings, store closures and cheap sales to bargain hunting investors.
“Certain chains in the past had other levers to pull to support themselves on a go-forward basis,” Werner said. “The rise of asset-light chains really stripped away the potential for them to really use some of the assets to pay down some of their debt. Now their potentially up against it.”
Of the major restaurant companies that filed for bankruptcy protection, debt was a problem in most cases. CEC Entertainment had an immense amount of debt, leaving it with little wiggle room when the pandemic hit. NPC International also had mountains of debt, leaving it unable to survive a pandemic that was actually good for much of its business.
Many more restaurants are in the same boat, hoping for calmer waters. “We’re looking at least at another six months, if not 12 months,” Werner said.
What could help? A vaccine, perhaps, more willingness by banks and landlords to kick the can down the road, perhaps some government stimulus. But without customers, this is going to be a very long winter.
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