Apparently, restaurant chains can just close locations and watch their results take off.
At least, that’s judging by commentary from a number of chains lately. Noodles & Company, for instance, cited closures in part for its recent same-store sales improvement. Jack in the Box also cited “sales transfer.”
The reality is more complicated, however. Closing locations should be about solidifying the finances of the existing restaurants, either in a market or nationwide. That can put a brand on better footing, providing a better foundation from which they can grow.
In some respects, doing this is like pruning a tree. It’ll be smaller but healthier, at least in theory.
But brands still lose customers and sales when they close restaurants. So restaurant companies need to pair these closures with investment in the existing base of locations, and their people, and the marketing. Effectively, they need to fix what was causing branches of the tree to wither and die, lest the problem spreads to other areas.
Closures are frequently part of the plan when restaurant chains are struggling with weak sales. They often use the opportunity to shed money-losing units or close those that no longer fit with the brands’ strategies.
Several chains are doing this, including giants like Starbucks and Wendy’s, full-service brands like Outback Steakhouse and Denny’s and small chains like &pizza and Pieology. Pizza Hut and Papa Johns are also closing hundreds of locations.
Only a few of these have cited “sales transfer” as a benefit. One was Noodles, which last year closed 41, or 8.6%, of its 463 restaurants, finishing the year with 423 locations.
Its average-unit volumes responded, up 5.5%, to $1.36 million. That was good. The company closed restaurants with weaker volumes, leaving behind the better performing locations. Noodles also reported a full-year, 4.1% same-store sales growth.
Executives cited its new menu items for driving that same-store sales growth. But they also cited the closures.
“We continue to see great results from this ongoing project,” CFO Michael Hynes told investors in March, according to a transcript on the financial services site AlphaSense. “The most meaningful impact is the post-closure transfer of sales to nearby Noodles restaurants, which is driving a significant increase to our company-wide restaurant-level profits.”
But Noodles also got the brand back up to the volumes it enjoyed back in 2022, according to data from Technomic. Total system sales, meanwhile, declined 0.5%. Noodles sacrificed sales for brand health, which is good. But it still has fewer total sales than it did before the closures.
Another company citing “sales transfer” is Jack in the Box, which closed 55 restaurants, but wanted to close more. Company executives estimated a 30% sales transfer from closed restaurants to surrounding locations.
But Jack in the Box, unlike Noodles, still has a problem with falling same-store sales and unit volumes. Its unit volumes fell 3.2% last year, to $1.95 million, which likely benefited some from the closure of weaker locations.
Its same-store sales averaged a 6.4% decline last calendar year. That sales transfer, in other words, helped only so much.
System sales, meanwhile, declined 4.3% to $4.2 million. The burger chain, in other words, has a lot of work to do beyond shedding underperforming locations.
The poster child for effective closures is McDonald’s, which for the past quarter century opted for a slow-growth mode. And then about a decade ago it started closing locations, mostly in Walmarts. It has started adding again, but it remains about 500 restaurants short of where it was back then.
Its unit volumes have grown 61% since then, adding another $1.5 million in sales per location. To put that into perspective, that’s more than the AUVs of Carl’s Jr. The brand has used effective marketing and investments in existing stores, in the form of remodels, to build those sales.
Closures should be targeted and, more importantly, temporary, and they have to come with that investment. The longer brands keep closing locations, the more customers start thinking of them as shrinking chains no longer available in their market. And if what’s left still provides substandard operations from poor-looking restaurants, then the company will end up in the same cycle in a couple of years.