Restaurant chains have no room for error

Bankruptcy filings by Bar Louie, Krystal and American Blue Ribbon all reflect the industry’s competitive and operational challenges, says RB’s The Bottom Line.
Photograph courtesy of The Krystal Co.

the bottom line

It would be easy to look at your inbox this morning and think something is seriously wrong with the restaurant business.

After all, we detailed two separate bankruptcy filings: Chicago-based Bar Louie and Nashville-based American Blue Ribbon Holdings, the owner of Bakers Square and Village Inn. These two came just a week after a filing by burger chain Krystal. All of them cited competition and costs for their financial woes.

It’s dangerous to judge the restaurant industry by a couple of chain bankruptcies. There are tens of thousands of restaurant companies out there and hundreds upon hundreds of chains. Some of them struggle and file for bankruptcy every year. A few of them inevitably file on the same day.

What’s more, each filing has its own story. Bar Louie, Krystal and Village Inn are all vastly different chains that focus on different dayparts and customer bases.

Yet it’s also notable that all three appear to be victims of operational issues as much as debt problems. In a bankruptcy, we typically look first for the amount of secured debt. But with Krystal, we found that the company had just received an equity infusion that cut its debt.

Bar Louie had plenty of debt but also used its cash flow to fund growth. Bakers Square and Village Inn had no secured debt, just a sister company that no longer wanted to fund its operating losses.

All three struggled to meet the industry’s operational challenges. Restaurant traffic is down, likely due to growing competition from all sources.

Bakers Square and Village Inn, for instance, struggled to compete with the growing number of breakfast-and-lunch places and the strength of larger chains such as Denny’s and IHOP. The chains have been in a yearslong secular decline and struggled to compete in that environment.

Krystal, meanwhile, faced intense competition in a burger space loaded with companies, from rival White Castle to fast-growing Shake Shack, in addition to big players such as McDonald’s and Burger King.

In other words, both of those chains are being squeezed out in mature markets where consumers have a lot more choices.

Bar Louie, meanwhile, grew too fast, struggled to fund its growth, and watched as 38 locations struggled with same-store sales down nearly 11%. It also cited a challenging environment for casual-dining chains—in particular the bar and grill segment, which has faced brutal challenges in recent years.

All three chains, meanwhile, also faced rising labor costs. Weak sales and higher wage costs cause all sorts of problems.

Still, it’s a reminder of the highly competitive industry. There are too many locations. Consumers are not eating out more often, and strategies such as delivery are not, in fact, adding to the number of occasions, despite executives’ insistence that they are generating “incremental sales.”

Earlier this month, Darden Restaurants CEO Gene Lee said that more restaurants will go under during the next recession than in the last one. We agree.

But we also fear that the industry won’t wait that long. This is a brutal operating environment despite a strong overall economy because competition is fierce and consumers are changing, giving operators little room for error.

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