We sure seem to be writing a lot these days on bankruptcy filings. An Arby’s franchisee filed for bankruptcy last week. So did a Subway operator. Rubio’s closed 48 restaurants and declared bankruptcy. Small chains are filing all over the place. Red Lobster is the biggest filing we’ve seen in years.
Several other chains are on watch, including BurgerFi and Uncle Julio’s. Others have closed large numbers of restaurants, notably casual diners Hooters and TGI Friday’s.
It’s quite a bit. And they come a year after a rash of large-scale franchisee bankruptcies disrupted a large portion of the industry.
First: There is typically a regular stream of bankruptcies in the restaurant industry, which features an unbelievable number of businesses. And they churn as new ones move in and old ones lose favor.
Consumers are fickle and their tastes change. Brands bring new ideas or new technology or new marketing and lure customers away from those that lost their allure or suffered some sort of management malfeasance or both.
(Check out: Welcome to the latest restaurant recession.)
Meanwhile, private equity and like-minded investors often take advantage of some of these chains on the downsides of their life cycles. They unload assets, cut back on corporate investment and collect the cash those companies generate.
Many of these investors look at brands when they are up for sale and make a cynical calculus, deciding whether they can make more money by investing in the brand or by selling off assets, loading the brand up with debt or both.
In any event, it all adds up to an industry that does a healthy business in bankruptcy court. And with hundreds of thousands of restaurants in the U.S., there are bound to be some that close every year.
This is not to say that the current period is normal. It’s not. The restaurant industry is coming off the most difficult stretch in its history, a global pandemic that led to widespread shutdowns, followed by a rapid recovery and fueled generationally high inflation, followed by a consumer price backlash.
And that has exacerbated the issues we normally see in the industry.
The best evidence for all this is the Red Lobster bankruptcy.
The seafood chain’s filing is indicative of cynical investment calculus buyers make in this business. It was sold to a private equity firm a decade ago that unloaded the real estate for not-so-favorable terms.
And later it was sold again to a shrimp supplier on the other side of the world that decided the chain was better used to build up its own sales of shrimp. That combination did a lot of damage.
But it also operates in a difficult market, full-service restaurants. And an operating environment like this one, where consumers are dining out less frequently and shifting their spending, is hardest on those types of companies that made that kind of calculus.
Consumers ultimately notice when brands are not doing what they should and they visit less.
Or, I suppose, they notice it too much and flock to companies selling unlimited shrimp at ridiculously low prices before the owners change their minds.
The filings or dangers-of-filings we noted above all have their individual stories. The Arby’s franchisee struggled with weak sales and had filed for debt protection before. So did Rubio’s. Subway operators have profit challenges and that particular operator is likely trying to save a business subject to a $3 million lawsuit judgment.
Hooters and TGI Friday’s operate in perhaps the most difficult sector in the industry right now, as consumers shift away from traditional casual dining.
But each of them in one way or another was weakened as the industry hit its current speed bump. And they ran off the road.
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