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Why casual-dining chains should close about 2,000 locations

Continued traffic challenges and industry changes suggest a need to keep reducing supply, says RB’s The Bottom Line.
Restaurant Business

Does it make sense for casual-dining concepts to close locations as a way to save the segment? RB Executive Editor Jonathan Maze and Editor-at-Large Peter Romeo offer opposing points of view. For the alternate take, see Reality Check.

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Casual-dining restaurants closed more units than they opened last year, according to Technomic's Top 500 Chain Restaurant Report. That was probably the first time in the sector’s history, which is surprising given the brutal market for dine-in chains in recent years.

It needs to close more. About 2,000, to be specific.

Here’s the issue: The sector has been adding units for a decade, despite persistent traffic and sales challenges, and bankruptcies beginning with Bennigan’s in 2008 and ending with Romano's Macaroni Grill in 2017.

The number of casual-dining locations in the Top 500 declined by 270 last year. For perhaps the first time in the sector’s history, the segment actually shrunk. That wasn't the case going into 2017, though: The number of casual-dining locations in the Top 500 grew by 19% between 2007 and 2016. Sales over that period grew by 25%.

The result? Worse unit economics.

Average sales per location between 2007 and 2017 increased to $3.25 million, from $3.04 million, an increase of 6.8%. But when adjusted for inflation, that 2007 figure is close to $3.7 million, meaning that average sales per location have actually declined by 12%.

Essentially, casual-dining restaurants kept expanding, despite a pretty persistent trend away from their type of service offering.

As such, the sector needs to focus on unit economics, so it can bolster the financial health of franchisees such as RMH Holdings, the large Applebee’s franchisee that filed for bankruptcy protection last month.

For that to happen, supply needs to shrink.

To return unit volumes to those 2007 levels would require a closure of about 2,100 chain restaurant, casual-dining locations.

Compare casual dining with quick-service restaurants. Over that same time period, the nation’s fast-food restaurants have done a good job of keeping unit growth to a relative minimum, increasing the number of locations by slightly less than 10%.

To be sure, quick-service restaurants are typically larger and more saturated, and unit growth will naturally be diminished. In addition, much of the unit count growth among limited-service chains is concentrated among fast-casual concepts.

Still, fast-food sales grew 34% over that same time frame. And sales per unit grew 25%. Adjusted for inflation, that’s a 5% increase over that period.

To be sure, I’m not calling for casual-dining restaurants to get together and divvy up the 2,000 locations to shut down. In addition, much of this growth has likely come from smaller concepts that have resonated with customers, which could allow one to argue that there was enough demand to keep growing.

In addition, while same-store sales in casual dining have definitely improved so far this year, traffic numbers remain weak, the improvement isn’t broad-based, and we’ve seen temporary sector improvement before, only to see customers fall back in with limited-service chains.

The 2,000 number is simply an indication of how oversupplied casual dining still is.

Unit economics matter. Restaurants with better average unit volumes generate higher profits and have more leeway to get things done, such as remodels and added technology. More chains need to take a step back from their expansion-driven mindset and start focusing on limiting the supply of their restaurants to get their volumes back up.

Be quicker to close underperforming units. Be highly conservative on any expansion. Build smaller locations when you do expand.  

Consumers are changing. They’re using casual-dining restaurants differently than they once did, making it more of a menu-specific, celebratory occasion. They’re less likely to dine in at mass-casual restaurants.

That kind of change comes with consequences. While that consequence might not be in the form of a mass closure of a couple thousand casual-dining restaurants, it should come with a long pause in development as the industry catches up with consumers.

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