Why do some restaurants get millions while others go bankrupt?

Investment dollars are still flowing into an industry where bankruptcies are common. Here’s why that is, says RB’s The Bottom Line.
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The Bottom Line

The restaurant industry sure seems to be struggling these days. To wit:

Noon Mediterranean, formerly known as Verts, filed for bankruptcy protection.

Just last week, Mike Isabella Concepts declared bankruptcy. So did Ruby’s Diner. This after Real Mex Restaurants filed last month.

Barnes & Noble admitted that its full-service restaurant experiment has been a major challenge.

Oh, and Taco Bueno just said it’s closing 16 locations.  

All of this bad news apparently isn’t stopping investors from pumping more millions into growth concepts.

Jollibee Foods Corp. invested $12.4 million into Rick Bayless’ fast-casual concept Tortas Frontera.

Not to be outdone, a bunch of well-known investors pumped $21 million into a single concept that has been open for less than six months: Spyce. Sure, it has robots. But that’s a lot of money for a one-unit restaurant.

And, as we highlighted in this week’s podcast, delivery sales are growing by leaps and bounds. Just last month, DoorDash received $250 million.

Investors flooding money into a business where bankruptcies are that frequent and questions exist over the state of industry traffic seems to be an especially risky venture. But all of these contradictions demonstrate that the restaurant business is both saturated and shifting.

It is full of locations, but a changing consumer keeps ensuring that some concepts will struggle while others will flourish—even though the economy is surging and the stock market is on a historic bull run.

U.S. consumers spend more at restaurants as a percentage of their overall food spending than any other country on earth, at more than 50%. That might be sustainable, but it also gets fundamentally more difficult to grow. Organic growth is therefore more difficult to come by because, frankly, consumers don’t have any space in their budgets.

While the economy might be growing, consumers are only willing to go out so often, as weak restaurant industry traffic as measured by both Black Box and Technomic demonstrates.

What we are seeing, however, is a shift in the way consumers consume their restaurant meals and the restaurants they are using.

Consumers are fickle. They change as new generations start spending more money, and as they discover new concepts and new ideas, and as technology changes what is possible. The restaurant industry is big and diverse, and it evolves with these changing dynamics.

We know, for instance, that consumers are ordering more food via delivery, which is why DoorDash is valued at $4 billion right now. But there’s little evidence to suggest that delivery is pulling up total traffic. While delivery sales are expected to keep growing at strong rates, it’s still shifting traffic away from concepts that don’t deliver or that do a weaker job at it or that have lower position on third-party delivery company apps.

We also know that consumers are shifting sales toward smaller chains and independents.

Technomic Managing Principal Joe Pawlak has long said that these newer concepts are pulling in traffic.

The Food Network and Cooking Channel and other networks have numerous shows in which colorful or obnoxious hosts visit local restaurants highlighting interesting and new types of food. Social media helps inflate this try-new-things culture, which helps generate sales at these newer concepts.

That continues to fuel new concept growth. As a result, restaurants like Tortas Frontera and Spyce are getting millions in investment.

But this growth comes from somewhere. While that somewhere is not always obvious, it means that some concepts and chains will struggle. Because consumers have so many choices, they’re rejecting concepts that don’t do as good a job.

Those concepts aren’t always old ones, either.

The Noon Mediterranean story that my colleague Heather Lalley reported illustrates this well. It was once one of the hottest concepts around. But then the company pulled popular items off its menu and changed its name. Anger and confusion are not good ingredients in a good restaurant chain recipe. And the company ended up in bankruptcy.

The news might seem contradictory at the moment. But it’s just a sign of the evolving and shifting nature of a business that has reached its saturation point. It means this business isn’t getting any easier, no matter what executives throw at it.

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