Red Lobster, Buca di Beppo, Roti, BurgerFi, now TGI Fridays and more: 2024 has been a year full of once-popular, casual dining chain bankruptcies, and industry experts are pointing to two main trends that have caused doors to close.
"There's been a lot of speculation about the heydays of fast-casual, the heydays of casual dining and about all different restaurant concepts. It comes down, really, to the brand's specific price value equation. What is the guest getting versus what are they giving up?" Cotton Patch Cafe CEO Brandon Coleman – formerly of TGI Fridays, Dave & Buster’s, Macaroni Grill – told Fox News Digital.
"When we talk about the fast-casual dining heydays being over, it's really a certain type of restaurant that has been around for 20, 30, 40 years that many of us grew up with. And it's normal for a lot of those chains to turn over, over time," Debtwire executive editor John Bringardner also told Digital.
"Tastes change. And if a chain does not evolve with their customer base," Bringardner continued, "then it's not uncommon for them to step aside."
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More than a dozen restaurant chains have declared Chapter 11 bankruptcy since the start of the year at the fastest rate in decades. According to the experts, coming out of the COVID pandemic fueled higher costs (for operators and customers) and influenced different dining habits. Analysts at Debtwire also predict the next brand names to fall could be Hooters or Denny’s.
"They have a similar level of debt as Fridays. It's a similar structure, and they suffer from many of the same issues. It's a legacy brand that everyone knows, but they took a big hit during the pandemic," Bringardner said. "They have new competitors, and they've not refreshed the brand in a way that gets people back into the restaurants."
"We had accelerated costs for our supply chains and for our labor, as well as for many other things that service the restaurant. When faced with this, many brands had to choose different paths," Coleman, who left TGI Fridays last November, began to explain.
"Some chose to absorb the cost for the short-term and positioned themselves better for the long-term. Some brands chose to innovate around these costs, and other brands chose to pass along these costs to the consumer," he added. "And when you start to put that pressure on the consumer, they're choosing with their feet, they're voting which restaurant they're going to go to based on their perception of the price-value equation."
The head of Debtwire expanded on this "barbell" issue, noting the confluence of these two indicators.
"First, the pandemic forced restaurants to take on a tremendous amount of debt out of the blue just to survive, particularly sit-down restaurants that lost most or all of their business for months… That's a tough blow for any kind of business," Bringardner said.
"But on top of that, the chains you're seeing go under are those that never really recovered. Second, there seems to be particular trouble in the family restaurant or casual dining sector, and that's a function of changing eating habits among Americans."
The kind of debt these companies incur is typically bonds, loans, asset-backed securities that are used to fund growth, Bringardner noted. A Chapter 11 bankruptcy is a unique tool in the U.S. legal system that gives companies breathing room they need to restructure their debts and come out on the other side as a profitable business.
He estimated that Red Lobster had about $1 billion in debt and TGI Fridays, who declared bankruptcy earlier this month, has more than $300 million in debt.
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"The problem with having that kind of debt is that it's much like a mortgage on your home. The mortgage payments might be fine if you still have your job, if everyone's healthy, but… suddenly you can fall back on your debt payments and risk losing your home. It's quite the same at the corporate level," Bringardner said.
"It's a very difficult decision for any brand," Coleman chimed in. "Obviously, there's a lot of impact to the guests, to the team and to the shareholders as well. And so it's never a decision that's taken lightly in any situation."
"But I think it comes down to each individual brand and what decisions are going to be made to maybe eliminate some poor locations, kind of clean up the business. I think that's what you've got to see when choosing bankruptcy. Is there something on the other side?" the CEO further posited. "Is there a core concept or brand that can flourish if it was freed of some investment decisions from previous years?"
Coleman gave a look inside what conversations might happen in a bankruptcy boardroom: "You are going to have to challenge… every preconceived notion or untouchable belief within that restaurant concept, and challenge it in order to create a great future for that brand. Now, the other thing you're going to have to do is really understand what your customer is seeking from your brand."
"More often than not, in a turnaround situation, we want to stay with our core guest and look at concentric circles and how to expand with guests that either look like our current guest, or very close proximity to our current guest… That creates momentum that can be carried through in combination with cost reductions and new value added to the guest, to create a sustainable, revitalized proposition for some of these brands that are challenged," Coleman said.
But there are some companies that continue to move the casual dining needle, according to Coleman and Bringardner. These include Chili’s, Chipotle, Texas Roadhouse, Wingstop, Cava and Sweetgreen.
Customers seem to be gravitating towards quick-service options that focus on fresh ingredients and fast turnover. Giving his best advice to other CEOs at failing restaurants, Coleman reminded them it’s "all about the people."
"If you truly understand what your guest is seeking, then you can create value for them, and that value will result in foot traffic," Coleman said. "The people that lead the restaurants on a daily basis, those are the people and the support centers that we serve every day. And if you put the people first… and you invest in coaching, training, mentoring and making sure that they have a strong quality of life in the restaurants, your guests are going to get that benefit."
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"It can sound like a chicken or egg question: are these restaurants not meeting expectations, or is it just the fact that customers are no longer coming in their doors?" Bringardner pointed out.
"But if restaurants were able to meet expectations, the customers would be there."
