Despite the demise of certain well-known restaurant chains, retail sales data reveals an overall upswing in the dining sector. The narrative of widespread industry collapse is countered by a nuanced reality where successful ventures coexist with those faltering. The shuttering of Red Lobster or Applebee’s in local neighborhoods might indicate individual challenges rather than a sector-wide downturn.
“The restaurant business has long been marked by fierce rivalry,” remarked Sara Senatore, an analyst at Bank of America with expertise in the sector. “What’s unfolding now is a resurgence of intense competition.”
The presence of dramatic headlines can easily evoke fears of an industry apocalypse.
What is it about closures that draws so much attention, if the industry is otherwise thriving?
Red Lobster, a seafood chain, in June declared bankruptcy, shutting down over 50 sites and seeking court approval to close another hundred. According to Dine Brands’ earnings report, Applebee’s closed more locations than it opened, with a net of 35 closures last quarter. TGI Fridays announced the closure of 36 “underperforming” spots in January. Boston Market, previously a ubiquitous name in rotisserie chicken, has drastically reduced its presence to just 27 restaurants by March 2023, reported Restaurant Business.
These closures may feel sudden due to the public’s lack of foresight regarding company difficulties. For example, as a privately held firm, Red Lobster was not required to disclose shareholder information, leaving the public unaware of looming issues. Their latest press release prior to bankruptcy boasted of new music tracks, masking underlying issues.
Reports following the closures pointed to Red Lobster grappling with a set of unique challenges, including mismanagement by the owning private equity firm and flawed promotional strategies. “These mass closures don’t just happen overnight,” Senatore explained. “There’s often a more prolonged pattern that leads up to them.”
However, while some brands shrink, others like Chipotle are expanding. The burrito chain launched 52 new stores in just one quarter, according to their June earnings report. Industry predictions from the National Restaurant Association suggest restaurants will not only hit a record $1 trillion in revenue in 2024 but also generate 200,000 new jobs. The Census Bureau’s retail sales figures affirm this growth, showing a 6% increase in food service and drinking place sales over the year’s first half.
Even if the closures don’t spell disaster, the recent economic turbulence could contribute to the latest wave of shutdowns. Post-pandemic, restaurants initially thrived as consumers spent heavily on dining out, buoyed by rapid wage growth and a “revenge spending” mentality, eager to indulge in luxuries missed during lockdowns.
However, this wage increase presented a conundrum: restaurants had to hike wages to secure staff while grappling with soaring food costs. The market now faces high restaurant prices, and those failing to adapt to these economic shifts risk falling behind, according to Senatore.
Evert Gruyaert, leader of Deloitte’s restaurant division, noted shifting consumer behaviors, with lower-income individuals dining out less at pricier locations. Price increases to offset costs could deter customers further, he warned.
The survivors in this high-inflation, high-wage climate are often those with innovative cost-saving measures, such as electronic ordering systems, Kaufman observed. Yet, the sustained viability of extensive casual dining networks remains uncertain.
“The pricing lever isn’t viable anymore,” Gruyaert noted. “To win over consumers, businesses must creatively craft value and promotional strategies, though such efforts like endless shrimp promotions can be financially draining. Large-scale investments, from facility upgrades to self-service kiosks, have induced significant debt. With rising interest rates aimed at combatting inflation, servicing this debt strains cash flows,” he observed. “Long-term investments may enhance customer experience and operational efficiency, but the accompanying monthly interest burden is challenging,” Gruyaert concluded.
Michael S. Kaufman, of Harvard Business School, emphasized the difficulty casual dining chains face. As he explained, meals at these establishments become early budgetary casualties for cost-conscious consumers. “Spending scrutiny is rising, impacting the middle market of Applebee’s, Chili’s, and similar chains,” he noted. “This middle sector faces inherent challenges,” Kaufman concluded.