Restaurant companies, like retail chains, may have depended too much on easy-to-borrow money for aggressive expansion plans, industry experts...
NEW YORK — Restaurant companies, like retail chains, may have depended too much on easy-to-borrow money for aggressive expansion plans, industry experts say — a move that may lead to more bankrupt chains and fewer new eateries opening in the months to come.
The gloomy outlook comes after Tuesday’s bankruptcy-protection filing by S&A Restaurant, the parent of Bennigan’s and Steak & Ale restaurants. S&A is owned by Metromedia Restaurant Group, a part of billionaire John Kluge’s empire.
Franchised locations will remain open and are not included in the filing.
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S&A is seeking to liquidate its assets and stop operations, a step usually taken in only the most dire financial circumstances. And although Bennigan’s may be the highest-profile chain to have filed for bankruptcy protection, it is far from the first this year.
Privately owned Vicorp Restaurants, which operates the Village Inn and Bakers Square chains, cited “substantial debt obligations” when it filed in April for Chapter 11 reorganization. Roadhouse Grill filed in October, intending to reorganize, but the private company converted to a liquidation proceeding in May.
At least four other restaurant chains have filed for bankruptcy protection since the start of the year. That compares with two during all of 2007 and six in 2004, estimated Ron Paul, president of consumer-research company Technomic.
Paul said the number of restaurant bankruptcies this year “could easily surpass” the 2004 number. The reason is the sharp change in balance between supply and demand, he said.
In the early 2000s, Paul said, credit was easy to come by and many restaurant companies — particularly in the highly competitive bar-and-grill and casual-dining segments — took advantage of that for ambitious expansion programs.
According to Technomic, the top 20 casual-dining chains increased the number of their locations by 45 percent during the past five years. Restaurant sales, meanwhile, rose 31 percent.
“The lenders were very aggressive in making loans they probably shouldn’t have made in financing restaurant expansion,” Paul said. Now, as consumers cut back on eating out, “there’s just not enough customers to go around.”
When the economy hit the brakes, consumers followed suit. High gas prices, the weak housing market and inflation have led to far slower consumer spending, especially on indulgences like a dinner out.
Meanwhile, restaurants have had to face far higher costs due to spiking commodity prices, which has put more pressure on profits.
Given the consumer slowdown and the higher costs, several chains have scaled back expansion plans, said Standard & Poor’s restaurant analyst Mark Basham.
With sales declining and some locations beginning to underperform, “all the bodies are floating to the surface, so to speak,” Basham said.
One company that has cut back on its openings is Ruby Tuesday — another popular family restaurant that has seen sales and profits slide.
In fiscal 2007, it either opened or bought 73 locations, not including those owned and operated by franchises. In the first nine months of fiscal 2008, Ruby Tuesday has opened or acquired 51 locations and plans to open just four more by the end of the year.
In a note to investors, Deutsche Bank North America analyst Jason West said he believes the industry is just at the “beginning of a store rationalization process” marked by restaurant closings and slower growth.