Sbarro And The Decline Of The Mall
The Internet isn't killing Sbarro, but it sure isn't helping.
The venerable mall-based pizza chain filed for bankruptcy protection this morning, just two years after it emerged from its previous go-round with credit protection. And the only thing that has changed in that time is that number of people who peruse the malls where the bulk of its locations are located has shrunk.
Consider this: During the holiday shopping season, foot traffic at retail centers declined 14.6 percent, according to the research firm ShopperTrak—even though sales increased 2.7 percent. The firm expects traffic to decline 9 percent this year. Consumers are obviously using the Internet more, even to reduce browsing.
This is bad news for a company that is dependent upon traffic at these retail centers. And it's no surprise that two of the restaurant chains that have recently filed for bankruptcy are mall-centric—Hot Dog On A Stick filed for bankruptcy earlier this year, and the company fully blamed the mall for its problems.
Even chains that aren't filing for bankruptcy are apparently struggling with declining retail traffic. BJ's Restaurants' recent sales declines could be tied to that decline—many of the company's locations are in malls or lifestyle centers. The company has listed the decline of retail traffic as one of its risk factors.
Neither Sbarro, nor Hot Dog, are destinations in and of themselves. They rely fully on that foot traffic. And declining foot traffic simply means fewer customers.
In January, both Moody's Investors Service and Standard & Poor's downgraded Sbarro's debt, in part because of a bad fourth quarter. The company relies heavily on the holiday shopping season for much of its annual sales, and the negative traffic numbers were brutal on the company, apparently. "Sbarro's cash flow is seasonal due to its reliance on shopping mall traffic patterns in the fourth quarter, which saw significant weakness during the 2013 holiday season," Moody's wrote. Cash flow is typically negative in the first three quarters of the year.
But Sbarro has also done little to set itself apart and give customers a reason to go to its restaurants even when they do shop. In an era when consumers are yearning for quality, the company serves reheated pizza and other Italian items. There is no reason to go to Sbarro unless you're out at a mall and it's convenient.
But even when it is convenient, the company often isn't the primary destination—malls are highly competitive places, after all. I go to a mall and have several different options. Indeed, those options have been increasing in recent years as shopping centers have turned to restaurants as replacements for retail shops that are closing.
Indeed, many of the comments we've read on social media and the Internet has said that very thing. Take this Tweet, from @HYCredit: "No one's ever been tempted by Sbarro. It's an 'I'm starving & it's the only real food nearby' thing. Losing strategy in 2014."
Standard and Poor's, which downgraded Sbarro's ratings further today on news of the bankruptcy, said that the company's management made various efforts after the 2011 bankruptcy to reinvigorate the brand, but sales and traffic were still declining through the end of December last year. Perhaps one sign that whatever Sbarro was working on hadn't been effective: Jim Greco, who took the helm of the chain after its bankruptcy, left the concept a year ago.
As we said last week, consumers aren't eating out as much as they did a decade ago. And they are less tolerant of poor quality. Companies that don't keep their strong connection with customers are losing out.