Why Are So Many Restaurant Chains Filing For Bankruptcy?


Two large, well-known chains are apparently exploring bankruptcy—the sub chain Quiznos and, reportedly, mall-based pizza chain Sbarro. Assuming those bankruptcies get filed, they would follow the sports bar owner Fox & Hound Restaurant Group, the buffet chain Furr's and the hot dog concept Hot Dog On A Stick in what is clearly a flurry of restaurant bankruptcy filings. Other chains could be in danger of the same fate.

Is this an industry problem? Not necessarily. But the struggles at these chains do show that the economy is not favorable to weaker concepts.

In a release this afternoon, Fitch Ratings called the bankruptcies "a warning sign of financial distress among restaurant chains." But, it added, "We do not view them as portending to widespread bankruptcies of US restaurants, but a reflection of difficulties faced by brands that have lost their competitive position and relevancy with consumers."

Each bankruptcy has its own individual story. Sbarro just got out of bankruptcy two years ago and already finds itself heading in that same direction. The company has about $140 million in debt and just closed 155 company-owned locations. Quiznos avoided that fate with a restructuring two years ago, but that deal left too much debt on its books—nearly $600 million.

The Quiznos situation, Fitch noted, underscores the problems faced by "highly levered restaurant chains with a dysfunctional franchise system."

But the common theme with many of these situations is that the brands have lost their relevance with consumers and are struggling to get it back.

Mediocrity doesn't suffice right now. Consumers aren't eating out as much as they did a decade ago. They don't have as much money. They have access to consumer-focused reviews of restaurants thanks to Yelp and other sites. So when they do go out, they increasingly opt for concepts that can pull the right levers.

Sbarro is struggling with weakening mall traffic and a poor reputation for product quality. Quiznos does have a good product, but it lost trust with consumers over the years amid so many store closures. It's difficult for the company to get that back.

In both cases, customers have lots of options. If I want a sub, I can choose from numerous brands that are just a two-mile drive from where I sit right now. If I want mall food, I have lots of choices there, too. And the competition isn't just coming from restaurants, either—convenience stores, grocery stores and even pharmacies have done a great job offering sandwiches and ready-to-eat pizza.

The level of competition has increased the stakes in the marketing game, and has made concepts more innovative. Those concepts that can't keep up with that pace have struggled. And the struggles seem to feed on themselves. "The Quiznos and Sbarro situations reflect the difficulties faced by brands that have lost their competitive position and relevancy with consumers," Fitch said. 

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