Several popular restaurant chains have filed for Chapter 11 bankruptcy in the year 2024, nearly doubling the number of filings from last year [3]. The following are some of the restaurant chains that have filed so far this year [3]:
Roti
Buca di Beppo
World of Beer
Rubio’s
Melt Bar & Grilled
Kuma’s Corner
Red Lobster
Tijuana Flats
Sticky’s Finger Joint
Boxer Ramen
BurgerFi
Tender Greens
Tocoya
What’s Chapter 11 Bankruptcy?
Chapter 11 bankruptcy is a provision in which businesses can file for bankruptcy without completely going out of business [1]. The court helps the company restructure its finances during this period, which is why Chapter 11 is often known as “reorganization” bankruptcy [1]. Businesses commonly use this provision when going through a rough financial patch, particularly in the highly competitive restaurant industry. So it’s not necessarily noteworthy that the restaurants above are filing for Chapter 11 bankruptcy, but rather that so many restaurants are filing in the same year.
COVID-19's Lasting Impact
It’s no secret that inflation skyrocketed during COVID-19 and still has not recovered to its pre-COVID rates. Restaurants have had to deal with raised ingredient and labor costs, which naturally leads to higher menu prices. According to the National Restaurant Association, menu prices have risen by 4% in the last year [5]. However, restaurants can only raise prices so much, and as those familiar with economics know, rising prices lead to a decrease in customer demand for those goods. In addition to inflation, the COVID economy has also impacted the demand side of the restaurant industry. Lockdowns and quarantines led to a rise in online food delivery and ghost kitchens (kitchens existing solely for fulfilling online orders without customer interaction), decreasing demand for sit-down restaurants. According to a report by Statista, the penetration rate (percentage of the target audience that a product/service has acquired) of the restaurant delivery market has skyrocketed from 18.1% in 2017 to 45.4% in 2024 [9]. Many of the restaurants listed above are primarily or partially sit-down, so they have undoubtedly experienced the effect of this changing consumer demand.
An Investor’s Influence on a Restaurant’s Finances
In addition to adapting to shifts in the restaurant industry as a whole, individual restaurant chains have struggled with private equity investors liquidating or selling off their assets within the restaurant industry when times are tough for the company [4]. Red Lobster is an example of a company that has dealt with this issue. In July 2014, a private equity firm that had invested in the company sold some of its real estate– about 500 stores in total [6]. This meant Red Lobster had to add rental payments to their costs as they no longer owned those locations. While the private equity firm profited, Red Lobster took a hit financially. Various factors contributed to Red Lobster’s eventual bankruptcy declaration ten years later, such as the shifting consumer demand mentioned above. Still, its issue with private equity investors greatly influenced the chain’s financial downfall.
Looking Ahead
In the past few years, the restaurant industry has seen more and more restaurants adapting to the current economic situation through market research for targeted advertising and a greater focus on delivery/takeout capacity rather than sit-down service. As time passes, companies will be forced to continue adapting to market trends to stay afloat amidst unforgiving economic conditions. The restaurant industry is a good representation of the effects of a capitalistic society where competition forces producers to modify their goods and/or services to fit the needs of an ever-changing market. While this kind of competition can be problematic for entrepreneurs and their small businesses, it enhances the experience for the average consumer since the variety in choices allows them to get the best value for their money. It’s important for future entrepreneurs to know that government provisions like Chapter 11 bankruptcy exist to temporarily assist companies struggling to get back on their feet financially. Still, a successful business needs to be adaptable, make wise financial decisions, and put its customers first to be sustainable long-term. Flexibility and adaptability are essential skill sets for any career path, even for students who are not planning to create a startup or work in the business field. Industries are constantly evolving, so the question becomes whether or not companies and their employees can grow along with them.
All content is the intellectual property of the Virginia Undergraduate Business Review.
REFERENCES
[1] Chappelow, J. (n.d.). Keynesian Economics Definition. Investopedia. http://www.investopedia.com/terms/k/keynesianeconomics.asp
[2] Dollarhide, M. (2019). Chapter 11. Investopedia. https://www.investopedia.com/terms/c/chapter11.asp
[3] Lucas, A. (2024, September). These 10 restaurant chains filed for bankruptcy this year. CNBC. https://www.cnbc.com/2024/09/01/restaurant-chains-that-filed-for-bankruptcy-this-year.html?&qsearchterm=restaurants
[4] Maze, J. (2024, June 27). A sign of the times? Why we’re seeing so many bankruptcies. Restaurant Business. https://www.restaurantbusinessonline.com/financing/sign-times-why-were-seeing-so-many-bankruptcies
[5] Menu prices. (n.d.). NRA. https://restaurant.org/research-and-media/research/economists-notebook/economic-indicators/menu-prices/
[6] Morgenson, G. (2024, May 24). How private equity rolled Red Lobster. NBC News. https://www.nbcnews.com/business/consumer/private-equity-rolled-red-lobster-rcna153397
[7] O’Neil, K. (2024, September 11). Popular fast-food burger chain files for Chapter 11 bankruptcy. TheStreet. https://www.thestreet.com/restaurants/popular-fast-food-burger-chain-files-for-chapter-11-bankruptcy
[8] Occhiogrosso, G. (2024, January 20). Trends Shaping The Ever Changing Restaurant Business In 2024. Forbes. https://www.forbes.com/sites/garyocchiogrosso/2024/01/20/trends-shaping-the-ever-changing-restaurant-business-in-2024/
[9] Restaurant Delivery - US | Statista Market Forecast. (2024). Statista; Statista. https://www.statista.com/outlook/emo/online-food-delivery/meal-delivery/restaurant-delivery/united-states
[IMAGE] Accessed via Reuters. (2024). https://www.independent.co.uk/news/world/americas/red-lobster-closures-bankruptcy-restaurants-b2545226.html
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