Are 40 percent of restaurant chains teetering on the brink of disaster?

A new study by AlixPartners, an international business-advisory firm, suggests that up to 40 percent of the nation’s chain restaurants could be fighting for their very survival within the next 12 months.

The startling study reveals that many chains are taking a beating as a result of a combined one-two punch of fewer diners spending less money and massive debt. AlixPartners’ analysts described the plight of the industry as worrisome, citing low-price, quick-service eateries as the lone bright spot.

Experts I spoke with for the latest version of our popular Chain Restaurant Ratings report (look for it in the July issue of Consumer Reports and online in early June) said total restaurant sales are down around 6 percent from a year ago, with fancy, fine-dining establishments hurting the most (sales are off by 15 percent). 

AlixPartners studied 110 restaurant chains across four main categories:  fine dining, casual dining (eateries with lower prices but that still offer full table service), fast-casual dining (those with no table service but with the promise of a higher quality of food and atmosphere than a fast-food restaurant) and quick-service restaurants (where food is ordered at a walk-up cash register or at a drive-through window).  

The firm also surveyed 1,000 consumers about their recent dining habits and expectations for future spending. Almost half (48 percent) of respondents said they plan to eat out less frequently in the coming year. More than half (51 percent) predicted they would spend an average of $10 or less per meal. When asked the same question in 2008, 42 percent of those surveyed they planned on spending $10 or less.

Andy Eversbusch, a managing director at AlixPartners and leader of the firm’s Restaurant and Food Services Practice, said, “While certainly there are healthy companies in every restaurant category, our analysis suggests that, without aggressive intervention, up to 40 percent of chains face the possibility of a severe liquidity crisis, which could mean failure, within a year.  And if things worsen in the economy, that timeline could shrink to just a few months for many chains. 

Eversbusch added that the company’s research suggests that fine-dining and casual restaurants, in particular, are likely to experience a further and potentially dramatic drop in earnings, cash, and returns this year, as they find themselves caught in the vice of a recessionary economy and rising labor prices due to hikes in the minimum wage rate.  

As the survey part of our study shows, when it comes to dining out these days, Americans are saying either, ‘let’s eat at home instead’ or ‘let’s eat cheap’ – or at least, ‘let’s get a lot more value for the money that we are willing to spend.’”

Comments

[Harold (SMM)]

Hi Tod,

Wow. Those are some hard numbers to think on. The down turn in the economy is affecting everyone one of us that is for sure. Makes even more important a businesses focus on trimming down costs and ramping up customer relations.

I know in my own experience, that I continue to return to the restaurants and business that take just a little extra effort to get to know me and build a friendly relationship with me. It's those places where it's a lot easier for me to part with my money.

[Kevin]

I'm glad these restaurants are failing. They were complicit in the surbanization of America and helped to make our country look uniformly dull from coast to coast.