What Do Chain Restaurant Closures Say About the Economy?

Key Takeaways

• A string of high-profile restaurant closures has fueled perceptions that the industry is in serious trouble or even collapsing.
• Hard data shows that restaurant sales are on the upswing despite the struggles of some prominent chains.
• Successful restaurants have expanded as others have faltered, but the successes have gotten less attention.

You may have noticed that the Red Lobster or Applebees in your town is closing down, or that Boston Markets, which used to be everywhere, have all but vanished. What’s going wrong in the restaurant industry?

Economic data shows and restaurant experts say there’s no need to fret—the industry as a whole is likely growing—but changing currents of the economy, as well as specific circumstances for some restaurants, have left a handful of well-known brands struggling to survive. 

“The restaurant industry is notoriously competitive,” Sara Senatore, a Bank of America analyst who specializes in restaurants, told Investopedia. “And in the current environment, what we’re seeing is a return to intense competition.” 

Closing Time

It’s easy to take a look at headlines and hear the hoofbeats of the Four Horsemen. 

In June, seafood chain Red Lobster declared bankruptcy and closed down at least 50 locations, and asked a bankruptcy judge for permission to shutter 100 more. Applebee’s closed 35 more locations than it opened last quarter, according to parent company Dine Brands’ latest earnings report. In January, TGI Fridays said it would close 36 “underperforming” locations. Boston Market, once a national rotisserie chicken chain, has closed hundreds of restaurants since 2023 and, as of March, was down to just 27 according to a report by Restaurant Business, an industry trade magazine.

But while some businesses struggle, others are gaining ground. For every Red Lobster that shutters, it seems, there is a Chipotle to take its place: the fast food burrito chain opened 52 locations in the second quarter alone, the company said in an earnings report in June.

As a whole, restaurants are gaining more ground than they are losing, data suggests. The National Restaurant Association, a trade group for the industry, forecasts that restaurants will bring in a record $1 trillion in revenue in 2024, and add 200,000 jobs. Data on retail sales from the Census Bureau show the industry growing too, with sales at food service and drinking places—the category that includes restaurants—up 6% in the first six months of the year compared to the year before. 

Are Closures a Red Herring?

If the industry is healthy, why are closures grabbing all the attention?

The closures may be particularly unnerving because they seem so sudden. For example, Red Lobster, a privately held company, was not required to file shareholder disclosures, so the public had little notice that a storm was brewing. On Red Lobster’s press website, the most recent news release before it filed for bankruptcy was headlined “Red Lobster Drops Music Tracks as Fresh as Their Cheddar Bay Biscuits.” 

According to press reports after the fact, Red Lobster had been plagued by a unique set of troubles including questionable management by the private equity firm that owned it and an Endless Shrimp promotion gone wrong.

“These are never things that just come out of nowhere,” Senatore said of mass restaurant closures. “There’s a longer term pattern that leads to this. But they appear to be more sudden, whereas openings don’t happen all at once.” 

The Struggle Is Real

The economic upheavals of the last few years also may be a factor in the latest round of closures even if those closures do not constitute an apocalypse.

Immediately after the pandemic, times were good for the restaurants that made it through. Diners had plenty of money in their pockets because of rapid wage growth, and a “revenge spending” mindset drove people to spend on dining out and other luxuries they had missed during lockdowns. 

But that wage growth was a double-edged sword, as restaurants had to raise their own wages to attract and retain staff, and also faced higher costs for food and other expenses. Now, with household budgets straining under higher-than-normal inflation and elevated interest rates for loans, customers may have reached their limit to pay for increasingly expensive restaurant tabs. Restaurants that haven’t adapted to the new economic realities are being left behind, Senatore said. 

There are signs that lower-income customers are eating out less and shifting their spending to cheaper restaurants, Evert Gruyaert, restaurant and food service leader at Deloitte, said. And restaurants can’t raise prices to cover their increased costs or else they’ll lose more customers.

“They cannot really pull the pricing lever anymore,” he said. “And in this war for customers, they have to go pretty creative on value and deals and promotions.”

But those promotions can be costly—think endless shrimp. 

“The combination of all of those things is putting a level of stress on brands that leads to, unfortunately, some of the announcements that you have seen,” he said.

There are a few other trends putting financial pressure on restaurants, Gruyaert said. The industry has made large capital investments in the last few years, including renovating buildings, buying self-service kiosks, upgrading kitchen equipment, and making other improvements. The debt incurred to make those investments is starting to bite harder because of high interest rates, a result of the Federal Reserve’s campaign to battle inflation.

“I made investments for the long term, and I might start seeing the benefits now: better customer experience, more efficiencies and all that stuff,” Gruyaert said. “But the reality is, from a cash flow perspective, just the interest that I need to pay for all those investments on a monthly basis is really putting pressure on my business.” 

The current environment may be especially challenging for sit-down restaurant chains, known in the industry as “casual dining” establishments, said Michael S. Kaufman, a consultant and lecturer on restaurants at Harvard Business School. Meals at places like that may be among the first sacrifices for people looking to cut costs.

“Consumers, as McDonald’s and others have indicated, are looking at discretionary spends more critically now. What’s a restaurant to do?“ he said. “Consumers are saying, ‘We’re struggling, or we’re beginning to struggle or we’re thinking more carefully about what we spend.’ And that combination for that middle market of Applebee’s, Chili’s, TGI Fridays, maybe even Outback, you know, it’s inherently going to be more challenging.” 

The chains that have flourished in the high-wage, high-inflation economy are those with relatively low labor costs, or who have found ways to save, by switching to electronic ordering for example, Kaufman said. But there will likely be more casualties.

“I don’t know that the ability to maintain the large fleets of traditional casual dining restaurants can continue,” he said.

Read the original article on Investopedia.