A growing number of major restaurant chains will likely continue to file for bankruptcy protection over the coming years as the industry struggles to manage the heavy debt it accumulated during the COVID-19 pandemic, according to bankruptcy attorney Daniel Gielchinsky.
“Restaurants that exist today may not exist in five years. They’ll be off the map,” Gielchinsky said. Additionally, consumers will “see a lot of restaurants with a decreased footprint,” he added.
The latest victim could be Hooters of America, which is considering filing for bankruptcy as a means of restructuring the restaurant chain and tackling its debt, sources recently told Bloomberg. The company would be the latest in a growing list of major chains such as TGI Friday’s, Denny’s, Ruby Tuesday, Rubio’s Coastal Grill and Red Lobster that have filed for protection in bankruptcy court.
Other companies, including those that didn’t file for bankruptcy protection, significantly reduced their footprint to position themselves better in the current environment. Wendy’s, for instance, announced in November that it was shuttering 140 underperforming locations through the end of 2024 as it looks to improve its “restaurant footprint and overall system health.”
HOOTERS LOOKING AT POSSIBLE BANKRUPTCY FILING
Gielchinsky said that “small restaurants and mom-and-pop restaurants are going under too.”
Several factors led to their downfall, according to Gielchinsky, founder and partner of South Florida-based DGIM Law. However, the COVID-19 pandemic was the catalyst, as the industry saw traffic decline significantly.
Operators wanted to keep their doors open, so they had to cover costs like rent, insurance, and payroll, even though customers weren’t coming in. To stay afloat, restaurants relied on government subsidies but also on taking out loans to fund business expenses. This meant that companies accumulated debt that they had to pay back over time plus interest.
“There is no escaping borrowing, you are always going to have to pay that money back or wind up in bankruptcy and reorganize the structure of the debt,” Gielchinsky said.
RED LOBSTER IS BACK; CEO PLOTS FUTURE FOR SEAFOOD CHAIN
The problem, however, is that the industry expected consumer spending at restaurants to return to pre-pandemic levels once things returned to normal. When that didn’t happen, debt-ridden restaurants were unable to repay those loans, according to Gielchinsky.
Top-line revenue never rebounded, according to Gielchinsky, who said that “customers never came back in full force” due to changes in their habits and spending ability.
Consumers became accustomed to eating at home more and saving their disposable income for other things, which led them to stop going out to restaurants three to four times a week.
On top of that, inflation was hitting consumers harder, especially lower-income households, which make up a significant portion of quick-service restaurant customers.
He also added that the popularity of weight-loss drugs is playing a role. The drugs have convinced more people to rely on healthier habits such as cooking at home.
Major heavy hitters in the industry have reported a decline in store sales in back-to-back quarters.
David Gibbs, the CEO of Yum! Brands, parent of KFC, Taco Bell and Pizza Hut, told analysts earlier this month that sales at KFC stores declined 2% during the fiscal year. During the last three months of the year, sales remained flat compared with the same period last year.
McDonald’s CEO Chris Kempczinski previously warned that while it anticipated a challenging environment in 2024, its performance for the year had fallen short of its expectations. The company rolled out a new value menu at its restaurants in a bid to rejuvenate traffic.
In its earnings call earlier this month, McDonald’s CFO Ian Frederick Borden said the company’s “2025 outlook reflects the current environment of softer, declining restaurant industry traffic in the U.S.”
