TAMPA Fla. The difficult operating environment inflicted extensive damage on the restaurant industry last year, according to a recently released report.
In a survey of more than 9,500 restaurant operators, Chain Store Guide, a retail and research firm based here, found that 388, or 4.1 percent, went out of business in 2008. While the firm conducts an annual census of restaurant operations, the notable number of closures prompted CSG to tally that figure for the first time.
CSG, which is owned by Nation’s Restaurant News' parent company, Lebhar-Friedman Inc., researched for the report 4,530 high-volume independent operations and 5,003 chain operations, for a total of 9,533 restaurant operators.
More than 70 percent of the 388 shuttered operations were high-volume independent restaurants, which are classified as restaurants that record at least $1 million per year in revenue, CSG said.
Among chain operators, 114 went out of business, or about 2.3 percent of the segment, CSG found. Those chain operators ran a total of 613 restaurants. Nearly 64 percent of the out-of-business chain operators were smaller businesses that ran fewer than 10 locations, and more than 50 percent of them were franchisees of major chains.
“What struck me was that the power centers — New York, Chicago, Los Angeles — [were] where high-volume independents took the biggest hits,” said Linda Helman, senior editor at Chain Store Guide. “Among chains, it was more proportional.”
Among the notable independent closings of 2008 were Anjou in San Francisco; Copperblue in Chicago; Monkey Bar, Grayz and San Domenico NY, all in New York; and French 250, Tula and Via, all in Denver.
Chains also shut off the lights at several units during 2008. Among them, Brinker International closed 18 Macaroni Grill stores, Roadhouse Grill closed all 21 units, Shells Seafood Restaurants Inc. closed all 22 units, and Starbucks shuttered 250 of the 600 units it had slated for closure.
Helman pointed toward three major culprits behind the number of closings in 2008: reduced corporate spending, high rents and the credit crunch, which cut off business lending.
When big businesses, from Wall Street banks to pharmaceutical giants, cut back on corporate spending as the economy soured last year, restaurants were hard hit by the smaller expense accounts, decreased travel, and fewer client meetings over lunches and dinners.
According to Chain Store Guide’s research, the majority of restaurants that went out of business were clustered in parts of the country that also are home to the largest banks, mortgage companies and insurance providers.
In addition, as guest traffic slowed, costs in those areas remained just as high, if not higher than in past years. Landlords, especially those that manage high-rent locations in major cities, did not immediately look to relax rent terms to help operators through the lean times.
“There was unwillingness among landlords to renegotiate rents,” Helman said. “Some landlords were taking a short-sighted approach, saying, ‘Pay rent or get out.’”
Finally, as the financial sector began to crumble, credit markets froze, shutting out many businesses from the needed lending and debt financing they use to operate, remodel operations or expand. While some sources have pointed to a recent thawing of the credit freeze, it is still difficult in 2009 to secure financing for many restaurant operators.
Allan Hickok, managing director of consulting firm Restaurant & Retail Strategies, said in an April report that during tough times restaurants must focus on cost reduction opportunities to protect assets, the most important of which is profit.
“Profits are the oxygen of business,” he said. “To protect your assets you must protect your earnings.”
Streamlining an operation’s cost structure is essential as operators adjust to lower levels of profitability that could linger as long as top-line trends remain slow. The cost side of the equation is where operators have more flexibility, Hickok said, because today’s environment will not allow for menu price increases to offset the sluggish traffic.
Hickok suggested in his report that operators should follow the 80/20 rule: spend 80 percent of the asset protection effort on the highest and most critical priorities.
“Rent is more important than laundry,” he said.
General and administrative spending, or G&A, should follow the traditional rule of between 6 percent and 7 percent of sales, and may even need to be less, he noted.
“I would not be surprised to learn that the normalized G&A average is reduced from this long-standing average as operators tighten their belts,” Hickok said.
Finally, while cost cutting and profit protection are essential in tough times, restaurants still need to focus on the top line that drives the business. Cost containment strategies to help operations stay afloat should not come at the expense of hospitality, as consumers will be quick to find flaws, Hickok said. Portion control, lower-quality products and reduced labor, could help shore up a cost structure, but could also lead to even lower sales should consumers get wise to those changes.
“Restaurants cannot simply cut their way to prosperity,” Hickok said. “Restaurants are a top-line business. You cannot generate a strong top line without reliable hospitality.”
Contact Sarah E. Lockyer at [email protected].
