In 2022 and early 2023, we were witnessing what many were calling a “restaurant renaissance,” driven by pent-up demand after two preceding years of uncertainty and distress.
We now seem to be experiencing a bit of a renaissance hangover. The first half of 2024 has been defined by bankruptcies, closures, consumer pullback, value wars, and bifurcation. Armed with Q1 earnings commentary, there are clear winners on sales and traffic (Chipotle, Wingstop, Texas Roadhouse come to mind) and plenty of companies that are struggling as consumers, fed up with relentless menu inflation, start cooking more at home. This confluence of trends caused Technomic to adjust its sales expectations for the year, from 5.3% growth at the beginning, to 3.8% now.
As we mark the halfway point, here are some of the biggest narratives from the industry so far this year.
Bankruptcies
A combination of thin margins and slowing consumer discretionary patterns create vulnerability for restaurants, which is why the sector tends to generate more bankruptcies than others. That vulnerability seems to be compounded with a renaissance hangover. Last year, for instance, we saw filings from Corner Bakery Café, as well as major franchisees from Burger King, Hardee’s, Wendy’s, CKE, Popeyes, Denny’s, and McDonald’s. Bankruptcy filings reached the highest annual total on record for private equity and venture capital-backed companies in the U.S. in 2023, according to S&P Global Market Intelligence data. Overall, U.S. corporate bankruptcy filings reached a 13-year peak last year.
Things haven’t necessarily been rosier this year. Bankruptcy filings rose 16% during the 12-month period ending March 31, 2024, according to the Administrative Office of the U.S. Courts. The pace has accelerated since and, in the restaurant industry, that means high profile bankruptcies from the likes of Rubio’s, Red Lobster, and Tijuana Flats. It also means a host of filings from smaller, less capitalized concepts, such as Party Fowl, Boxer Ramen, Sticky Fingers, Oberweis Dairy, Foxtrot/Dom’s Kitchen, Melt Bar & Grilled and Kuma’s Corner. It also includes some franchisee bankruptcies, such as Subway’s River Sub LLC and Arby’s Miracle Restaurant Group.
Closures
While some companies are working out their debts through the courts, others are targeting a turnaround by closing underperforming units. This list includes Hooters, Pizza Hut, Applebee’s, Outback Steakhouse, Cracker Barrel, TGI Friday’s, Denny’s, and MOD Pizza. Meanwhile, BurgerFi is searching for “strategic alternatives” to manage its debt.
To be sure, 2023 was also a bad year for retrenchment, as nearly 33% of the Top 500 chains measured by Technomic experienced a net decrease.
A value war erupts as lower-income consumers pull back
In early February, McDonald’s CEO Chris Kempczinski said his company experienced traffic loss among lower-income consumers, calling the environment a “battleground” over those consumers. This rhetoric evolved to a “street fight” by May as menu inflation continued to outpace grocery inflation, leading 78% of consumers to believe that fast food is now a luxury. The result has been an aggressive value war to win those consumers back, with nearly every major QSR brand jockeying for top-of-mind value awareness.
McDonald’s just launched its $5 Meal Deal on top of “Free Fries Fridays,” for example, while Wendy’s, Burger King, Taco Bell, KFC, Subway, Jack in the Box, Carl’s Jr., Sonic, Fazoli’s, heck even Starbucks, have all introduced some type of combo meal deal in the past couple of months. The question now is ‘will it work (and without eroding margins)?’ Only time will tell.
Industry darlings
Despite the bankruptcies and closures and sharpened value focus, there have been plenty of eye-popping success stories this year to feed an optimism narrative as well. Consider fast-growing, traffic-generating beverage concepts like Dutch Bros and 7 Brew, or the curious innovation of McDonald’s CosMc’s. Burgeoning chicken concepts, like Dave’s Hot Chicken, Slim Chickens, and Huey Magoo’s, continue to garner much attention. Cava has held onto its strong halo since going public last year, while Wingstop, Chipotle and Texas Roadhouse have defied any conversations about traffic slowdowns.
AB 1228
Legislatively speaking, the biggest headline from the first half of the year is California’s AB 1228 going into effect April 1, raising the minimum wage at QSRs in the state to $20-an-hour, or by 25%, overnight. The implications have been swift – Rubio’s blamed California’s operating environment for its decision to abruptly shutter 48 locations, while two major Pizza Hut franchisees laid off their delivery workers ahead of the increase. A longtime McDonald’s operator shut down his San Francisco restaurant in part due to the new wage levels.
AB 1228 has been the elephant in the room at major restaurant events such as the Restaurant Leadership Conference in April and the National Restaurant Association Show in May, as operators hit the show floors and commiserated with their peers to seek out labor-saving solutions should this increase translate elsewhere.
Below the fold headlines
Apart from the major headlines, the industry has pieced together plenty of additional subheads so far this year that are also worthy of conversation. Here are some examples:
- On the menu front, protein, steak, and burger revamps have become a bigger focus, for instance. Starbucks’ “alchemic” Oleato is now available nationwide. McDonald’s and Taco Bell both shared their plans to go bigger on chicken this year (including through new McCrispy variations and a new Cantina Chicken menu, respectively), while KFC brought us a Chizza (pizza using chicken as the crust). McDonald’s and Krispy Kreme announced their intention in March to bring donuts to McDonald’s restaurants nationwide by the end of 2026.
- The M&A and IPO markets haven’t been dormant; Next Level acquired Veggie Grill, 7-Eleven acquired 204 Stripes, Burger King acquired its largest franchisee in Carrols, Savory Fund added South Block, One Group acquired Benihana, Blackstone bought Tropical Smoothie, Brix acquired Clean Juice, and Craveworthy Brands continued to collect even more brands. Meanwhile, Fat Brands’ Twin peaks and Smokey Bones confidentially filed for an IPO in May, while Pinstripes went public via a SPAC in January.
- New CEOs have taken over at Wendy’s, MOD, Bonchon, Noodles & Company, Handel’s Ice Cream, Starbucks North America, Taco John’s, Smashburger, El Pollo Loco, Mountain Mike’s, Shake Shack (which led to an interim CEO role at Papa Johns), Red Lobster, and Tijuana Flats. Further, there are new presidents at Perkins, Carl’s Jr., Pizza Hut, and Corner Bakery Café,
- Focus Brands, parent company of Auntie Anne’s, Cinnabon, Jamba, Moe’s, McAlister’s, and more, rebranded to GoTo Foods in February, while Zoup! Rebranded to Z!Eats in February, and Perkins Restaurant & Bakery is now Perkins American Food Company.
- On the marketing side, Applebee’s Date Night Pass sold out in under a minute, Smalls Sliders came up with its own Pantone color – “Smorange” – and influencers’ influence continued to grow, informing menus and campaigns and everything in between.
- On the employee proposition side, Chipotle added new benefits including a student loan debt/401K match, and a 50-to-1 stock split to make its shares more accessible. First Watch began subsidizing childcare benefits for its employees, and Waffle House began phasing in wage increases last month after five years of planning and disruptions.
- On the tech side, more companies – like Wingstop and Yum – began leaning into proprietary systems, while McDonald’s ended its AI drive-thru test with IBM.
- On the development, we’re seeing an acceleration of smaller prototypes as construction and real estate costs remain high, while Chick-fil-A debuted its first mobile pickup restaurant in New York City.
What now?
To nutshell, it’s safe to call this environment tough and perhaps tougher than initially expected at the beginning of the year, with flashing signals all over the place. But there are also plenty of bulls running around and reported signs of improvement from an abysmal Q1. How the rest of the year plays out with such a dichotomous backdrop is anyone’s guess. What we know now is the National Restaurant Association forecasts that the industry will surpass $1 trillion in sales and half-glass-full toasts are more fun than half-empty ones.
Contact Alicia Kelso at [email protected]