What restaurant operators can learn from this wave of bankruptciesWhat restaurant operators can learn from this wave of bankruptcies

Joanna Fantozzi

From Red Lobster and BurgerFi to Rubio’s and Tender Greens, as well as many franchisees in between, restaurant bankruptcies have been rampant in 2024. While many thought the post-COVID years would be a time of prosperity for restaurants and retail, rising prices in a persistent inflationary environment have led to an extended time of cautious consumer spending. With the lean COVID years being a recent memory for the industry, many restaurant operators are struggling to survive and thrive, which has led to the slew of Chapter 11 filings over the past year.

During a conversation called Emergency Restaurant Broadcast, industry thought leaders Zach Goldstein, founder of Thanx; Meredith Sandland, CEO of Empower Delivery; Ellie Doty, founder of high Impact Marketing; and Andrew Smith, cofounder of Savory Fund,  discussed why so many operators have filed for bankruptcy and what industry leaders are doing at this time to stand out and organically boost traffic.

“The restaurant industry suffers from nearsightedness,” Goldstein said. “We tend to look at our challenges and where we are right now.”

As a result, a lot of decisions that operators made five years ago are just now coming back to haunt them, and investments made during that time of prosperity just aren’t working as well anymore in 2024.

Related:Emergency Restaurant Broadcast: Navigating restaurant bankruptcies

“When debt was easily available and was relatively inexpensive, it was very easy to justify funding a brand that seemed on trend and growing with healthy margins,” Sandland said. “Now, debt is expensive and hard, and there are not a bunch of people willing to just keep pouring cash in until the moment that the brand finally gets into a cash-flow-positive situation.”

In the immediate aftermath of the pandemic, when dining rooms started reopening and people were going back to work and spending government stipends (as well as not yet paying student loan payments), things were looking up for operators. But that confidence didn’t last, and prices continued to rise.

“The problem is that [operators] with debt made decisions in 2017-2019 to overleverage themselves, increasing their [costs] and were not ready to pivot,” Goldstein said. “Of course, the pandemic happens. The government then gives money to people and bolsters up some of these businesses to stay alive.… They were bolstered up with cash on their balance sheets. That’s all gone now.”

One major issue is, to survive inflation, operators have begun relying on third-party delivery and discounting, both of which can harm profits in different ways.

Related:Restaurant bankruptcies and the thousands of cuts

“If you increase your off-premises business, a lot of brands underestimate the costs of doing so,” Doty said. “Guests are paying more for food that’s wrong and cold and that’s just not a recipe for a devoted customer. If you’re not doing the work of making delivery a great experience for your guests, they’re not going to come back to it.”

As restaurants stretch themselves thin trying to equally invest in different channels, it can come at the cost of restaurant experience. Sandland pointed out that many of Starbucks’ current problems began as more and more guests started pre-ordering on the app, which makes the café experience somewhat superfluous and secondary to the speed and efficiency of picking up the right drink on time.

“In a lot of ways, Starbucks cafes have become e-commerce fulfillment centers, and guess what? No one wants to hang out in an e-commerce fulfillment center,” Sandland said.

Besides over-relying on off-premises channels, often at the cost of the on-premises experiences, many operators are also falling into the over-discounting trap. Although it might seem lucrative in the short-term to appeal to budget-conscious customers by offering up discounts and dollar menus, it can be detrimental in the long run, not only to a restaurant’s bottom line (since people are paying less for the food), but also because it isn’t a net positive for traffic patterns.

“We have brands right now in the Savory Fund portfolio totally crushing the market, and they’re discounting nothing,” Smith said. “They’re able to get to that point because they’re building that loyalty with that customer…. Operators might think, ‘Well, I'm not like that. I have to discount, or I have to use third-party delivery to survive’…. But that's going to be just this long death spiral for your brand… [and you’re] not making decisions today to be a long-term brand.”

While it is important to be digitally savvy and meet customers where they’re at, it’s equally important to realize that many third-party delivery customers or coupon-hunters aren’t necessarily loyal to your brand; they’re loyal to the discounts and delivery apps. The key to success in this challenging environment, each of these experts agreed, is to create long-term loyalty that withstands periods of cautious consumer spending, because even the penny-pinching loyal customer will find their way back to spending money at their favorite restaurants.    

Contact Joanna at [email protected]