Fate of Chain Restaurants: Spring of Hope or Winter of Despair

We miss our restaurants and they miss us. Before COVID-19, off-premises dining was a cutting-edge concept being investigated as a supplemental-income stream. Now curbside and delivery, as well are architectural changes are a necessity and a matter of survival. Let’s see how this is playing out now, and will in the future.

The Winter of Despair

Even before COVID-19, many restaurants were financially challenged. Older chains were under pressure from changing demographics, increased competition and rising costs for years. Even those restaurants that began reconfiguration in 2019 found their progress stymied by the impact of COVID-19, resulting in accelerated closure of both franchised and company-operated locations. COVID-19 broke the back of iconic chains such as Chuck E Cheese, California Pizza Kitchens, Cosi, and Friendly’s Restaurants and forced these companies to close their underperforming locations. Experts predict somewhere between 40% to 60% of restaurants nationally will close permanently. For these restaurants, this is the season of despair.

Huge franchisees of many of these chains also had to reorganize in Chapter 11. The largest franchisee of Golden Coral, 1069 Restaurant Group, almost took the chain down by itself. NPC International Inc., the nation’s largest franchisee of Pizza Hut and Wendy’s restaurants, filed bankruptcy and wants to sell its entire company to the Flynn Restaurant Group.

The Season of Hope

The bankruptcy of NPC International also shows that the death of restaurants has been somewhat overstated. With reduced competition, bidding wars and increased merger-and-acquisition activity of restaurant chains have developed. As of Dec. 1, 2020, Wendy’s has opposed NPC’s sale to Flynn, the largest restaurant franchisee in the United States. Wendy’s instead has made its own offer with a consortium of regional franchisees. Wendy’s is in talks with NPC to drop its opposition in return for an agreement by Flynn to invest tens of millions of dollars in NPC’s Wendy’s restaurants. Another example is Dunkin’ Brands, which was acquired by Inspire Brands – the owner of Arby’s and Corner Bakery – for $11 billion.

Overheard at the Restaurant Finance and Development Conference in November 2020 was the report that franchise and restaurant investment capital is plentiful, but not at traditional banks. Some banks are open to it, but most of the bankers interested are in those nontraditional banks, who have little competition, and charge accordingly. Private equity and private placement money are available as well at reasonable costs.

Additionally, companies positioned for increased delivery, drive-thru efficiencies and home delivery have prospered. Pizza restaurants have reported steady 20% increases, and some brands have even quadrupled their sales. Yum Brands, a publicly held owner of various brands reports same store sales increases for its U.S. operations, including KFC, which is up 9%, Pizza Hut up 6% and Taco Bell up 3%.

More restaurant shakeouts and consolidation will likely occur this year. Independent chefs will move into the former space of aged-out restaurants, and continue the cycle of rejuvenation. All the more reason to visit your favorite eateries now, and to look forward to the innovations that will adopt to changing customer needs and values.

The full article (first appeared in The Legal Intelligencer) in its original form can be found here.

Craig R. Tractenberg is a partner at Fox Rothschild (Philadelphia and New York offices). He has a broad business practice, with strong focuses on franchise, insolvency and infrastructure transactions.

Leave a Comment