Casual Dining Chain Bankruptcies Highlight Industry in Flux

America’s casual dining chain restaurants, struggling with operational costs and changing consumer habits, are rapidly going bankrupt in last-ditch efforts to rightsize or sell themselves to opportunistic investors.

The Chapter 11 filing in May by Red Lobster may be the most spectacular restaurant collapse of 2024, but the iconic seafood chain is just one of several brands forced into bankruptcy this year due to unsustainable debt and bloated operations. The trend continued earlier this month as Italian eatery Buca di Beppo and craft-beer focused chain World of Beer sought refuge in bankruptcy.

For many, the goal is to use the debt payment breathing spell afforded by Chapter 11 to close unprofitable locations and rework a number of vendor contracts to save money. Several are also using bankruptcy to finalize a changeover in ownership or solicit offers to buy the business at a discount.

In court filings, the bankrupt brands all say they’ve failed to make ends meet in the face of industrywide difficulties, including rising costs for food and labor and shrinking consumer demand. The Covid-19 pandemic is often cited as the genesis of despair, as many restaurants have struggled to adapt to changing consumer behavior, like spikes in delivery or takeout orders and diminished weekday lunch crowds.

Plus, pandemic-era guardrails have been removed and price-conscious consumers have shunned dining out due to higher costs. Even fast food brands are deploying value meal deals to reel customers back amid inflationary pressures.

“There’s an impending bust that’s on the way,” said restaurant industry consultant Aaron Allen, head of Aaron Allen & Associates. “We’re getting more and more calls these days for folks who need turnarounds.”

The cases illustrate not only how a global event affected a consumer market, but also how an entire industry is reckoning with broad, lasting changes.

“This is kind of a convergence of things,” Allen said. “There’s going to be a reconfiguration of the industry that will emerge out of this in the next two or three years.”

Eyeing Opportunities

Pushed to the brink, restaurateurs like Mod Pizza—a fast casual chain with more than 500 locations across the country—have inked buyout deals before ending up in bankruptcy court. In other cases, Chapter 11 is being used to facilitate a business handoff to investment firms that acquired substantial amounts of the company’s secured debt.

Red Lobster is moving forward with a deal that will see Fortress Investment Group take over the business by exchanging secured debt. Buca di Beppo also asked for court permission to launch a sale process with a starting offer from Main Street Capital Corp. to purchase the business via a debt swap.

One Table Restaurant Brands LLC, the operator of California-based Mexican chain Tocaya and salad concept chain Tender Greens, has similarly moved to hold an auction with lender Breakwater Management LP in the catbird seat holding more than $30 million in secured debt.

“There’s a lot of money on the sidelines,” said Los Angeles-based bankruptcy attorney Howard Ehrenberg of Greenspoon Marder LLP. “Smart people are figuring out if they invest in this and restructure, and redecorate and change the menu, can they make a go of it? Maybe they can.”

Rubio’s Restaurants Inc. completed a transaction in Chapter 11 this month, in which the fish taco chain sold the bulk of its operations and business to an affiliate of TREW Capital Management Private Credit LLC for $40 million. Run by Jeff Crivello, the former CEO of barbecue restaurant chain Famous Dave’s, TREW Capital purchased Rubio’s debt in March as the company was preparing to file for Chapter 11.

“Certainly there are brands that are stronger than others,” Crivello told Bloomberg Law. “You wait for a patient who’s usually healthy to be on the operating table to make an investment.”

‘New Normal’

A number of large restaurant brands like California Pizza Kitchen and Le Pain Quotidien filed for bankruptcy at the height of the pandemic, but the vast majority limped along hoping that business would return to normal before government relief dried up.

With the backing of landlords that couldn’t quickly find new tenants and lenders that didn’t want to take over their businesses, operators were largely spared.

“Some companies filed during Covid but there was definitely a trend of kicking the can down the road,” said Mette H. Kurth, chair of Culhane PLLC’s bankruptcy practice. “Mid-Covid nobody was going to buy it.”

Government assistance and creditor patience has since waned. Consumer demand in many respects has also not returned.

One Table noted upon filing for Chapter 11 in July that the ripple effects of the pandemic have devastated its businesses, “as they no longer enjoy the same volume of lunch-time workers as they did pre-pandemic.”

The operator of New York-area restaurant chain Sticky’s Finger Joint told a Delaware bankruptcy judge in April that it has similarly seen reduced workday lunch crowds and has had trouble adjusting to “the ‘new normal’ of shorter work weeks for employees who previously commuted to work in New York City five days a week.”

Kurth, who last year guided fast casual chain Corner Bakery into Chapter 11 and through a bankruptcy sale process to SSCP Management, said rising debts and interest rates—coupled with inflationary effects on food prices and worker wage costs—have made it “very difficult for these companies to keep their doors open.”

The problems are acute in California, which in April raised the minimum wage for fast food workers to $20 an hour.

“The restaurants have record levels of debt,” Allen said. “We expect to see an acceleration of bankruptcies in the fourth quarter and into 2025.”

Rightsizing

Bankruptcy court can also help chains with a glut of unprofitable locations.

“Bankruptcy is the function of capitalism that helps cleanse the business of locations that aren’t working,” said Crivello, whose firm purchased 86 of the 150 restaurants that Rubio’s once operated. “There’s always a buyer for a small portfolio of restaurants.”

Chains that went bankrupt this year looked to rip up lease agreements at locations that were shuttered before they filed. Some also left the door open for additional closures or lease payment reductions.

Widespread mismatches of location-by-location costs and revenues don’t mean any particular chain will be forced out of business for good, Ehrenberg said, but smaller physical footprints are a likely result.

“It seems like the entire industry has to rightsize,” he said. “So underperforming locations have to go.”

Figuring out a profitable version of a once-successful, now-distressed restaurant chain is particularly complicated given the economic climate and shift in consumer habits, Allen said. Restructuring analyses must consider restaurant categories and competition, changing geographical markets, debt levels, and the story behind a brand, the consultant said.

“It’s a really nuanced view that’s required,” he said. “There’s going to be a new ecosystem that gets created out of this, most likely.”