Factors leading to a surge of restaurant bankruptcy filings

Over the last couple of years, numerous restaurant chains have filed for bankruptcy protection, including the following:

• TGI Fridays
• Red Lobster
• BurgerFi
• Anthony’s Coal Fired Pizza
• Buca Di Beppo
• Tijuana Flats
• World of Beer
• Rubio's
• Rōti Modern Mediterranean
• Melt Bar and Grilled
• Sticky's Finger Joint
• Boxer Ramen
• Kuma’s Corner
• Bar Louie
• Hooters
• On the Border Mexican Grill & Cantina.

In addition, numerous quick service restaurant franchisees have filed bankruptcy:

• Meridian Restaurants Unlimited - 120 Burger King locations
• Toms King- 90 Burger King locations
• Premier Kings- 172 Burger King locations
• Consolidated Burger Holdings LLC – 57 Burger King locations
• River Sub - 50 Subway locations
• EYM Pizza L.P. - 142 Pizza Hut locations
• NPC International, Inc. - 1,200 Pizza Hut locations and nearly 400 Wendy’s restaurants
• Starboard Group – 61 Wendy’s locations
• Miracle Restaurant Group- 25 Arby’s locations
• Summit Restaurants - 145 Hardee’s locations
• RRG Inc. – 17 Popeye’s locations

Restaurants faced significant headwinds during the pandemic. Negative same-store sales compressed profit margins which resulted in the inability to cover fixed costs. Price increases and reduction of operating disbursements couldn’t adequately compensate for a rise in labor and commodity expenses, resulting in an erosion of cash positions. Free money from federal stimulus programs promised temporary relief, but did not fix balance sheet or operational deficiencies. Overall declines in system-wide same store sales and low sales-to-fixed cost ratios have hampered efforts to sell locations.

Post-pandemic, many of these same headwinds continue to cause negative cash flow and defaults under credit facilities. Restaurant sales often fluctuate throughout the year, making it difficult to maintain consistent cash flow, especially for establishments in tourist locations or those with seasonal menu items. Discretionary consumer spending is also difficult to predict.  Below are certain factors contributing to negative restaurant cash flows:

• High Operating Expenses: Restaurants have substantial costs associated with rent, utilities, staffing, and other ongoing expenses. 
• High Cost of Goods Sold (COGS): Food and beverage costs, often a significant portion of a restaurant's expenses, can fluctuate and impact cash flow. 
• Inadequate Pricing: Setting prices that don't cover costs can lead to negative cash flow. In addition, further price increases may not be possible.
• Increasing Competition: A saturated market and new entrants can pressure prices and sales volume. 
• Inventory Management Issues: Poor inventory control, including overstocking or spoilage, can tie up capital and negatively affect cash flow. 
• Inaccurate Bookkeeping and Forecasting: Mistakes in tracking revenue and expenses can lead to inaccurate cash flow projections and potential issues.  Many restaurants fail to prepare profit and loss statements and 13-week cash flow projections with actual to budgeted variance reports.  
• Late Customer Payments: If customers take too long to pay their bills, it can negatively impact the restaurant's immediate cash flow. 
• Uncontrolled Growth: Rapid expansion without a sound financial plan can strain resources and lead to negative cash flow. 

In response to these factors, McDonald Hopkins’ franchise team is working with financially distressed franchisors and franchisees in the restaurant industry to:

• Control Spending: Implement strict budgeting and 13-week cash flow forecasting, monitor expenses, and explore ways to reduce costs. 
• Improve Efficiency: Optimize kitchen operations, reduce waste, and explore strategies to decrease labor turnover. 
• Analyze and Adjust Pricing: Review pricing strategies to ensure they cover costs and generate profit. Try to reduce overhead costs and consolidate your vendor base.
• Manage Inventory Effectively: Implement inventory control systems to minimize spoilage and reduce storage costs. 
• Explore New Revenue Streams: Consider offerings like takeout, catering, or online ordering to increase sales. 
• Secure Additional Funding: Explore new financing options from private lenders and non-institutional lenders to obtain additional capital. . 
• Monitor and Forecast Cash Flow: Regularly track cash flow and create accurate forecasts to identify potential problems early. 
• Embracing Technology & Reliable POS Systems:  Advanced point of sales systems are equipped with analytics capabilities which provide crucial data to evaluate restaurant performance.

In 2025, financially distressed restaurants must explore several solutions, including leveraging technology, optimizing operations, and focusing on customer experience.  Restaurants can also consider expanding revenue streams, implementing data-driven decision-making, and exploring alternative financing options.