High-profile Restaurant Closures Teach Valuable Lessons

Legend has it that shopping cart roams the parking lot to this day... Image: CJM Grafx / Shutterstock

The closing of multiple restaurant locations by several restaurant chains is both omen and opportunity.

Donald Burns, 2020 Nightclub & Bar Show speaker and contributor, made the convincing case yesterday that a restaurant apocalypse will descend on the industry next year.

High-profile closures have already taken place in 2019, and they may indicate a worrisome trend for chains, supporting Burns’ prediction.

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We asked industry leaders to weigh in on what metrics they were tracking to ensure proper cash flow, increased profit margins, and operations setup for future growth.

But they may also represent opportunities for established independent operators and those looking to get into the industry with their first restaurant.

Multiple outlets have reported on global, national and regional chains closing multiple “troubled” locations. Some have shuttered “only” four or five units, but a single closure can mean the loss of several million dollars. Other chains have closed hundreds of locations already—yes, hundreds.

The reasons for these closures run the gamut: failure to innovate; lack of agility in adapting to shifting consumer preferences; failure to capture younger demographics; branding that no longer resonates with the public; reduced traffic; overexpansion; increased competition; increased costs across the board; a slip in public perception; and controversy.

Among the operations that have closed (or plan to close) less than 100 locations so far this year, Luby’s has closed four locations; TGI Fridays has shuttered five; Taco Bell and McCormick & Schick’s have both shed six locations; Roy Rogers has closed seven restaurants; both Perkins and Red Robin have shut down ten units, and The Cheesecake Factory may join them; Fuddruckers has closed 11 restaurants; O’Charley’s has shut down 14 units; Ruby Tuesday closed down 18; Marie Callender's and Kona Grill have shuttered 19; Applebee’s has closed at least 20 restaurants this year; IHOP (formerly IHOB for a hot minute) will turn the lights out in 30 to 40 units; and Boston Market has turned off the lights of almost four dozen restaurants.

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The numbers only tell a portion of the story, however. We’re often left to speculate as to the cause of closures since most chains choose to remain quiet about such things. It’s possible that chains like Luby’s, O’Charley’s, Roy Rogers, Marie Callender’s and Fuddruckers failed to attract new, younger guests because they didn’t revamp their menus to offer healthier items.

On the branding side of things, it’s likely in the case of Roy Rogers that the name and theme simply aren’t appealing to younger generations—Millennials and Gen Zers probably don’t know who Roy Rogers was. If a brand fails to resonate with the largest generation, they’ll likely continue on a downward trend.

While it may not be part of The Cheesecake’s overt branding, the chain is known for succeeding with a menu large enough to destroy the ticket times and turnover rates of other brands. But the brand is also “known” for high-calorie dishes that aren’t exactly healthy. Today’s more-informed, healthier guest is seeking lighter, healthier fare during many of their dining occasions. IHOP is in the same boat, adding a number of burgers to its menu during the IHOB campaign rather than offering healthier options.

Agility seems to be the Achille’s heel for several restaurant chains. In fact, large corporations in several industries seem to adapt more slowly than their smaller, nimbler counterparts. Strong brand recognition and superior purchasing power work in a big chain’s favor, but an independent operator usually isn’t contending with a board of directors, shareholders, and financial and legal departments to make an important operational decision, making them quicker to adapt.

We do know, thanks to Neve Gotshalk via MoneyWise, that Boston Market’s CEO Frances Allen said the closing of 45 units was due to an increase in competition, increased costs, and changes in consumer behavior.

Interestingly, Luby’s—which closed four units—owns almost 50 Fuddruckers locations. They went from owning 60 as of last year to 49, most likely accounting for the 11 that were closed this year. The majority are operated by franchisees and it’ll be interesting to see if Luby’s closes even more units next year.

Perkins, Ruby Tuesday, Marie Callender’s and McCormick & Schmick’s seem to be following a downward trend. In 2005, Perkins was operating around 500 restaurants. That number slipped by almost 160 stores, including its ten closures this year. Ruby Tuesday not only closed 18 restaurants in 2019, they shuttered 51 last year. There are only a couple dozen Marie Callender’s left today—the brand once operated 50 units. And McCormick & Schmick’s, 85 restaurants strong when they were acquired by Landry’s in 2012, now has just 36.

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When it comes to the importance of location, Red Robin has learned that lesson well. Of the ten restaurants they’ve closed in 2019, seven were located in malls. Credit Suisse, a leading financial services company, has predicted that a quarter of malls in the United States will close by 2022. Restaurants located in malls rely heavily on foot traffic—if the mall suffers a slowdown, the restaurants suffer along with it.

Overexpansion and cutting back on several aspects that determine restaurant success has led to Kona Grill not only closing locations but filing for bankruptcy and courting potential buyers. According to Gotshalk, sales began slipping in 2015 and caused an internal panic. The ensuing “strategy” to deal with slipping sales was to pull back on management and employee training, and to halt menu innovations, likely in a misguided attempt to reduce costs.

Not all closures necessarily point to doom for a restaurant chain. Applebee’s aims to close a minimum of 20 locations this year. Keep in mind, however, that the brand operates over 1,800 restaurants. According to parent company Dine Brands Global, the plan is to adapt and retool, adding healthier and ethnic menu items while zeroing in on delivery and carryout, and also pursuing off-premises catering services.

Reviewing 100-plus unit closures, at least four restaurant chains are framing their decisions in a positive light. Steak ‘n Shake, for instance, has labeled their 106 closures temporary, claiming to be updating the units to sell to franchisees.

Starbucks has closed 150 locations, admitting they were underperforming. Considering that the coffee behemoth celebrated the opening of its 30,000th unit in March of this year and factoring in how many restaurants have been located in the same cities in close proximity to one another, the acknowledgement that underperforming units need to be closed can be seen as a wise decision.

Burger King has closed hundreds of restaurants over the course of the past several years. This year, 250 units were slated for closure. However, the company has claimed that new restaurants, outfitted with tech like self-order kiosks and digital drive-thru menu boards similar to those that McDonald’s has been rolling out, will generate $500,000 more than those being shuttered. (McDonald's is facing its own newly revealed challenges after announcing on Sunday that its board had voted on November 1 to fire CEO Steve Easterbrook for an improper but reportedly consensual relationship with an employee.)

Pizza Hut plans to cull units from 7,450 to 7,000 this year. And while restaurant closures can cost chains millions and millions of dollars, they can also be the tip of the spear for a long-term, profitable strategy. The plan is to leave the traditional restaurant model entirely and focus only on delivery and carryout.

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Subway has been battling public perception. They faced a PR crisis in terms of an ugly scandal, and today’s more health-conscious guest doesn’t appear to think the chain has enough to offer them. Subway closed almost 360 locations in 2016, and that number leapt to over 850 in 2017. Last year, the chain shut down more than a staggering 1,100 units. If this trend continues, well over 1,000 units could be closed by the end of this year, and there’s no telling how many may close in 2020.

The importance of adaptability is the greatest lesson learned by the restaurant closures from the restaurant chains reviewed here. Whether it’s branding, menus, tech, location or services, operators must be agile to survive shifts in consumer preferences. Today’s restaurant guest wants transparency and healthier items from relevant brands that offer convenience, and several brands on this list struggled to meet those challenges.

A second lesson? Savvy independent single- and multi-unit operators (along with smaller chain operators) looking to expand may benefit from the number of shuttered but purpose-built locations that are currently on the market. Future operators hunting for locations for their first restaurants or bars can also benefit. Keep on the lookout for deals on closed locations.

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