In this declining economy, it is not surprising to hear that restaurants are struggling. Despite being a huge foodie, I admit I was very choked up to hear that my old college hangout, Bennigan's would be closing its doors for good.
This has marked one of the largest Chapter 7 bankruptcies, according to the Wall Street Journal. Its high ingredient and labor costs are eating into the restaurant's profits. The added pressures of the nation's high gasoline prices and dwindling home values have motivated consumers to eat out less or switch to cheaper fast-food eats.
Greg Ruedy, a Dallas-based restaurant analyst for Stephens Inc., an investment bank, said the casual-dining sector has been beaten on all fronts.
"Pick your poison — the gas price, falling home values, food costs, inflation, minimum-wage hikes, tightening credit markets," Ruedy said.
All of the companies he covers have seen a drop in customer traffic. And there’s just too many restaurants operating, he said.
"For some time there’s been a supply/demand imbalance, and that needs to be corrected," he said.
"Six months ago, there were 10 options," said Stephen "Duffy" Oyster, a former Jack in the Box executive who operates the Pancho’s Mexican Buffet chain. "Sounds like they waited too long and there was no way to dig themselves out. From my perspective, they could have saved some or part of it, but their management team wouldn’t admit that it was going wrong until it was too late."
This bankruptcy trend has also hit "the do no wrong" Starbucks. The large coffee company has already alerted the world that they will be closing 617 of its stores. So, where will we go for our coffee and snickerdoodle infusion?
Starbucks is struggling nationwide as it faces slowing sales growth and increased competition.
Howard D. Schultz, the man who built the chain, faces the difficult task of slowing down the company to reinforce the hip-neighborhood -coffeehouse-feel of current stores, while also continuing to supply steady growth that investors expect from Starbucks.
Starbucks, not entirely hurt, earned $673 million in profit on $9.4 billion in net revenue for 2007. Nonetheless they have been damaged by rising costs and stiff competition. In the summer of 2007, customer traffic declined for the first time since the company went public, sending the stock tumbling. Starbucks stock, by the end of the year, once seemingly invincible, had declined by 42 percent.
In January 2008, Starbucks kicked out their chief executive, James L. Donald, and brought back Mr. Schultz to try to invigorate the company. Mr. Schultz announced that his company would stop selling warm breakfast sandwiches and close 100 under performing locations in the U.S. and scale back the increase of domestic store openings. Starbucks will then move to aggressively to open stores overseas, where business remains healthy. In February, the company alerted the world that it was cutting 600 jobs. And on February 26, 2008, it shut all 7,100 corporately operated stores for three hours for retraining of 135,000 employees
Sonny’s B-B-Q has also been hit by the country’s woes.
Greater Atlanta Bar-B-Q LLC, a Norcross-based franchisee of Sonny's barbecue restaurants, just filed this Thursday for Chapter 11 bankruptcy protection.
The filing stated, Greater Atlanta Bar-B-Q had estimated it has $1 million to $10 million in assets and $1 million to $10 million in liabilities. The company's top unsecured creditor was Sysco Food Service, which was listed, in the filing, as being owed $392,000.
The reason is the sharp change in balance between supply and demand, Ron Paul said.
Ron Paul, who is the president of consumer research company Technomic Inc., has said that in the early 2000s, credit was easy to obtain and many restaurant companies -- especially highly competitive bar-and-grill and casual dining segments. These same restaurant companies are now paying the price for taking advantage of easy credit and the appealing low finance percentages of yesteryear.
Technomic, has reported that the top 20 casual dining chains increased their number of locations by 45 percent during the past five years. Restaurant sales, in the meantime, rose just 31 percent.
"The lenders were very aggressive in making loans they probably shouldn't have made in financing restaurant expansion," Paul said. Now, particularly as consumers cut back on eating out, "there's just not enough customers to go around."
When the U.S. economy slammed on the brakes, consumers followed suit. High gas prices, the weak housing market and inflation have led to a tortoise-like consumer spending, especially on indulgences like a dinner out. Fourty five percent of Americans are eating out less this year to save some money. This is nearly a Twelve percent increase from last year, according to BIGResearch, a Worthington, Ohio-based firm that does consumer research.
This turn has forced restaurants to pay higher ingredient costs due to spiking commodity prices, which has put more pressure on profits.
This is by no means a first for this country. During the Great Depression, credit was ample and available at low rates. But by May of 1930, auto sales had declined to below the high levels of 1928. The prices in everyday staples began to decline, but wages held steady in 1930, before dropping dramatically in 1931. And by late 1930's, a steady decline set.
These troubles only added to struggling businesses, including restaurants, as the public reacted to the higher cost of eating out, when compared to the price of eating at home.
Quantum leap forward to 2008 and it is no different. The U.S. is in financial crisis and the food industry is going to be hit hard.
One thing is definite, food may be a necessity but who prepares it, is not. In this economy, we, as food providers, have become a luxury. And when is the last time, you went to the spa?
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