San Francisco, Aug. 6 - Opportunity beckons for restaurant survivors in what may be a record year for industry bankruptcies that free up plum U.S. locations and ease competition.
Eateries are going belly up faster than usual, said Ron Paul, president of restaurant consulting firm Technomic. "We are already running slightly ahead of pace. Typically in slow times we have seen at least six per year."
S&A Restaurant Corp, owner of the Bennigan's and Steak & Ale chains, last week filed for Chapter 7 liquidation, shuttering dozens of company-owned restaurants and becoming the fourth large chain to go bankrupt this year.
"We haven't seen more than six (large restaurant bankruptcies) since 1980," said Paul, referring to a time when hundreds of savings and loan associations failed and commercial real estate values plummeted.
S&A's move came on the heels of Chapter 11 filings from Steakhouse Partners Inc, Ryan's and Old Country Buffet chain owner Buffets Holdings Inc, and Bakers Square and Village Inn owner VICORP Restaurants Inc. The bankruptcy reorganization process can be used to break leases and shutter restaurants.
Paul expects more private and publicly held restaurants, especially casual diners, to go dark in 2008.
"We should easily surpass 1,000 closed," including franchise outlets, he said. Percentage-wise, however, "it's a drop in the bucket" as the United States had about 575,000 private and chain restaurants at the end of 2007, he noted.
Most 2008 closures are likely to be by mom and pop operators who tend to be based within neighborhoods instead of urban centers, Paul said.
CLOSE DOORS, OPEN WINDOW
Restaurant closures can open windows of opportunity for nearby operators.
"(In) locations where we are located right next to where Bennigan's was, we have seen an uptick in sales and traffic," Brinker International Inc Chief Financial Officer Chuck Sonsteby said on a conference call after reporting higher earnings on Tuesday.
Restaurant operators, analysts and consultants have said a shakeout has been long in coming -- especially among mid-tier casual dining chains that have expanded aggressively in the United States during the real estate boom.
"I think everybody has been looking for correction in supply," said Sonsteby, whose company this year has closed some of its own Chili's Grill & Bar and Romano's Macaroni Grill restaurants.
Industry experts say strong operators like Olive Garden owner Darden Restaurants Inc, private entrepreneurs and popular new publicly held chains are likely to gain by having more prime spots available. However, since their growth plans are set far in advance, it would be hard to switch sites at short notice.
One potential beneficiary is Texas Roadhouse Inc, a fast-growing chain that opened in 1993 and now has more than 300 restaurants in 44 states. The chain, which is honoring Bennigan's and Steak & Ale gift cards, is eyeing real estate opportunities.
"Given the large number of closures, we would certainly expect to see some prime locations be available," Chief Executive G.J. Hart told Reuters in an email. "But many of the Bennigan's and Steak and Ale's were located very near existing Texas Roadhouse restaurants."
Industry watchers expect little to no impact on pricing power since many restaurant operators are scared of alienating customers who are already grappling with higher food and fuel bills.
"There is no lack of competition," said restaurant consultant Malcolm Knapp. "At best (any benefit from a closure) is temporary. If it's a good location someone will fill it. Good real estate gets occupied."
DEBT WATCH
Investors are keeping a wary eye on operators like Ruby Tuesday Inc and DineEquity Inc, formerly IHOP, because they are carrying significant debt.
But those publicly held chains are more the exception than the rule. Unlike retailers, most restaurant operators -- excluding those owned by public equity firms -- do not pile on loads of debt.
Harlan Platt, a professor of finance at Northeastern University, said that while the industry would likely see more small or marginal restaurant chains fail, the demise of Bennigan's and Steak & Ale does not foretell an avalanche of bankruptcies in the restaurant industry.
"I don't think it's a sign that the end is near. I'm surprised they lasted a long as they did," Platt said.