This post is part of the On the Margin blog.
News that Cosí Inc. filed for bankruptcy Wednesday came as no surprise to industry observers. The chain has lost money for years. And lots of chains are taking the debt-protection route these days.
Indeed, Cosí was the eighth restaurant company to file for bankruptcy in 10 months. They represent at least 12 chains: Logan’s Roadhouse, Fox & Hound, Champps, Bailey’s, Old Country Buffet, HomeTown Buffet, Ryan’s, Johnny Carino’s, Quaker Steak & Lube, Zio’s Italian Kitchen, Black-eyed Pea and, of course, Cosí.
To be sure, restaurants file for credit protection every year. They are capital-intensive businesses operating in a saturated industry that caters to a fickle consumer. They frequently borrow money to expand. And they lease spaces for their restaurants. Thus, when sales fall, bankruptcies can often follow.
But the current wave of bankruptcies is definitely unusual, and rivals the chain bankruptcy wave of 2009 and 2010, when several chains filed for debt protection after sales fell.
In this case, the wave of bankruptcies is largely due to a decline in sales at restaurant chains that is particularly harmful to companies that are already walking a balance-sheet tightrope. The companies that filed for bankruptcy recently were already weak.
A few have filed for bankruptcy before. Buffets LLC, owner of Old Country Buffet, HomeTown Buffet and Ryan’s, has filed three times; Fox & Hound and Champps, two times. Same with Johnny Carino’s.
Many of the others have been perpetually struggling. That was true with Logan’s, which has been trying to work out a deal with its lenders for some time. Cosí, meanwhile, has been a perpetual money loser and long speculated as a candidate for bankruptcy.
Companies can do all they want to cut costs and run a tight ship, but at the end of the day the best predictor of profitability is sales growth. When sales fall, it’s tougher to make a profit, especially when that company has a lot of debt and/or costly leases.
Cosí is a perfect example. The company has never made a profit and has an accumulated deficit of well over $300 million.
Last year, occupancy and other expenses were 36.2 percent of sales. That’s huge. Much larger bakery/café chain Panera Bread, by contrast, spends 21.4 percent of its revenue on occupancy and other costs. The low sales also inflate the cost of labor, which at Panera was 32 percent of revenue last year. At Cosi it was 37.7 percent.
Thus, Cosí was walking the tightest of ropes. Same-store sales fell 4.5 percent in the second quarter ending June 27, and Cosí said the decline would keep the company from generating positive cash.
Buyers of locations want the ability to close more poorly performing units in the theory that getting rid of the money-losing locations will enable the company to operate more profitably. Cosí, therefore, closed 25 of its 74 company-owned units, or 40 percent of its owned locations, and 24 percent of its total unit count.
Companies need bankruptcy, however, to get out from under those leases to be able to sell to potential buyers. Thus, Cosí filed for bankruptcy so it could close those units, get out of those leases and sell the company to keep operating.
Debt also pushes companies into bankruptcy. Logan’s Roadhouse filed last month with $400 million in long-term debt.
But efforts to pull sales back up failed. Cosí shifted away from the discounts, but lost numerous customers in the process. Same-store sales and traffic fell steeply last year, and continued in 2016. In the first half of this year, sales fell nearly 4 percent, and traffic declined nearly 9 percent. The company then filed for bankruptcy.