Florida’s faltering economy burns chains, forces statewide wave of unit closures

Florida’s faltering economy burns chains, forces statewide wave of unit closures

Pummeled by rising costs and falling sales, restaurant companies are shuttering units in Florida as the Sunshine State’s once blazing-hot economy continues to fizzle.

In recent months, select units of Church’s [3] Chicken, Donatos Pizza, Sam Seltzer’s Steakhouse, Bennigan’s [4], Steak and Ale [5], and Roadhouse Grill, among others, have closed their doors, prompting observers to lament the spate of closures as extraordinary.

Carol Dover, president and chief executive of the Florida Restaurant and Lodging Association, believes the number of closings to be the highest in her 13-year tenure with the FRLA.

“We aren’t just getting hit with fuel prices, but food, labor and more,” she said. “So it’s not just one thing hitting the operators here. Every time they come up for air it’s something else.

“Every little expense is crawling higher and higher, and this is more than a lot of these smaller businesses can handle,” she continued. “A lot of them are at 2 [percent] to 3 percent profit margins. I just wonder at what point will we be at a breaking point in the industry.”

While Florida is not the only state affected by the slowed economy, it has been hit hard as the booming growth of the early 2000s sputters with the sub-prime mortgage meltdown, throwing Florida’s real estate market into disarray.

According to RealtyTrac Inc., the number of foreclosure filings nationwide in June was 71,000, up 50 percent from the same period a year earlier. Also, for the third month in a row, Florida and California were home to nine out of 10 geographic areas suffering the most foreclosures.

“This situation has a lot of people worried,” said William P. Fisher, Darden [6] Eminent Scholar in restaurant management at the Rosen School of Hospitality Management at the University of Central Florida in Orlando. “They feel wealth is diminishing, thus they are eating out less, so it is no surprise that a fair amount of restaurants are closing. This is as much a psychological depression as it is anything. I don’t see us coming out of it for a year or more.”

In the meantime, many operators are stemming their losses by closing underperforming units.

Quick Service Foods, a Church’s Chicken franchisee based in Tampa, Fla., recently received court approval to put some of its 18 units on the block, including three it had closed after filing for Chapter 11 bankruptcy protection in February.

The company blamed a decline in sales and rising fuel costs on its financial troubles.

Sam Seltzer’s Steakhouses of America Inc., also based in Tampa, filed for Chapter 11 bankruptcy protection in June, claiming that the weak economic environment, debt from previous expansion and rising fuel costs all had contributed to its problems. The company obtained a $1 million credit line to support it as it restructures and also closed three of its nine restaurants.

Tammie Atkinson, director of marketing for the regional steakhouse chain, said the remaining six restaurants are profitable and will stay open.

Columbus, Ohio-based Donatos Pizza closed its remaining seven company-owned restaurants in Florida in June, citing the high cost of operations. The pizza chain closed four units last October, the same month it announced a 60-unit, expansion deal in the Southeast with Piedmont Pizzeria LLC. Piedmont is led in part by Bojangles [7] veteran Joe Drury.

In June the Orlando Business Journal reported that Plano, Texas-based Metromedia Restaurant Group, parent of the Bennigan’s, Ponderosa [8] and Bonanza [8] brands, was closing 24 units in Florida.

Metromedia spokeswoman Monique Feid refuted that number, saying the company had closed just 10 locations in the state, including seven Bennigan’s and three Steak and Ale units.

Metromedia officials also said in a statement: “Given the slow economy and its impact on the entire casual-dining industry, Metromedia Restaurant Group must address several difficult issues to make smarter decisions for our bottom line. Our goal is to be proactive by creating a healthier financial outlook for all our brands. As a result MRG has made the difficult decision to close underperforming units.”

In May, West Palm Beach, Fla.-based Roadhouse Grill announced it was closing its remaining 20 company stores after an anticipated loan fell through, forcing the casual-dining chain from Chapter 11 bankruptcy protection into Chapter 7 liquidation. Five of the stores were in Central Florida.

In January, three of the 11 Mel’s Diners in southwest Florida owned by Bonita Springs, Fla.-based Creative Restaurant Management Co., closed their doors, leaving roughly 50 employees without pay and a host of other financial obligations, such as back sales and property taxes, unpaid rents and attorneys fees.

Three units of Carino’s Italian Grill [9] in the Jacksonville area also closed earlier this year, as did four units of the Don Pablo’s chain in the Tampa area.

Hudson Riehle, senior vice president of research and information services for the National Restaurant Association [10], said growth in the number of closings is to be expected.

Restaurateurs “are doing everything they can to look at costs and operations without affecting the guest experiences, and these actions are merited by current concerns,” he said.

Recent surveys by the NRA show that 24 percent of operators said the economy is their top concern, and food costs were cited as No. 1 by 23 percent, Riehle said.

“I haven’t seen anything this challenging since the downturn in 2001,” he said. “Compare these numbers with last year, when the top concern at 30 percent was recruitment and retention, while 14 percent cited building and maintaining sales.”

In 2007, food costs were top of mind for only 8 percent surveyed, he added.

Despite the tough environment, some operators see opportunity in the troubles of others.

Maryville, Tenn.-based Ruby Tuesday [11] has created a program to seek out sites vacated by others.

“We’ve actually established a plan in place for when restaurants close because it’s happening so frequently, so that we can effectively try to capture as much of the sales as we possibly can,” Kimberly M. Grant, the company’s executive vice president, said during a recent conference call with investors.

John Crossman, president of commercial real estate firm Crossman and Company in Orlando, said his business has grown more than 15 percent this year. Strong operators can find lease rates that are significantly lower than they were a year ago, he noted.

“I think this is a great time to be in the market,” he said. “When it is hot and doing well, it is hard for people to separate themselves. But when it’s going south, people have the opportunity to differentiate themselves. So sure, we’ll still see a lot go down, and a lot of chains will pull the reins back, but those focused on customer service and creativity will win.”