U.S. chain restaurants are four times more likely to fail in 2009 than they were a year ago, and up to 40 percent of chains could face cash flow problems within the next year, according to a study released Tuesday by business consultant AlixPartners.
The study, which focused on 110 restaurant chains across four categories, including fine dining, casual dining, fast casual and quick service, found that fine dining and casual restaurants are the most likely segments to experience additional and potentially dramatic decreases in earnings, cash and returns this year, said Andy Everbusch, a managing director at AlixPartners and leader of the firm’s restaurant and foodservices division. New York-based AlixPartners specializes in improving corporate financials and operational performance.
“While certainly there are healthy companies in every restaurant category, our analysis suggests that without aggressive intervention, up to 40 percent of chains face the possibility of a severe liquidity crisis, which could mean failure within a year,” Everbusch said. “And if things worsen in the economy, that timeline could shrink to just a few months for many chains. Overall, we found declining growth rates and declining same-store sales in all four sectors, as well as declining EBITDA in three of the four sectors, with only quick serve bucking the trend.”
The study also determined that the debt-to-equity ratio for chains has increased to 1.38, from 0.68 in 2006. At the same time, cash levels have dropped at a rate of 6.5 percent annually since 2004.
Adam Werner, a director at AlixPartners, said that in order for restaurant companies to remain solvent during the current crisis, they must keep all costs in check.
“Just as lean production has saved billions of dollars for leading manufacturing companies, our research and experience in the field shows that restaurants could also benefit greatly from the application of similar techniques, such as minimizing energy and water use, optimizing labor schedules and controlling waste and inventory levels with improved demand forecasts,” he said. “When combined with proven techniques in supply-chain and real-estate management, this could amount to savings of at least 15 percent against current costs.”
Adam Fless, author of the study, noted that now is the time for operators to rethink the way a meal is served in their restaurants.
“The main concern, whether it’s a chain of quick-service restaurants or fine-dining establishments, has primarily been with the quality of the food, its presentation and so on,” he said. “However, in today’s environment, ‘the meal’ needs to be rethought. It needs to be looked at not just as a consumer experience, but also very much as a product, a product that needs to be optimally produced, sourced and delivered. To do any less is, really, to shortchange today’s budget-conscious consumer.”
Among the 1,000 adult consumers polled for the study, 48 percent said they planned to eat out less frequently during the next year, while 51 percent said they would spend no more than $10 per meal.
Contact Elissa Elan at [email protected]