This post is part of the On the Margin blog.
The fast-casual bubble has popped.
Earlier this month, I discussed reasons for the challenges facing fast-casual restaurants, which averaged a same-store sales decline of 1.1 percent in the last quarter of 2016.
The sales problems are starting to result in unit closures. To wit:
In February, Noodles & Company said it plans to close 55 restaurants.
More recently, the fast-casual pizza chain Pie Five closed nine locations.
Neal Sherman, president of RestaurantEquipment.Bid, which helps sell equipment from closed restaurants, said that he’s been selling more equipment from fast-casual concepts recently. He specifically mentioned closed better burger restaurants and shuttered fast-casual pizza units.
To be sure, the closed locations are providing openings for other brands, as noted by news last week that Bibibop Asian Grill will move into the 15 closed ShopHouse Asian Kitchen locations — more than doubling the size of that chain virtually overnight.
One interesting nugget in that piece: Bibibop is considering “similar deals.”
The closures are likely a natural outgrowth of weak segment same-store sales and aggressive development, fueled by private-equity investment and pushes by many chains to be first in their respective markets.
That expansion intensified competition for leases, driving up costs and increasing the supply of such restaurants at a rate faster than demand. The closures are an outgrowth of this phenomenon.
“There has been such an over-expansion in recent years,” Charley Shin, founder of Bibibop and Charleys Philly Steaks, told me. “It might have been a little too aggressive. There might be weaker players falling off, especially in the fast-casual industry.”
To be sure, these closures are not quite the level that appears to be happening in casual dining, which is faring worse and has for far longer.
And, as the Bibibop case indicates, there are frequently restaurant chains eager to move into the closed locations. Bibibop wasn’t the only company that was bidding on the ShopHouse leases — which included some high-profile areas. “Chipotle really picked the prime sites,” Shin said. There is always demand for strong sites.
Also, not all closures are created equal. In the case of Burger Works and ShopHouse, the chains were experimental concepts started by larger companies that ran into problems and opted to shut down the brands. Shutting such brands down can be more advantageous to the companies than it would be if they simply sold the brands outright.
Still, the weakness recently in the fast-casual segment could portend to broader problems.
Consider one example we didn’t include, My Fit Foods. My Fit Foods sold prepared foods in locations that didn’t have dine-in seating, making it different from your typical fast-casual concept. But it had received significant investment over the years, expanded heavily and competed in the fast-healthy space with many fast-casual restaurants.
In February, My Fit Foods closed all 50 of its locations.
Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.
Contact Jonathan Maze at [email protected]
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