OPINIONFinancing

Who is struggling the most? Midsized restaurant chains

The restaurant recession has been hardest on concepts in the middle, says RB’s The Bottom Line, and that should push the industry toward more consolidation.
Photograph courtesy of Tilted Kilt

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Small chains and independents have been largely winning the restaurant battle in recent years as consumers spread their visits around and focus on experiences when they dine out.

That has to be bad news for the biggest chains, right? Nope.

In reality, it’s the midsized chains that struggled the most. Consider these numbers:

According to Technomic Transaction Insights data, the median sales change for the 200 largest restaurant companies was a 1.6% decline. In other words, the typical restaurant chain experienced a sales contraction in 2018—which explains why so many companies have been so eager to discount their food. (Technomic is a sister company of Restaurant Business.)

The top 50—from Krispy Kreme up to McDonald’s—saw growth of 1.2%. That is weak. It illustrates the difficulty restaurant chains had last year.

But it was chains Nos. 51 to 200 that saw the biggest problems, with a median, year-over-year decline of 2.3%.

To be sure, total chain numbers will probably look better than this, especially given the performance of the top chains, and finalized data is not yet available. We looked at median sales changes, rather than total numbers, to get a better sense of what the typical chain restaurant did last year.

That typical restaurant chain contracted.

The contraction, and the improved performance of larger chains, will likely provide even more ammunition to fuel even more consolidation in the restaurant space.

Large chains have inherent advantages in the current market. Notably, they have the financial wherewithal to make the investments required of modern restaurant chains.

Look at what McDonald’s Corp. has done over the past two years. In 2017, the company did as much or more than any other chain on the planet to put third-party delivery on the fast track by adding it quickly in half of its restaurants.

It followed that up by kicking off a three-year plan to remodel nearly all of its 14,000 locations. While much of the attention has been focused on franchisee pushback on this plan, it is nevertheless one of the boldest moves a restaurant chain has made in years.

Meanwhile, the country’s largest pizza chain, Domino’s Pizza, has decided to add 2,000 units over the next few years—essentially dumping what would be the fifth-largest pizza chain by unit count into the middle of a market known for disloyalty among consumers. Rival Pizza Hut is backed by the large Yum Brands, which invests heavily into its concepts.

Midsized chains can’t keep up.

This is nothing new. Midsized chains traditionally operate in a difficult middle ground, where they are either surging growth concepts or struggling chains past their peak. They don’t get the consumer love that independents and small concepts do, and they don’t have the financial power of large concepts.

Getting past this point is especially difficult. Look at the experience of Pollo Tropical. By all accounts it should have been able to expand beyond Florida, given its immense profitability. But it struggled once it did—and the chain’s sales fell more than 10% last year as it pulled back.

Yet it appears that midsized chains have struggled even more than normal in the current market. There is certainly an abnormally high number of free-falling chains.

Tilted Kilt sales fell 36% last year, according to Technomic. Taco Bueno was fine 18 months ago. But its heavy debt levels, weak same-store sales and bad weather in Texas all put it into bankruptcy. Bertucci’s also filed for bankruptcy, but many others simply struggled with closing locations and weak same-store sales.

Recent reports from both Black Box Intelligence and Technomic show some improvement at the end of last year and the start of 2019, which suggests the industry could be turning around.

Yet larger chains’ growth push and investment efforts could well keep the pressure on midsized chains to figure out how to compete. And most likely that will be through additional consolidation, as chains such as Romano's Macaroni Grill and Quiznos fight for survival.

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