Bidenomics Taking It’s Toll
The anticipated consumer pullback has arrived, and its impact on the restaurant industry is severe.
When the economy is booming, restaurant parking lots are full and chains are feverishly establishing new locations. But when the economy is struggling, restaurants get a lot less traffic and poor performing locations get shut down. Sadly, in 2024 it appears that a “restaurant apocalypse” has started to sweep across America.
For months, experts have forecasted a tightening of consumer spending, and now that prediction is becoming a reality. As households tighten their budgets, discretionary spending is one of the first areas to see cuts. Dining out, often considered a luxury rather than a necessity, is experiencing a significant decline as a result.
Restaurants across the board are feeling the effects. Fast food chains, casual dining spots, and upscale eateries alike are witnessing a drop in customer foot traffic and order volumes. This decrease in patronage is straining an industry already grappling with rising costs for labor, food, and utilities.
Get Ready: Recently Announced Restaurants Closing Locations
There is a long list of restaurant chains closing locations due to financial reasons keeps growing. Here are just a few of the best known.
- Red Lobster: Headlines are confirming recently that Red Lobster is facing bankruptcy
- Pizza Hut: Popular chain abruptly closes 50 locations
- Boston Market: Once with over 1,000 locations, now facing it’s final days
- TGI Fridays: TGI Fridays in 12 states will close, with New Jersey taking the biggest hit
- Popeyes Fried Chicken: One of the nation’s most popular fried chicken chains is closing restaurants due to a bankruptcy
- Tijuana Flats: With dozens of locations across Florida, Alabama, North Carolina and Tennessee, filed for Chapter 11 bankruptcy
- Cracker Barrel: The chain closed two California locations and also closed restaurants in Oregon and South Carolina suddenly shuttered
- Applebees: Last year, the casual eating chain shut down 46 locations. Now with 35 more to come
Tough Decisions Coming
Many restaurants are being forced to make tough decisions to stay afloat. Cost-cutting measures such as reducing staff hours, simplifying menus, and even temporarily closing locations are becoming common strategies. However, for some establishments, these measures are not enough to weather the storm.
Independent restaurants, in particular, are facing an uphill battle. Unlike large chains, they often lack the financial reserves to endure prolonged periods of reduced revenue. Many beloved local eateries have had to close their doors permanently, unable to sustain operations in the current economic climate.
The broader economic implications of the consumer pullback extend beyond the restaurant industry. Suppliers, delivery services, and other businesses that rely on the restaurant sector are also feeling the pinch, creating a ripple effect throughout the economy.
In response to these challenges, some restaurants are adapting by enhancing their delivery and takeout options, offering promotions and discounts, and seeking new ways to engage with their communities. However, the road to recovery remains uncertain, and many in the industry are bracing for continued hardship.
Risks for Merhcant Cash Advance Lenders and Restaurants
Merchant Cash Advance (MCA) transactions have become a common financing option for restaurants, especially those struggling with cash flow issues. While MCAs can provide quick access to needed funds, they also come with significant risks for both restaurants and lenders.
The Appeal of MCAs for Restaurants
Many restaurants turn to MCAs due to their accessibility and speed. Unlike traditional bank loans, MCAs offer a streamlined application process with less stringent credit requirements. This makes them an attractive option for restaurants that may not qualify for other types of financing. The advance is repaid through a percentage of daily credit card sales, which can seem manageable during periods of strong sales.
The Downside of Merchant Cash Advances
However, MCAs come with high costs. The repayment terms, which are tied to daily sales, can quickly become burdensome, especially during slow business periods. The factor rates associated with MCAs often translate into annual percentage rates (APRs) that can exceed 100%. For struggling restaurants, the daily deductions can exacerbate financial woes, making it even harder to cover operational costs and stay afloat.
The Impact on Failing Restaurants
For restaurants already on the brink of failure, the pressure of MCA repayments can be the tipping point. When sales decline, the fixed percentage taken by the lender remains the same, leaving less revenue for the restaurant to manage its other expenses. This can lead to a vicious cycle where the restaurant struggles to keep up with payments, leading to further financial distress and, ultimately, closure.
The Risk to MCA Lenders
Failing restaurants pose a significant risk to MCA lenders. The structure of MCAs relies on the assumption that the borrower’s daily sales will be sufficient to cover the repayment amounts. When a restaurant’s sales plummet, the risk of default increases. Since MCAs are unsecured and subordinate to other debts, lenders often find themselves with limited recourse in recovering their funds.
Conclusions for Consultants
The long-predicted consumer pullback is no longer a future concern; it is a present reality that is reshaping the landscape of the restaurant industry. As consumers prioritize essential spending, restaurants will need to innovate and adapt to survive in this new economic environment.