The recent trends in the restaurant sector indicate that filing for Chapter 11 bankruptcy may not signify the end for many businesses. According to bankruptcy attorney Daniel Gielchinsky, the number of major restaurant chains seeking bankruptcy protection is likely to rise in the coming years.

“Restaurants that exist today may not exist in five years. They’ll be off the map,” Gielchinsky warned. He suggests that consumers can expect to see a reduction in the number of operational restaurant locations.

Current Situation of the Industry

Hooters of America is reportedly exploring the option of filing for bankruptcy to restructure its operations and manage its debt. It joins other notable chains like TGI Friday’s, Denny’s, Ruby Tuesday, Rubio’s Coastal Grill, and Red Lobster, all of which have sought protection in bankruptcy court recently.

Meanwhile, some establishments, such as Wendy’s, are adapting without filing for bankruptcy. The company announced plans to close 140 underperforming restaurants by the end of 2024 in an effort to strengthen its overall business structure.

The Impact of COVID-19 on Restaurants

Gielchinsky noted that the pandemic served as a pivotal moment for the restaurant industry, with many operators struggling to maintain operations amidst significantly reduced foot traffic. Restaurants were often compelled to bear ongoing costs such as rent and payroll even when patron counts dwindled.

To offset losses, many businesses relied on government aid and loans, which ultimately contributed to a rising debt burden. “There is no escaping borrowing; you are always going to have to pay that money back or wind up in bankruptcy and reorganize the structure of the debt,” Gielchinsky explained.

Changing Consumer Habits

Restaurants anticipated a rebound in consumer spending post-pandemic, hoping to return to pre-COVID levels of activity. However, this expectation fell short, leaving many restaurants unable to repay their loans as customer habits shifted.

Customers began favoring home-cooked meals over dining out, influenced by heightened cost consciousness and the ongoing burden of inflation, particularly among lower-income demographics which many quick-service restaurants rely on. Gielchinsky also highlighted the increasing popularity of weight-loss medications that are prompting individuals to adopt healthier lifestyles, further dissuading diners from frequenting restaurants.

Looking Ahead

Major chains are already feeling the squeeze, with reports of declining store sales in successive quarters. For example, David Gibbs, CEO of Yum! Brands, shared insights indicating a 2% drop in sales at KFC stores over the fiscal year. Additionally, McDonald’s has acknowledged challenges in the current marketplace, initiating a rollout of a value menu to entice customers.

As the market adjusts, the outlook suggests that more restaurants may pursue bankruptcy in an effort to restructure and survive in a more competitive landscape.