Demystified. Restaurant chains not closing in droves, Independents are.

PREFACE

There has been current press that discusses restaurant failures such as Don Pablo\’s, Sweet Tomatoes and Cosi. Whereas these management failures are well documented and true, the survival and growth landscape of chains has never been better.

Restaurantdata.com googles and calls every restaurant in our internally developed database of over 600,000 locations every six months. The recent six month period, ended on June 30, shows a sharp decline in the number of chain restaurant closures while the independent closures are way up.

Fact> Independent restaurants (19 units or less) have closed more units than is ordinary.

Fact> Chain stores (20 units or more) have improved – 36% better than in previous 6 month period.

Fact> The failures of independents have not increased in the minimum wage increase regions (San Francisco, Seattle, New York City).

Fact> McDonald’s reported plan to close under-performing units in early 2015 produced almost twice as many closings in the 2nd half of 2015 than the 1st half of 2016.

Fact> Independent restaurant owners in the value menu segment are finding tremendous competition from QSR and Fast Casual chain concepts.

ARTICLE

Despite the front page industry news on chain bankruptcies this summer, the overall restaurant chains segment had a healthy start to 2016. Chain restaurant closures in the first half of 2016 were well below closures in the second half of 2015. Overall, we found 3,171 closures in the recent half year period. This is well below the 4,983 closures in the prior six month period. This 36.4% drop in closures was widespread with all regions of the country experiencing lower closure rates.

While chain restaurant closures have fallen, closures of independent restaurants have risen. The independently owned restaurants (including regional groups) experienced much higher closure rates in the first half of 2016. The 26,224 closures in the first half of 2016 were 50% higher than the 17,444 closed in the second half of 2015.

The difference in closures between chains and independents is linked to chain dominance in the lower check average concepts. We found chain closures in our lower check average groups ($4-12+ and $6-15+) dropped in the first half of 2016.

The growth of fast casual chain concepts has added to the pressure on independents. Closing rates for independent restaurants in our lower two check average groups nearly doubled. Fast casual chain concepts directly compete for diners in the same price category.

We are finding a higher rate of closures in well-established independently owned restaurants. These locations, in business over 5 years, are experiencing higher occupancy costs and increased competition from new concepts. In today’s competitive restaurant environment, an increase in menu prices needed to cover occupancy costs may not be possible.

On February 27, 2016, the owners of the very popular 69 Bayard Street in New York City’s Chinatown closed. We first visited 69 Bayard Street in 1977. The lease ended and the owner did not renew the lease. Sitar Restaurant in Albany, NY closed after 34 years in business. The owners decided to retire. Both of these two restaurants are in the $6-15+ check average group.

Bucking the trend, independent restaurants offering upscale dining at much higher check averages experienced a decrease in the number of closures in the first half of 2016. This category was hurt badly during the recession years and is now showing signs of stability.