Unexpected Costs May Now Drive Restaurants to Close Down

January 31, 2024

Unexpected costs may now drive restaurants to close down in 2024, especially when mixed with labor shortages, experts warn.

Industry experts say that issues with margins or cash flow due to supply shocks, labor shortages and other disruptions can push operators into covenant default over their debts.

Last year, several large franchisees declared bankruptcy.

While each of these bankruptcies had unique causes, they provide a window into a set of common industry problems: rising input costs, including labor and food costs; difficulty raising capital to fund expansions or remodels needed to drive new sales; evermore expensive debt service; and static or falling consumer traffic, reports Restaurant Dive.

“All of those pressures that the franchisees are citing as causing problems with their operating economic models show really no sign of slackening their impact as you move into 2024,” said Eric Danner, a partner in CohnReznick’s restructuring and dispute resolution practice.

Ab Igram, executive director of the Tariq Farid Franchise Institute at Babson College, said those problems were likely to be serious only for over-leveraged operators.

“For the most part, it depends on the individual operator, what markets they’re in, how well they’ve maintained their units,” Igram said.

“If the economy continues to improve, that bodes well for franchisees heading into 2024.”

However, Danner noted that factors driving higher costs haven’t changed.

Unemployment is still low, contributing to labor market tightness that forces employers to compete for workers.

This dynamic may be driving wage growth above inflation on a broad basis.

While good news for workers, wage growth may eat into the cashflow franchisees need to meet the covenants on loans, which puts pressure on operators’ balance sheets, said Kevin Clancy, global director in CohnReznick’s restructuring and dispute resolution practice.

Because franchisee debt generally has cash flow or profitability requirements, issues with margins or cash flow due to supply shocks, labor shortages or other disruptions can push operators into covenant default, Clancy said.

Those shocks can be as minor as a particularly harsh winter, which cuts into traffic in some regions, he said.

Danner said full-service and fine dining in urban centers may also see a number of bankruptcies if business traffic and office attendance in central business districts remains depressed.

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Also Read: Three Massive Restaurant Chains Now Begin Closing Locations

Other Economy News Today

A retailer with 507 locations will now close its anchor store after 45 years with liquidation sales underway, sources report.

Macy’s is permanently closing another of its 507 remaining nationwide department stores, The-Sun reports.

Liquidation sales are underway and will last eight to twelve weeks.

Macy’s has announced the closure of its store at Tallahassee’s Governor’s Square Mall in Florida.

A final date has not yet been shared, although it is expected to close in early spring, as per local station WCTV.

Macy’s is an anchor store of the mall and has been there in one form or another since 1979.

It originally opened as Maas Brothers, converting to Burdine’s in 1991, and then Burdine’s-Macy’s from 2003 to 2005, and has been just Macy’s ever since.

“The decision to close a store is always a difficult one, but Macy’s is grateful to have served our customers and the community,” a spokesperson told WCTV.

A clearance sale is currently underway and is expected to last eight to twelve weeks.

Once the Tallahassee store is gone, the nearest Macy’s in Florida will be over 180 miles away in Ocala.

Approximately 40 store employees have been affected by the closure, reports The-Sun.

Many shoppers in the state capital were disappointed to hear that their local store is closing down.

“Sad to see the decline of a one-time retail leader,” wrote one on X.

“I’ll miss the Tallahassee store!” posted another.

The Tallahassee store is one of five locations affected by the latest round of store closures announced by Macy’s.

A total of five stores are being shuttered as the company transitions to a new CEO, former Macy’s president Tony Spring.

The other four locations to close are in Arlington, Virginia; San Leandro, California; Lihue, Hawaii; and Simi Valley, California.

Macy’s has closed 100 stores since 2020, many of which were located in shopping malls.

Also Read: A Home Improvement Retailer Now Closes All 157 Stores

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