Is the Restaurant Industry Headed for a Bankruptcy Wave?

Outdoor dining has helped some restaurants survive in recent weeks. How long will it continue?

Photo Courtesy of FSR Magazine.

Before the pandemic, operators expected a reduction in restaurants because of oversaturation.

COVID has accelerated that process and acted as a butcher knife to the overinflated tire that was the food and beverage industry.

Numerous restaurants have either closed permanently, or turned to bankruptcy, such as 1,200-unit Pizza Hut franchisee NPC International, Chuck E. Cheese, FoodFirst Global Restaurants, Sustainable Restaurant Holdings, Garden Fresh Restaurants, Le Pain Quotidien, TooJay’s Deli, and HopCat owner Barfly Ventures.

As the U.S. heads into the latter half of 2020, what more should the industry be expecting in terms of loss and reorganization of debt?

Joseph Acosta, partner at law firm Dorsey & Whitney, says it’s a challenging time, and he doesn’t think one can come to a definitive conclusion as to what will happen because of two factors.

“First, the government levitated the economy the first few months with $2.3 trillion in aid packages to households, employees, small businesses, local governments,” he says. “That has really staved off a lot of the massive defaults. But that’s all phasing out. That’s one dynamic. What happens when no one’s supported anymore?”

“The second dynamic is, coronavirus hasn’t ended,” he continues. “Last week alone they reported a single-day of about 60,000 cases. So if there’s a second phase of coronavirus and more stay-at-home orders, you might really see a change in the mindset of society. … One of them is wanting to reduce risk. Staying at home reduces risk. Saving money for a rainy day. That means no more demand and no more going to restaurants. No more having that experience.”

To Acosta’s first point, the federal government is currently debating whether to send a second round of stimulus checks to American citizens and whether it will extend the extra $600 in weekly unemployment benefits—both of which have given consumers increased buying power during the pandemic. The government is also deciding what to do with the remaining hundreds of billions in the Paycheck Protection Program, which ends August 8. Treasury Secretary Steve Mnuchin suggested reallocating the money to the hardest-hit industries, which include restaurants.

Regarding Acosta’s second dynamic, California and New Mexico re-closed dining rooms statewide. Miami, Atlanta, and Pittsburgh have re-closed dining rooms, as well.

New York Gov. Andrew Cuomo delayed reopening dining rooms. Texas and Arizona rolled back their capacity limits to 50 percent. California reclosed all indoor dining.

Simply put, it’s now survival of the fittest—the ones that can afford to stick around will last. That spells doom for the independent restaurant segment, Acosta notes.

While large chains like Chuck. E. Cheese are seeking to reorganize and come out successful when the market stabilizes, many independent restaurants don’t have bankruptcy as a last resort.

“There’s just nothing there to go to court with,” Acosta says. “They could just shut the lights off and then just walk away. Don’t get me wrong, that does come at a loss to the investors, to the owners, but the money that it would take to turn it around just wouldn’t be there. … [Bankruptcy] is expensive. That process requires planning, it requires attorneys, professionals. The biggest interruption has been the limited access to courts. Because courts have been shut down. So hearings have now had to go through webcams, Zoom type of platforms. And they haven’t been as effective as regular in-court proceedings.”

According to a report released by Compass Lexecon in conjunction with the Independent Restaurant Coalition, 85 percent of independent restaurants could permanently close by the end of 2020—crumbling a segment that generates about $760 billion in sales and employs 11 million people. That’s if direct aid, like a stabilization fund, is not provided.

Photo Courtesy of Wall Street Journal.

Democratic Rep. Earl Blumeanuer from Oregon introduced legislation called the RESTAURANTS Act, which would establish a $120 billion fund for restaurants not publicly traded or part of a chain that includes 20 or more locations under the same name. The funds would provide grants and prioritize locations with annual revenues less than $1.5 million.

Acosta says he’s represented several restaurant clients, and there are some with harrowing stories. He adds that while independents give consumers choices, they don’t necessarily have the funding to survive. Even K-Paul’s Louisiana Kitchen, a legendary restaurant in New Orleans that’s been open since 1979, couldn’t last through the pandemic.

“It’s hard to walk away from something you’ve invested a lot of your time and energy in, but at the same time, the effort that it would take to save it—the money it would take to save it—just isn’t there,” Acosta says. “The ones that do have money to be able to reorganize, they can be successful, you just have to set forth a plan on how to let them survive until this pandemic thing goes away.”

The attorney says that if one looks back at 2008 when the Great Recession began, there wasn’t a surge in bankruptcies until the next year. That’s due to a ripple effect, he explains.

He expects the same to happen because of COVID. Ripples caused by failing major players in big industries will lead to more bankruptcies in 2021 than this year.

“That’s not to say industries aren’t hurting,” Acosta says. “I think everyone is hurting. It’s to say that people are able to stave it off or avoid it, but eventually there’s going to be enough pressure from banks and other lenders to force these companies to make a decision—are you going to be able to pay us back or not?"


2020 FSR Magazine.

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