According to a new study by AlixPartners LLP, up to 40 percent of restaurant chains could face high-risk liquidity crises within the next year. Study authors cite the cause as decreased traffic, low cash levels, and high debt—a combination that could prove deadly for many chains if the economy doesn't improve in the next 12 months.
“Those who are hoping for a better day without taking a rigorous look at their cost record and how their value proposition is positioned to consumers are the ones who are going to be in for an unfriendly surprise,” says Andy Eversbusch, a managing director at AlixPartners. “From our perspective, from everything we can see, this is not likely to be a quick turnaround.”
The study, which looked at 110 chains across the restaurant industry, shows fast-casual brands growing the fastest, while quick-serves also should fare relatively well. Fine-dining and casual-dining chains have the worst outlook.
“Consumers are being much more mindful of every dollar they spend,” Eversbusch says. In addition to examining restaurant chain performance, the study also surveyed 1,000 consumers. More than half (51 percent) said they planned to spend $10 or less per dining-out meal, and almost half (48 percent) said they plan to eat out less in general this year. “What you're seeing is a very cost-conscious consumer—no surprise with the current state of the economy.”
Still, Eversbusch says every segment has its winners and losers. He cites the elusive perfect mix of ambiance, value proposition, quality of food, and positioning as being key to winners' successes. Heavy debt, however, could be debilitating.
In the quick-serve segment, pizza brands that the study investigated often struggled.
“What we have found is that the pizza chains have basically habituated the consumer to buy off of promotions,” Eversbusch says. “When the promotion support goes down, there's a very significant correlation with decreased traffic.”
The larger chains, on the other hand, have the economies of scale to keep prices low, often resulting in success despite a rough economy.
“Those who are really rigorous about managing the cost side of things clearly have tended to fare better,” he says. In addition to remaining vigilant about taking advantage of the lowest commodity prices—one of the bright spots in a down economy—Eversbusch recommends re-examining payroll expenses.
“This is an industry that institutionally has been very much focused on service—and rightfully so,” he says. “But now those who are the ones at the leading edge are figuring out how to find just the right balance between optimum service and very good, cost-effective productivity.”
The ideal result is “lean” spending principles that don't compromise quality.
“Pure cost-cutting is not something that's going to make you successful in the long run in this business,” Eversbusch says. “You can still deliver a high-quality product if you do it at a much lower cost because you're wringing out any waste in the system.”
Plus, customers will likely continue to demand high-quality products at low prices even after the economy improves.
“A lot of the impact here is consumers' expectations of value,” Eversbusch says. “Focus on how they're spending their money has been reset.”