CapitalData Intelligence

Chains are Slowing Expansion as Traffic and Sales Decline

For the first time since 2009 when the country was still reeling from the effects of the Great Recession, restaurant chains experienced a drop in sales for every quarter in 2016 when compared to the same quarter the year before. Those that were linked to shopping malls, such as Ruby Tuesday, have been the hardest hit. In light of sales, some restaurants are slowing their expansion plans.Dunkin’ Donuts is adding fewer locations this year due to the decline in customer traffic going from the previous number of 385 down to around 340.

Zoe’s Kitchen, a Mediterranean-inspired restaurant chain, is opening approximately 39 new restaurants this year, but is reducing that number to around 27 for 2018. In 2017, their stock shares plunged by 51.7 percent. This was due, in part, to higher costs and declining comparable-restaurant sales.

Subway has cut back on expansion which was, at one time, dramatic. From 2007 to 2009 it added 2,300 units and the next five years saw an additional 4,000. Now, unit sales are on the decline and they are placed in a position of helping current owners achieve success instead of adding more stores that will place added burdens on an already maxed-out market.

Cosi, an international restaurant with a trendy fast-casual venue, recently emerged from Chapter 11 bankruptcy and closed 40 percent of its company-owned units citing overexpansion as the number one reason. 

 

Why the Decline?

Some are pointing to saturation while others are suggesting that the decline in retail is also affecting the restaurant industry. With approximately 18 new restaurants opening up every day, supply is definitely exceeding demand. The mammoth rise in food delivery options has also left its mark, while rising labor costs have led to increasing costs to customers, some of which are no longer willing to pay the price. And, in light of grocery store prices dropping a little over 1 percent in 2016 and restaurant prices rising some 2.6 percent, some consumers are choosing to buy a nice New York Strip for the grill and stay at home. There is also a shift from larger chains to smaller more unique concepts, particularly those that are socially responsible.

 

In an Attempt to Turn the Tide

In an effort to increase sales and foot traffic, restaurants are simplifying their menus and updating them to include fresher local ingredients that newer generations are demanding. Others are incorporating technology to make the experience better and faster for their tech-savvy customers. Emphasizing customer service and employee retention as well as improving the look and feel by remodeling are all factors that are separating the expanding from the diminishing.  One venue on the rise is delivery-only restaurants otherwise known as “virtual restaurants.” 

Chains that are thriving include Panera Bread and Chick-fil-A. Comparatively speaking, while each Panera Bread unit earned, on average, $2.5 million in 2015 and each Chick-fil-A raked in nearly $4 million, Subway averaged only $424,300 for each of its locations.  

As per Barbara Benedek, “More isn’t always better. Sometimes it’s just more.” Some chains are learning this valuable lesson and, in an attempt to stem the out-flowing tide, are striving to make their existing restaurants a better experience for their loyal customers and patrons-to-be.

 

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