The restaurant industry can expect some troubled times ahead.
After a prolonged period of growth, fueled by Wall Street, experts say the market is now oversaturated with casual, fast-food and chain restaurants, the New York Times reports.
After the dot-com bust, many investors turned away from Silicon Valley and looked toward the hospitality sector for more reliable — although smaller — returns. The New York Times reported that Wall Street “poured billions into the restaurant industry.”
In recent years, the number of restaurants in the U.S. — currently estimated at about 620,000 — has grown at twice the rate of the population.
It’s true that customers are faced with busy lifestyles and continue to spend a large portion of their food budget at restaurants. But that dollar amount is now being spread across an ever-increasing number of establishments, so profits are divided into smaller and smaller pieces. Changes in single-store sales over time are down to the lowest they’ve been since 2010.
The Times explains that franchises are overburdened. In order to appease their private equity investors, the largest chains have been selling restaurants locations to individuals. This allows the company to offload the operating costs while still pulling in “a steady stream of franchise fees and royalty payments.” According to the Times, the chains are pushing franchisees into excessive development.
“They want us to sign aggressive development agreements,” said Shoukat Dhanani, the chief executive office of the Dhanani Group, which owns hundreds of Burger King and Popeyes restaurants. Dhanani told the Times that a franchisee who opened one restaurant, might be expected to open 10 new locations — something unheard of even five years ago.
The parent company benefits from the franchise fees, while the new restaurant owner is left to deal with the market they have helped to saturate.
Further troubling, the National Restaurant Association reports that the restaurant industry currently employs 14.7 million Americans. It’s hard to estimate how many jobs will be lost when the profits sink too low to make the cost of operating some restaurants worth while, but last month’s labor statistics were not encouraging.
(h/t Eater)
