The Restaurant Industry Is in Trouble Because There Are Too Many Restaurants

The restaurant business is in trouble. In addition to labor shortages and rising labor costs and increasing real estate costs and slim margins and shifting consumer desires, restaurants are in trouble because there are too many restaurants, according to a New York Times report.

After the dot-com bust of the early aughts, many investors turned away from Silicon Valley and to the hospitality sector in search of more reliable — though smaller — returns. The Times says Wall Street “poured billions into the restaurant industry” in recent years and that the number of restaurants in the U.S. — currently estimated at 620,000 according to the Bureau of Labor Statistics — “is growing at about twice the rate of the population.”

It’s also true that Americans are spending more of their budget on dining, that the hospitality industry has added a record number of jobs to the economy, and that restaurant sales are up. The concern is that growth — the change in sales over time — is down “to the lowest rate since 2010.”

There are a number of potential reasons for this. One is that franchisees are overburdened. In order to appease their private equity investors, the biggest chains, including McDonald’s and Burger King, have been selling off company-owned units to franchisees. This approach allows them to offload operating costs and labor-related issues to franchisees while pulling in “a steady stream of franchise fees and royalty payments.”

Franchisees have always been motivated to open additional locations to offset overhead costs. But according to the Times, big chains are squeezing franchisees for more. “They want us to sign aggressive development agreements,” said Shoukat Dhanani, the chief executive officer of the Dhanani Group, which owns hundreds of Burger King and Popeyes restaurants, telling the Times that franchisees who signed on to operate one restaurant might be expected to open 10 locations. “I didn’t see that even five years ago,” Dhanani said. These deals unfairly benefit the parent company, which collects the same franchise fees year after year. Meanwhile, franchisees are left to deal with any fluctuations in the market they’ve now helped to saturate, like rising labor costs.

Speaking of labor, the potential market saturation could obviously pose a problem for restaurant workers. The American economy is currently growing on the back of hospitality industry employees. It’s too soon to tell exactly how the dominos will fall, but last month’s labor report was not encouraging.

• Thanks to Wall St., There May Be Too Many Restaurants [NYT]
• Restaurant Jobs Now Dominate the Workforce. That's a Bad Thing [E]
• All Labor Coverage [E]