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The Casual Restaurant Bankruptcy Epidemic

We've examined the rise in bankruptcies among casual restaurant chains.

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Although we are starting to see some signs of a recovery across a number of consumer-related sectors, casual restaurant operators continue to struggle. Given that restaurants are traditionally a low-margin business due to high fixed costs--a successful stand-alone restaurant generates operating margins in the low single digits--it is not surprising to find individual operators increasingly file for bankruptcy protection. However, we believe that the threat of bankruptcy also spread to casual restaurant chains during the current economic downturn. Looking out over the past year, a number of small to midsized casual dining chains (loosely defined as those between 50 and 500 units) have filed for bankruptcy protection, a trend we expect to continue during 2010.

Among the most notable casual restaurant bankruptcies thus far have been Metromedia Restaurant Group (which shed 150 company-owned Bennigan's, 50 Steak and Ale, and 50 Ponderosa Steakhouse locations), Vicorp Restaurants (which closed 56 of the 400 Village Inn and Bakers Square restaurants), and G&R Acquisition (owner of 106 Max & Erma's and 53 Damon's Grill units). With the exception of Metromedia Restaurant Group, these bankruptcies were chapter 11 filings, meaning that the chains will continue to operate as they renegotiate their obligations with creditors, landlords, and other suppliers.

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R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.