Landlords Add Franchising to Menus as Restaurants Struggle

This year, a number of familiar restaurant brands are paying the price for consumer cutbacks in dining out. Bankruptcy filings by operators of familiar chains like Bennigan’s, Bakers Square and Mrs. Fields Cookies are closing hundreds of locations and returning space to the market. Meanwhile, other casual restaurant chains like Pizzeria Uno, Ruby Tuesday’s and Applebee’s are struggling.  Industry experts expect little relief anytime soon: Hudson Riehle, the National Restaurant Association’s chief economist, told Reuters this month that the restaurant business faces its toughest climate in nearly 30 years. One-third of operators expect their sales to drop year-over-year over the next six months, and only 30 percent expect sales to rise during the same period. In light of these trends, restaurant owners are delaying plans for capital expenditures. According to the association’s latest survey, a record-low 43 percent of operators expect to invest in expansion, equipment or remodeling during the next six months. But even in this climate, some players are finding opportunity, and franchising may generate much of the demand for new space. That may help breathe new life into even troubled brands like Bennigan’s. More than 300 outlets owned by its parent, S&A Restaurant Co., closed suddenly after S&A filed under Chapter 7 of the U.S. bankruptcy code in July. But another 132 locations franchised separately by S&A affiliate Bennigan’s Franchising Co. stayed open. This week, the Atlanta-based private investment firm Atalaya Capital Management expects to close on its acquisition of Bennigan’s Franchising. In addition to keeping the existing franchised restaurants open, Atalaya Capital is recruiting franchisees to re-open another 60 company-owned restaurants closed by the parent company’s bankruptcy filing. Atalaya stated last week that it has also hired a marketing consultant to reposition the Bennigan’s brand and introduce a new “fast-pub” concept. Smaller, up-and-coming restaurant franchisors are looking for locations, too. Smashburger, a fast-casual burger brand that now has seven company-owned locations in Denver and Fort Collins, Colo., is a case in point. Last week, the brand’s private owner, Consumer Capital Management, disclosed a franchising deal with Mascott Corp., which aims to open 30 locations in New Jersey. By the end of 2009, Consumer Capital wants to expand Smashburger to as many as 60 locations nationwide. Whether franchises like Smashburger allow landlords to expand their restaurant space or merely backfill vacated locations, the demand may help ease the strain of the economy.