The United States Has Too Many Restaurants

Today, there are more than 620,000 establishments for eating and drinking in the United States. The growth rate in number of restaurants is still double that of the population growth rate too.

While the total industry sales is still growing, that growth rate has decelerated. More individual locations and chains are struggling to keep up with the increasing competition. It doesn’t help that wage inflation is also accelerating in what remains a labor-intensive business.

The franchisee/franchisor model is partly responsible for the over-expansion of fast food chains and casual dining restaurants. The corporation as franchisor incurs less of the development and operating costs and has a more predictable earnings stream in the form of royalty payments from the franchisees running the individual locations.

Famous investor Jim Chanos has pointed out though that a corporation using this business model can only grow in three ways: open more stores, grow sales of current stores, or negotiate a higher royalty payment from your franchisees. However, when current stores are struggling, you are not going to ask your franchisees for more money. That leaves only store expansion as a growth strategy, which exasperates the oversupply problem in the industry.

It will require more restaurant chains declaring bankruptcy, and perhaps interest rates going up (to make the main form of financing such expansion plans more difficult), for this current oversaturation to rationalize itself.

Source: Rachel Abrams and Robert Gebeloff at New York Times