The restaurant industry overindulged — and now it’s paying the price
Last year was a disastrous one for Chipotle, as the burrito behemoth grappled with the fallout from a food contamination scare and problems such as slow moving lines and untidy restaurants. Its sales continued to decline and investors punished its stock.
And yet, the chain was still adding stores at a breakneck pace, opening some 240 locations in the last fiscal year alone. And there is no sign it is pumping the brakes, reporting this week that it had opened 57 more stores in the first three months of this year.
That kind of expansion is an extreme example of a pattern that we’ve seen widely across the restaurant industry. Chains have aggressively added more locations, determined to make the most of a cultural moment when consumers wished to dine out more often.
Since the recession ended, visits to U.S. restaurants had been growing steadily at around 1 percent a year, according to market research firm NPD Group, giving these dining companies ever more opportunities to pull down dollars.
But 2016 was different. Restaurant visits declined slightly, according to NPD.
And there are fresh signs of trouble for established restaurants. Based on sales and guest count data from some 22,000 restaurant locations, BlackBox Intelligence says same-store traffic to these places was down 3.6 percent in the first quarter, adding to a streak of declines that began last year.
These gloomy traffic figures put into focus one of the industry’s key problems: The supply of restaurants appears to outstrip demand.
“The structural headwind is there are a lot of seats out there,” Eugene Lee, the chief executive of Olive Garden’s parent company, told investors last month.
There is some indication that a shakeout is already underway. NPD says the total number of U.S. restaurants decreased by 2 percent from a year ago. The pullback includes some big-name chains: Subway — by far the most prolific of the big chains with around 27,000 locations — closed hundreds of stores in 2016. McDonald’s has trimmed its U.S. restaurant portfolio slightly, reporting 14,155 locations here in 2016, almost 200 fewer than two years earlier.