Small companies are taking a big hit in this economy

Razzoo’s is the latest in a rash of small restaurant chain bankruptcies. | Photo: Shutterstock.

This week, Razzoo’s Cajun Café, a 20-unit chain based in Addison, Texas, declared bankruptcy. In so doing, as my colleague Joe Guszkowski wrote, it blamed chains like Applebee’s and Chili’s, which have been heavily marketing discounts, for siphoning off its traffic. 

Razzoo’s was the fifth bankruptcy or mass closure event in a month, and sixth since mid-August, suggesting that the economy is taking its toll. 

At least four of those companies could be considered small. Opa! Authentic Green Cuisine shuttered five locations and filed for Chapter 7. Iron Hill Brewery abruptly closed all 16 of its restaurants and is reportedly filing for bankruptcy. Another 16-unit chain, the Texas-based Abuelo’s, filed for bankruptcy and cited sales declines, rising costs and staffing challenges.

But neither of the other two, the bowling concept Pinstripes and the Italian chain operator Bravo Brio, are exactly giants. 

Earlier this week, we wrote about the bifurcated economy and its potential impact on the restaurant industry. One way in which the economy is divided is between large companies and small ones. And right now, small companies are paying the heftiest price.

To wit: We also wrote about the slowing jobs market. Only the largest companies, with 500 or more workers, added jobs last month. Those with fewer than 500 workers all cut jobs, and those with 50 or fewer employees cut the most. 

The restaurant industry is coming off a brutally inflationary period to watch consumers cut back on dining. Nearly 30% of visits are coming on some form of discount. And operators are pushing discounts in almost every channel, including third-party delivery. 

Discounts are fundamentally tougher on smaller companies than they are on larger ones, because the smaller companies are less able to withstand the hit to profitability. 

This was a major consideration for McDonald’s, which just lowered the prices on its combo meals. In simple terms, the company is flexing its financial muscles, effectively daring its smaller competitors—which is all its competitors—to do the same thing. 

Smaller chains dominate the restaurant industry. Consider that there were 340 restaurant chains last year that generated more than $100 million in system sales, according to data from Restaurant Business sister company Technomic. There were 1,160 restaurant chains that generated between $7 million to $100 million in system sales.

It’s why getting into the Top 500, and certainly the Top 100, is such a major accomplishment. These chains navigate an intensely competitive environment and myriad challenges to get to that point.

Add in generationally high inflation, profit declines and a discount-heavy, weak-traffic environment and these companies just have it that much worse.

To be sure, companies that end up in bankruptcy frequently have other issues that contribute to the problem. Few companies go that route purely because of the economic environment. Financing, personal or other challenges often go along with it. 

But the current environment is clearly taking its toll on a growing number of restaurant companies. And most of the companies paying that toll are small.