Thread by @petition

A number of restaurant chains have been going bankrupt recently. Of size/note, in 2018-19:

Restaurants Unlimited Inc.
Kona Grill
Perkins and Marie Callender's
PGHC Holdings Inc.
Bertucci's Holding Inc.
Real Mex
Cafe Holdings Corp.
RMH Franchise Holdings Inc.
Taco Bueno

Why?

And in '18:

PGHC Holdings Inc.
Bertucci's Holding Inc.
Real Mex
Cafe Holdings Corp.
RMH Franchise Holdings Inc.
Taco Bueno

Why all the distress?

Generally, it's been a perfect storm of factors:

Challenges confronting the “casual dining” restaurant segment.✅

Too much competition.✅

Senior management changes. ✅

Ever-changing strategy & poorly executed growth. ✅

Increased/increasing labor costs. ✅

Unfavorable leases. ✅

Too much debt (and default) ✅.

This week's chapter 11 filing of Houlihan's shines a light on another factor: THIRD-PARTY DELIVERY.💥

“Various industry headwinds, senior mgmt changes & shifts in investment philosophy eventually left the Co w/o the $ needed to grow their businesses & absorb the costs associated with the shifting labor market, unfavorable leases, & the rapid growth in costly 3rd-party delivery”

Houlihan's is no small victim. York Capital-owned, it has 47 restaurants in 14 states. $202mm in revenue in '19.

It also had $42.3mm in secured debt (CIT Bank NA) and unsecured debt of approximately $30.7mm (with trade debt of $8.2mm).

It had 80+ locations just 2 years ago.

Houlihan's partnered with unicorn-13x-over, DoorDash, for delivery.

eaterypulse.com/2019/09/01/hou…

Who eats these delivery fees, we wonder?!?

Soooo, this partnership really only kicked off two months ago and yet Houlihan’s lists delivery as one of the main reasons for its bankruptcy filing?🤔 It almost sounds as if its Hail Mary into third-party delivery ended up being the final nail in the coffin.

And yet they're increasingly reliant upon it.

"34%. That’s the percentage of restaurant customers in the 35-to-54 age range who are the most likely to dine out often. That number is down from 41% in 2007."

forbes.com/sites/lisettev…

LONG delivery bikes and cardboard boxes.

qz.com/quartzy/174819…

More people are getting their food at home. Including groceries. Note that Walmart Inc. $WMT reported numbers this week reflecting a 2.5% YOY revenue increase ($128b…BEAST!!). E-commerce increased 41% driven in large part by food.

retaildive.com/news/walmart-p…

In turn, this week Target Inc. $TGT integrated its same-day shopping service, Shipt, into its mobile app — a clear effort to expand its grocery delivery business.

techcrunch.com/2019/11/14/tar…

Likewise, restaurant delivery continues to explode. This week, unprofitable DoorDash Inc. raised an additional $100mm — which tops off a $600mm infusion in May. The company has now raised $2b (at a $13b valuation) and has Sequioia Capital and Softbank Group Corp. on its cap table

The Financial Times skewers the third-party delivery business here (in the context of Deliveroo): ftalphaville.ft.com/2019/11/11/157….

This makes it sound like restaurants have leverage. Maybe Houlihan’s didn’t get the memo about negotiating down fees!?

And, yet, the delivery providers aren’t exactly killing it either. Here is the CEO of prepared food ordering and delivery marketplace, GrubHub Inc. $GRUB:

So is ANYONE MAKING ANY F*CKING MONEY WITH DELIVERY??? Here is the $GRUB stock chart. The stock is down 75% over the last 15 months (notably, Barclays gave GRUB a double-upgrade on Friday).

cnbc.com/2019/11/15/sto…

@felixsalmon crushes it this week with this synopsis for @axios.

axios.com/newsletters/ax…

If the delivery services are uneconomical and yet smaller restaurant chains are forced to use them — in turn, rendering their operations uneconomical — where does that leave things? Increasingly, it looks like size will really matter in the restaurant space.

No wonder Tilman Fertitta is gobbling up one chain after another. h/t @jonathanmaze

https://twitter.com/jonathanmaze/status/1195385744011014145?s=11

Houlihan's has been in a state of operational restructuring since the end of ’18. This includes closing underperforming locations, firing people, grasping at new marketing and promotion strategies, and more. None of it…OBVIOUSLY…was enough. Hence, the chapter 11 filing.

The debtors haven’t paid interest on their loan since December and they’re past due on rent obligations and vendor payments. Their leases are killing them: they note “unsustainably high occupancy costs … accounting for approximately $3.5 million of annual EBITDA losses.”

Consequently, they closed 12 unprofitable locations pre-petition. They have been operating pursuant to forbearance with CIT since then and now the bankruptcy is meant to accomplish a 363 sale to Landry’s LLC for $40mm plus the assumption of certain liabilities.

Unsecured creditors had better hope that another bidder emerges because $40mm clearly doesn’t clear CIT’s secured debt. In the absence of that, this will be a bad result for those $8.2mm-worth of trade creditors.

Disruption doesn’t happen in isolation. It cascades across a stream of victims. Query whether the VCs understood the carnage that unprofitable delivery services would create. 😬💥

For more content like this, check us out at petition.substack.com. Cheers!

(Damn you Twitter. This is not the thread we completed before we clicked "Tweet All." Hence the repetition of tweets 1 and 2. CODE IN AN EDIT BUTTON FOR F*CK'S SAKE)