Why more restaurant chains may end up like Red Lobster
Saratta Chuengsatiansup for BI
The 1988 buddy-comedy action flick "Midnight Run" had an unexpected impact on the restaurant industry. While the romp about a bounty hunter transporting an accountant across the country didn't make a box-office splash, one line stuck around.
"A restaurant is a very tricky investment," the accountant, played by Charles Grodin, tells the bounty hunter, played by Robert DeNiro. DeNiro's character dreams of opening a coffee shop with his big score, but the accountant shuts him down: "More than half of them go under within the six months."
The idea that restaurants are a bad investment predates the film, but the quote lodged in people's minds. Over the past 20 years as a cook, restaurant critic, and food writer, I've heard Grodin's risk assessment quoted repeatedly, almost verbatim. But if restaurants really are a lousy investment, then why would private-equity firms be dumping billions into the sector? Data from PitchBook found that private-equity investments into fast-casual restaurants grew from $7.7 million in 2013 to $231 million in 2023 — a nearly 3,000% increase.
In 2024 alone, Blackstone purchased 1,400 Tropical Smoothie Cafes and a majority stake in Jersey Mike's — deals that gave the chains multi-billion-dollar valuations. Sycamore Partners also bought 250 Playa Bowls locations. Before its IPO in 2023, the Mediterranean eatery Cava raised nearly $750 million from private investors. Meanwhile, SoftBank Vision Fund has pumped hundreds of millions of dollars into restaurant tech over the past decade.
All that cash has led to a boom in places like Chipotle, Shake Shake, and Sweetgreen. Between 2009 and 2018, the number of fast-casual restaurants in America doubled, while sales have nearly tripled. Meanwhile, the amount of money Americans spend eating out has jumped by nearly 60% since 2009. That doesn't exactly sound like a lousy investment.
The trouble is that private equity has a knack for destroying businesses. Red Lobster declared bankruptcy earlier this year after 10 years under private-equity management, Toys "R" Us famously shut down following a private-equity takeover, and even hospitals have struggled after private equity got involved. The cash infusion to wannabe chains and franchises has also made it harder for independently funded restaurants to compete for customers, real estate, and staff. When the gravy train stops, fast-casual restaurants are going to be in trouble.
To understand why private equity is pouring money into restaurants, we have to start with the appeal of the fast-casual model. In some ways, it's the golden mean of restaurants. You can charge twice as much for a meal at a fast-casual spot as you can at a fast-food joint. In Manhattan, a Burger King cheeseburger costs $3.40, whereas a Shake Shack burger will run you $7.79. But when you look at the overhead costs, there isn't much difference. Both restaurants staff a similar number of people and rely on similar ingredients. Chipotle may offer a burrito, a bowl, a quesadilla, and a salad, but it's all more or less the same ingredients: beans, corn, salsa, cheese, and basic proteins. The limited menu enables both fast-food and fast-casual restaurants to be efficient, keep costs down, and avoid losses from food waste and labor. And since fast-casual spots appear to be the nicer restaurants — with gourmet ingredients like brioche buns, healthy-sounding options, and claims of sustainable sourcing — they can charge more. If price and speed aren't priorities, many people would prefer to grab lunch at a Chipotle than at a Taco Bell.
The model also has an edge over sit-down restaurants, which have struggled in recent years. "Casual dining proper is not doing so well," Alex M. Susskind, a professor of food and beverage management at Cornell University, says. "Fast casual has provided consumers with a better meal experience that's equal to, or in some instances better than, a casual-dining restaurant, with less of a time and financial commitment."
The food is just as good, but the service is much faster. He says that's helped make the model a better investment than a place like Applebee's. Thanks in part to those higher profit margins, one restaurant analyst said it takes 18 months for a Chipotle to pay back buildout costs, compared to five years for a Cheesecake Factory.
That's what's making the investments in these businesses attractive. Because a lot of the weaker players have been weeded out.
"PE is investing money in the fast-casual market because the economics of a fast-casual concept is much better than any other type of restaurant concept," says Chris Macksey, the CEO of Prix Fixe Accounting, which specializes in hospitality. "Profit margins are anywhere from 10% to 15% as opposed to a full-service restaurant, which is 5% to 8%. Fast casual is just a far more scalable concept."
Scalability is really the brass ring. Investors in fast-casuals aren't buying restaurants; they're buying the potential growth of restaurant brands. Susskind says the boom reminds him of the late 1990s when casual-dining brands like Applebee's, TGI Fridays, and Olive Garden were taking off. He sees the recent shutdown of some of those chains — such as TGI Fridays, Red Lobster, and Smokey Bones — as a market correction for their overexpansion.
"That's what's making the investments in these businesses attractive. Because a lot of the weaker players have been weeded out," Susskind says about fast-casual restaurants. The frenzy has also been encouraged by the successful IPOs of companies like Sweetgreen in 2021 and Cava in 2023. Seeing Cava's stock grow by nearly 250% since its IPO has left investors searching for similar success.
While Sweetgreens and Dave's Hot Chickens are popping up across the country, independent restaurateurs are often left scrambling — not even for a piece of the pie, but for the crumbs.
Tracy Goh is the chef and owner of Damaran Sara, a two-year-old Malaysian restaurant in San Francisco, home of some of the most expensive commercial real estate in America. She's experienced landlords' preferences for fast-casual chains over small businesses like hers. "Especially for me, because it's my first restaurant. I don't have data to convince them that I can stay on a lease as long as they are likely to," Goh says. "They have a preference for the franchises or the big names."
A landlord's job is to generate money from their property. Their business isn't about enriching their community; it's about finding the most reliable tenants who can pay the most rent. In the restaurant real-estate space, that often means fast-food and fast-casual brands backed by major investment firms.
When small-time restaurants get left out of the real-estate market, diners are left with a food scene that increasingly looks and tastes the same.
"If you're Chipotle or Shake Shack, you may decide to take a lease above market. You can afford it because you're privately funded," says Talia Berman, a partner at the hospitality advisory firm Friend of Chef and an expert in New York's restaurant real-estate market. "You beat out the competition because you don't care how much money you make in that space because it wasn't meant to be profitable based on the unit economics. It's part of a larger strategy."
That strategy is all about growth, she says. The primary goal of investment-backed restaurants is to expand quickly. "They're typically barreling toward an exit. So they're looking to get purchased by Nabisco or Darden or Levy or one of these huge restaurant conglomerates. And they need to show distribution — that they're operating in many states and that they have high top line," Berman says, referring to high sales volume.
A location that can gross $2 or $3 million in a year can demonstrate to a potential buyer that the eatery is successful — even if a high rent lowers the average unit profit margin. "They're thinking short term. It's a private equity mentality," says Berman.
Investment-backed restaurants also have a timing advantage over smaller shops. When a developer begins work on a new building that might lease space to a restaurant — a strip mall, food hall, or multipurpose apartment complex for instance — it's usually working on a multiyear timeline. Moshe Batalion, the vice president of national leasing for RioCan, one of Canada's largest real-estate-investment trusts, told me the firm starts thinking about who to lease to before it even breaks ground on a new property. Leases might be signed years before the space is even ready for move-in. Independent restaurateurs typically can't plan for a restaurant that won't open for two to three years.
"For independent operators, the real disadvantage is access of capital," Susskind says. "If they have access to a decent level of capital, they can grow, open more units." For chains, that's easy to do. But, he adds, "if I'm an independent, I don't know where I'm going to get $500,000 to ink a deal and build a restaurant."
When small-time restaurants get left out of the real-estate market, diners are left with a food scene that increasingly looks and tastes the same.
Thomas Crosby, the CEO of Pal's Sudden Service, a Tennessee-based chain of 31 burger shops, is all too familiar with the downsides of private equity. It's why he has eschewed outside investment. Millions of private-equity dollars might help triple the number of Pal's locations in five years — but could the chain continue to train and retest staff to remember that the perfect french fry is 3.7 inches long?
"As soon as you start taking investments or go public, you confuse your mission," Crosby says. "It becomes, what metrics can I do to wow stockholders instead of wow customers? And I think that's how so many companies get sideways. It's kind of like cars: You drive down the interstate, and you cannot hardly tell one brand from another. It becomes so homogenous." He adds: "That's what happens in the restaurant industry."
Chasing the success of another restaurant chain means everyone just tries to copy everyone else. "To please the stockholders or investors, they've got to be all things to all people," he says. By maintaining control over his operations, Crosby says, "We don't owe people money. We don't lease land. We have zero debt."
Since the early 2000s, private-equity firms started taking on a bigger role in the companies they'd invested in; these firms didn't just expect returns down the line, they began telling companies how to achieve those goals. This was good for innovation and safety, but bad for job creation and wages, with "sizable reductions in earnings per worker in the first two years post buyout," professors from Harvard and the University of Chicago's Booth School of Business wrote in a 2014 research paper.
As soon as you start taking investments or go public, you confuse your mission.
In the long run, private equity often leaves companies worse off. In 2019, researchers found that public companies that are bought out by private-equity firms are 10 times as likely to go bankrupt as those that aren't — a finding that complicates the argument that companies like Toys "R" Us closed simply because of market forces. Similar to the casual-dining boom before it, Susskind, the Cornell professor, believes that the investment boom in the fast-casual sector will eventually lead to a bust.
Already, the graveyard of private-equity-backed restaurants is growing. BurgerFi, which has 93 locations and 51 pizza subsidiaries, primarily in Florida, received $80 million in investments just a few years ago. But despite last year's plan to update the chain's stores, menus, and technology, the investment has largely transformed into debt. The company defaulted on $51 million in credit obligations this year, and in September, it filed for bankruptcy.
Between 2015 and 2019, Mod Pizza received a total of $334 million in private-equity investments, which enabled the brand to grow to 512 locations across Western states, with over 12,000 employees. In 2019, the firm boasted of being "the fastest-growing restaurant chain in the United States for the past four years," with a plan to hit 1,000 locations in five years. The rapid expansion outpaced realistic sales growth, and earlier this year, the company closed over 40 locations.
Similarly, Rubio's Fresh Mexican Grill, founded in 1983 in California, was acquired by Mill Road Capital in 2010 for $91 million. The new ownership updated the name (to Rubio's Coastal Grill), the interior design, and the menu. Renovations at each location cost about $200,000. The chain ended up declaring bankruptcy twice: once in 2020 and again earlier this year. Though the company attributed the first filing to pandemic lockdowns, it was already struggling to maintain its growth and stay in the green prior to 2020. When it closed more restaurants earlier this year, some employees found they were unable to cash their final paychecks.
Even some of the most visible success stories of investment-based growth haven't borne fruit. Sweetgreen, "the Starbucks of salad" that was heavily backed by venture capital before its IPO, grew from one location in 2007 to 227 this year, with plans to open another 30 a year — though the company still hasn't seen a profitable year. The chain lost over $26 million last year.
At some point, the market taps out and there isn't room for more growth. Americans are already spending 42% more money on dining out than they are on groceries.
Berman says that the high volatility creates opportunities. For one, when a cash-rich restaurant bails on a retail location, it becomes available as a turnkey space, complete with HVAC, grease traps, and floor drains. Berman's company recently made a deal for a popular food brand to build out a research kitchen. It's designed to be an experiment, but they signed a 10-year lease. "Believe me, this place is not going to be around in three years, I promise you," she says. That leaves the door open for other entrepreneurs to take over.
In other words, don't get too attached to the Sweetgreen down the street. It may take longer than six months for private-equity-backed restaurants to go under, but there's a good chance your new fave won't be around in a few years.
Corey Mintz is a food reporter focusing on the intersection between food, economics, and labor. He is also the author of "The Next Supper: The End Of Restaurants As We Knew Them, And What Comes After."