Why are so many restaurant chains filing for bankruptcy this year?

The year has not even reached its fourth quarter and bankruptcies among restaurant chains, operating companies and large franchisees are already nearly double what they were in 2023.

Jonathan Carson, co-CEO of bankruptcy services and technology firm Stretto, says there have been 17 such Chapter 11 filings in the sector so far in 2024, and there were only nine at this point last year. He expects the trend to continue.

The numbers this year are low compared to the pandemic era, when nearly three dozen major franchises folded over a 12-month period, but there are different dynamics at play with the new surge, he says.

"In this situation, a challenging economic environment, post-pandemic recovery issues, rising labor costs, changing consumer habits and inflation have caused more restaurants to struggle in 2024," Carson told FOX Business in an interview, noting those issues have also impacted other sectors of the economy.  

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But he does not think those are the sole reasons for this year's rise in bankruptcies in the industry, in particular.

Carson noted that just because a company files for Chapter 11 does not mean it is going out of business or going away, it just means that there is a challenge facing that business that the stakeholders believe can be addressed by that form of bankruptcy. 

A great example of that in the restaurant industry is the ability to get out of long-term leases with landlords, as Red Lobster is doing as it goes through the process.

He pointed to further macro-economic factors, such as interest rates being higher than they have been in recent memory, leading businesses to operate on a thinner margin, while at the same time, input costs have also gone up. 

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Carson believes the change in consumer behavior is also playing a role in more major restaurant chains filing to restructure, too.

He said his firm tracks the fact that the consumer balance sheet is in a difficult position today, with rising student loan debt, mortgage debt, and credit card debt.

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"The numbers are staggering and rising, and high interest rates don't help when it comes to the health of the consumer," Carson said, adding, "The consumer is in a rough spot."