Bankruptcy courts are busy again with restaurants

The restaurant industry is still analyzing the effects of last week’s funhouse ride on Wall Street. But one scream of fright should’ve been audible before the white-knuckle trading began: There’s been another wave of restaurant bankruptcies, this time of franchisees.

The busts tend to get less attention than the filings of a brand’s parent company, which themselves have been less than high-profile in recent weeks (the most recent chain to put creditors at arm’s length: Bill Johnson’s Big Apple, a five-unit chain of family restaurants in the Phoenix area).

Taken together, the bankruptcies prove the industry shakeout is still underway, this time on a market-by-market basis.

It’s tough to read a pattern in the failures. On first glance, fast food is the source for a disproportionate number. This Wednesday, an auctioneer in Dallas will sell off the Burger King units of a bankrupt franchisee. A bankrupt El Pollo Loco operator has nine units on the block in southern California. The weekend brought news that a Rally’s franchisee in Birmingham, Ala., was throwing in the paper napkin.

But the full-service sector has seen its share of failures, too. Chevys, a low-ticket casual chain, lost two stores in St. Louis when an eight-unit franchisee there couldn’t cut the mustard.

A number of family restaurants, including franchises of bankrupt Perkins & Marie Callender’s, have provided the bankruptcy courts with considerable business from that segment.

Here and there, a common element does crop up: Locations rendered unfeasible by the economic downturn. It’s often less a matter of a traffic freefall than a function of a rent that’s tough to cover.

The outcome should be healthier local markets. Supply usually dips, to some degree, and the shuttered stores provide an expansion opportunity if the landlord is more realistic going forward about the lease.

The question, underscored by last week’s roller coaster, is how all this uncertainty is going to affect consumers and lenders.

The rejuvenation effort to watch

When I heard Dick Rivera had been named CEO of Real Mex Restaurants, I shrugged and figured, A job’s a job. He’d already diamond-studded his reputation by leading such big-name brands as Red Lobster, T.G.I. Friday’s and Longhorn Steakhouse. So what if he was stepping back now to what anyone in the business would regard as second-tier concepts? He’d help such relics as Acapulco and El Torito play a little Bingo in the home for aged restaurant chains.

Then Rivera tapped Lowell Petrie to lead Real Mex’s marketing efforts. It’d be like the Mississippi Mud Hens putting Derek Jeter in as shortstop, after slotting Ivan Rodriguez as the clean-up batter. Petrie has earned mountains of respect in similar roles at concepts large and small, from Denny’s to his most recent employer, the much-watched Daphne’s Greek fast-casual chain.

Then came the announcement that Craig Miller, a longtime casual-dining leader, and Jeff Campbell, perhaps foodservice’s biggest marquee name during the 1980s, had been appointed to Real Mex’s board.

And along the way, Rivera lined up $130 million in debt financing.

Suddenly, what sounded like a reshoot of “Going in Style” was emerging as the story to follow. Indeed, it may be the most intriguing situation in all of foodservice right now, with more drama and audacity than the saga of Starbucks. Wisdom, financing, talent, determination and old but extremely well-known brands, all blended into a comeback effort that would make Lance Armstrong look as if he was back on training wheels. This is one for the Harvard Business Review.

Of course, there’s no guarantee of a happy outcome. As one close observer put it, Real Mex’s concepts come with plenty of baggage. El Torito can boast of being the granddaddy of Mexican dining in the U.S. But that’s like touting a Walkman in the age of the iPod. Freshness, novelty and perceived authenticity are what seemingly pull consumers to today’s Tex-Mex outlets. Can Real Mex promise real Mex?

Then again, it has a gem in Chevys, a brand that touted freshness while Steve Ells was still toying with the idea of a Mexican concept that could offer food with integrity. Long before Chipotle Mexican Grill, it was boasting that it used nothing canned or frozen, and entertained guests by cranking out fresh tortillas on a signature machine visible from the dining room. In short, it was fresh before fresh was cool. With only 68 restaurants in operation, it has plenty of room to grow.

Real Mex also has a few youngsters in its nine-brand, 189-restaurant fold. It opened a concept called Sinigual last fall in New York City, for instance. There’s also what’s now a single-outlet concept in Laguna Beach, Calif., called Las Brisas.

In any case, it’ll be interesting to track the turnaround efforts of Rivera and his team—a line-up that presumably hasn’t yet been completely drafted. That alone will be something to watch, given the talent available and how many all-star acquaintances the current recruits enjoy.

It’s also a buyer’s market for top-grade development sites, or even acquisition candidates.

Clearly this’ll be no checkers game at Shady Acres Retirement Village.

8 restaurant cos. put on Moody's 'death watch'

Eight restaurant companies, including the parents of Outback Steakhouse and Arby’s, have been included on a list of companies rated by Moody's as the most likely to default on their debts.

In addition to OSI Restaurant Partners and Arby’s Restaurant Group, presumably a predecessor of what’s now Wendy’s/Arby’s Restaurant Group, the 283-company list includes El Pollo Loco Inc.; Perkins & Marie Callender’s Inc.; Chevys and El Torito parent Real Mex Restaurants; and Sagittarius Retaurants Inc., apparently an affiliate of Del Taco and Captain D’s parent Sagittarius Brands.

The roster also lists a company called Rare Restaurant Group LLC, identified as being in the fast-food business, which suggests it is not connected with Rare Hospitality, the steakhouse operator that’s now part of Darden Restaurants.

The list has been posted in its entirety by the financial website SeekingAlpha.com.

Moody’s calls the list The Bottom Rung, but media reports have opted for more colorful slugs, including "company dead pool"; "dead companies walking"; and "the death watch."

Most also note the credibility of Moody’s Investors Service has been called into question by its failure to anticipate the meltdown in mortgage-backed investments. The catastrophic collapse was not foreshadowed by the risk ratings of Moody’s or the two other major financial rating services.

Moody’s is quoted as saying about 45% of the Bottom Rung concerns will default on their debts during the next year. One list-ee, Eastman Kodak, has already blasted the report as “irresponsible” and inaccurate.