Lessons to be learned

It appears that these outfits over reached and rather than grow slow and sure they borrowed heavily against the strong segments of their business to finance expansion or perhaps fund new ventures. There is a lesson there for the rest of us.

Bloomberg News reports that Uno Restaurant Holdings – which operates Pizzeria Uno – is the latest in a string of restaurants that can’t stay afloat as consumers reverse splurge on their recession diets. It follows Bennigan’s and Steak & Ale among those national restaurant chains that couldn’t feed banks’ hunger for loan repayment.

In addition to Bennigan’s, Bloomberg reported that a big Pizza Hut chain filed for bankruptcy this month – “Ohio-based Midland Food Services LLC, the operator of 92 Pizza Hut restaurants.”

George Mills

Wow. In this tough climate most people people I’ve spoken to have commented that the public in general have tended to ‘trade down’ in their spending maybe moving to a cheaper restaurant or getting take aways. Much as I know the TT’s view of PH I would have thought that PH would have weathered this storm as well as any other if not a bit better - ‘well know’ restaurant and delivery etc etc.

With all due respect to restaurant owners working hard to make a dime my take on this is a bit from the norm. This is just my 2 cents, and only my opinion.

First off, the media tends to create mass drama and are fully capable of making it happen just to have a news story. Sure times are tough and have been tough but I don’t think times are as tough as people make it out to be. People are still eating out, buying houses, starting businesses and surving in this so called “recession”

This company which has 92 stores, I wonder if it was really the economy which drove them out. Perhaps it was poor management. I would imagine someone owning 92 stores and ALL of them closing… closed, not because of a recession but because of their inability to pay debt. Our society has come to believe debt is normal, a way to wealth. Borrowing money doesn’t lead to wealth.

When someone files bankruptcy it is because they can’t pay debt, not because sales are down. (Even though I understand slumping sales may cause this to happen) A sign of great management would be a business built on a rock foundation, minimal or no debt. One built on loans and high overhead are quick to sink because it is built on sand.

Our original location without a doubt over the last 14 years has survived many economic downs because and only because it was NOT engulfed in debt. The low overhead allowed the variables costs to change with the slump in sales.

A so called “recession” last about 18 months. If your company didn’t have debt it could ride the storm out, but if you are smothered in debt and living “paycheck to paycheck” “daily sales to daily sales” I don’t think you would last more than a year, just missing the turn around of the economy.

So we can blame the economy all we want but I think it comes back to us, the owners, who make decisions which impact our survival during tough times.

So for me the lesson to be learned is:

Our society has become a society which thinks debt is normal. It is not. A debt free person (company) never files bankruptcy. Just because we can get a loan doesn’t mean we can afford it.

Again, just my 2 cents.

Kris

I agree that businesses are a little too eager to take on debt in the hopes of quick growth but also at the risk of not being unable to survive down economies due to debt service. But debt-free is not a healthy position either unless you are not interested in growth. If you just want to run your single shop, absolutely. Keep any recurring fixed costs to a minimum.

But if you want to grow at more than a snail’s pace, it is healthy to use debt to fund it. If you are trying to fund it from cash flow, it is going to take too long. Think of it as buying a house. If you wait until you can pay cash, you will give up a substantial part of your life without it while saving for it.

You just have to make sure you are not leveraging your business too much and that you plan for the worst. But being debt-free still comes at the cost of lost opportunities.

There might be another factor at work in some cases. When times are good, as they have been the last few years, there are people who get into business who should not. Perhaps thinly capitalized and perhaps poor operators but they survive because times are good. When things get a little tougher they expose managerial weaknesses. Plus, when some companies begin to grow, because the growth comes fairly easily, they do not make enough of an effort to make sure their operational skills improve and adapt along with the growth. Then there is the syndrome where we get fat to easily and we forget what got us there. We take our eye off the ball.

Tougher times are often the mechanism that makes for better businesses. A case could be made that the businesses that don’t make it possibly shouldn’t make it. Maybe its something akin to culling the herd for ranchers. After the herd is culled what remains is stronger and better. Not sure about the rest of the country but here in California we are in the middle of round two of the yogurt craze. We did this before in the 90’s and here we are again. There are so many new companies developing multiple yogurt locations and there is no way the market is going to support them all unless people all of a sudden decide they have to have a yogurt every night of the week. I know of one group of investors who have purchased the rights to five franchises and they are committing to leases a little over two years into the future. I am not much of a betting man but I would be willing to bet one of my precious extra large pizzas that they are not going to like the landscape in two years for their franchises.

The economy is a concern to be sure. If we get a hefty increase of various taxes on top of a not so strong economy things could get worse. Here in California our government has managed to create a 15 billion dollar deficit and the only answer the politicians have come up with is to raise taxes even more. More Federal and more state taxes at a time like this? You have to wonder what our politicians are thinking or maybe we give them to much credit by assuming they think. Oh, and did I hear one of the candidates say that he was going to increase the capital gains tax as well? That will be a economic killer all by itself.

Hi Guys;
Glad to see my observation stimulated so many excellent responses.
George Mills