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Bankrupt restaurants are still holding on

You see them all across the country, in shopping malls and street corners, suburban towns and city centers: zombie restaurants.

Many of the undead are part of familiar chains that filed for Chapter 11 bankruptcy protection this year: Friendly’s, Chevys, Sbarro, Perkins. The zombie restaurants, barely bringing in enough cash to cover basic expenses, always seem to be one sizzling fajita or glazed chicken skewer away from a merciful end, but somehow keep hanging on — leaving too many restaurants chasing after scarce dining dollars.

"There’s a lot of walking dead," said Bob Goldin, executive vice president for Technomic, a consulting firm that works with restaurant companies. "A lot of chains, they hang in there and they’re hard to kill off."

Consumers, who have generally cut back on the number of meals out since the recession began, are benefiting from the proliferation of zombies. Healthy and failing restaurants alike have been forced to discount relentlessly to lure diners. But for the restaurants, particularly small independent operators, the competition from the undead is a nightmare that just won’t end.

The hard times for restaurants began in 2008, as the recession and staggering unemployment forced Americans to cut back on dining out. During the 12-month period ending in August, the average American ate or got takeout at restaurants 195 times, down from 208 times in 2008, according to Harry Balzer, the chief food industry analyst for the NPD Group.

The industry puffed up like a souffle in the boom years. Led by quickly expanding chains, the number of restaurants in the country grew by more than 100,000 from 1996 to 2008. By that year, there were 545,678 restaurants nationwide, according to the Bureau of Labor Statistics.

When things turned bad, many analysts said, the total number of restaurants needed to shrink by at least 20,000 to bring supply and demand back into balance.

Instead, the number of restaurants kept growing, albeit more slowly.

Sales have taken a beating along the way. For example, at Applebee’s, one of the nation’s largest midprice chains with more than 2,000 restaurants, sales at restaurants open at least 18 months slumped every quarter from mid-2008 through the middle of 2010. The chain’s sales have grown modestly since then, compared with the low level of sales during the recession, but dipped again in the three months ending Sept. 30.

Analysts say the restaurant industry bears some similarities to the consumer electronics retail industry. Before 2009, there were far too many electronics stores. Then, Circuit City failed, closing 567 stores. The sudden shuttering was painful for the chain’s 34,000 employees, but it meant greater market share for other retailers, like Best Buy, Wal-Mart and Target.

"We need that Circuit City event," said Steve West, a restaurant industry analyst for ITG Investment Research.

That kind of reckoning has remained elusive, despite bankruptcy filings this year by several major chains.

When Friendly’s Ice Cream, the chain based in Massachusetts, filed for bankruptcy protection in October, it said it would close 63 underperforming restaurants. But the company said it would continue to operate 420 stores, and a spokesman said it was making plans to expand again.

In California, Real Mex Restaurants, which owns several chains, including the midprice Chevys Fresh Mex, closed just 30 outlets after it filed for bankruptcy in October. It continues to operate 156 restaurants.

After Sbarro, the Italian fast-food chain, filed for bankruptcy in April, it closed 31 stores in the United States, but kept the doors open on 429.

West said that many chains and independent restaurants were able to survive the recession because their costs fell along with demand. Labor costs went down, as high unemployment led to lower worker turnover and gave restaurant owners greater ability to adjust worker schedules and hours.

Prices for food commodities also fell sharply.

"It saved all these companies that we thought were going bankrupt," West said.

The most crowded sector of the industry is midprice restaurants, which include chains like Applebee’s and Chili’s. West estimated that as many as 13,000 midprice restaurants would have to close to balance supply and demand and return the industry to prerecession levels of profitability.

The oversupply is partly a result of the economics of the restaurant chains, which often keep underperforming restaurants open as long as they are generating enough money to cover basic costs, said Mark F. Fallon, vice president for real estate for Jeffrey R. Anderson Real Estate, a Cincinnati company that develops shopping centers and operates 15 restaurants, including 12 Hooters franchises.

Anderson said that zombie operators cut costs to the bone to stay in business.

"It has nothing to do with the quality of the food or serving the customer," he said. "It’s just a financial play."

He said his company operated differently and located new restaurants in areas with healthy demand.

But in the eyes of some competitors, Fallon’s firm may be contributing to the oversupply problem. The company is in the process of completing a new development in downtown Cincinnati called the Banks, which will include 300 apartments and, by the end of next year, up to 10 new restaurants, with a total of about 3,000 seats. They include chains like Johnny Rockets and Toby Keith’s I Love This Bar and Grill.

Harry E. Stephens, the co-owner of two Cincinnati restaurants, one a short drive from the new development, can hardly believe it.

"There are restaurants downtown that are struggling now and you add all those seats," he said. "They’re going to drain our market share for sure."

While many restaurant chains have been able to scrape by through difficult economic times, independent restaurants like those run by Stephens have had a much harder time of it, with more of them closing than opening during the recession even as the number of chain restaurants has increased or held steady.

The imbalance does not seem likely to end soon. Indeed, one midprice chain that everyone thought was dead and buried — Bennigan’s — is now coming back from the crypt.

Bennigan’s declared bankruptcy in 2008 and abruptly shut down the approximately 240 restaurants operated by the company, although some franchise-run Bennigan’s restaurants stayed in business.

Now, a group of investors has resurrected the franchising company and plans to open a small number of company-owned restaurants and dozens of new franchised outlets over the next five years. Paul M. Mangiamele, chief executive of Bennigan’s Franchising, said he had come up with a new design for stores and a revamped menu that would inject new life into the brand.

He said he did not worry about overcrowding in the industry but acknowledged that it would be good if some "old, tired restaurants" — a description he said once fit Bennigan’s — would get out of the way.

"I don’t think we’re overbuilt," he said of the industry. "I think we’re underdemolished."


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