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Sbarro's Bankruptcy Filing Points to Bigger Problems

By Andrew Marder - Mar 11, 2014 at 10:15AM

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After years of poor operating results and falling sales, Sbarro filed for bankruptcy protection -- today, it did it again.

Let's travel back in time to a simpler place, a place where anything was possible and everyone was joined together in acting for the common good -- America, 2011. It seems like only yesterday that the new royal couple was walking down the aisle and Charlie Sheen was getting fired. It was also the year that Sbarro was filing for bankruptcy protection for the first time. At the time, the business said that it was a strong company and that it intended to "emerge expeditiously from Chapter 11 as a stronger, well capitalized and more competitive company." 

Or not. Yesterday, Sbarro filed for Chapter 11 protection again, hot on the heels of a January announcement that the company was shuttering 155 of its approximately 400 North American locations. The 58-year-old chain is looking rough around the edges.

Is Sbarro suffering from pizza exhaustion?
Maybe Americans just aren't crazy about pizza anymore. We've gone through our Atkin's diet phase, our low-fat phase, that weird year where we didn't eat tomato paste because it gave us gas. As it turns out, we're not that averse to the occasional slice, with nine out of 10 Americans consuming pizza at least once a month. 

According to PMQ Pizza Magazine -- voted No. 1 "magazine to eat when you want a late night snack" -- U.S. pizza sales topped $37 billion in 2013. Sales have put up slow but steady growth, rising 1.2% last year and 1.6% in 2013.

Pizza's popularity may be Sbarro's biggest problem. New pizzerias are opening up all over the place, with study from showing that openings have increased by more than 10% every year for the past few years. Those new businesses have been competing with established players like Sbarro, Pizza Hut, and Papa John's, but have also had to contend with the rise in fast-casual locations.

Slow food equals bad news
One of the biggest challenges for pizzerias has to be the perception that pizza takes time. That means that at lunch, on the road, or anytime you're in a hurry, pizza moves down the list of options. Instead, consumers are flocking to businesses like Panera Bread ( PNRA ) and Chipotle Mexican Grill ( CMG 1.60% ) for quick but substantial meals.

Fast-casual chains are soaking up diners' cash, putting the squeeze on other restaurant chains. Chipotle's revenue increase 17.7% last year and Panera's revenue was up 12%. Sbarro has felt that pinch, and when Moody's dropped the company's debt rating, it cited declining foot traffic and revenue as major components of the company's overall problem. Those feet are off to Chipotle instead. Moody's reported approximately $290 million in revenue for Sbarro last year, whereas the company was pulling more than $475 million in 2009.

With Chipotle working on a pizza chain called Pizzeria Locale, Sbarro and other pizza servers are going to be facing down new competition. Panera tried pizza and failed, back in 2007, but if Pizzeria Locale takes off, there's no reason the sandwich chain wouldn't try again. The future of pizza looks bright, but Sbarro seems unlikely to be a major -- or even minor -- player.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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