Author: Demitrios Kalogeropoulos | October 05, 2018
Making the choice to cut back
It’s always possible to have too much of a good thing. Following a long streak of aggressive expansion in the restaurant industry, several major chains have found that they took that growth a bit too far recently. As a result, these companies are now paring back on their store footprints in hopes of building a stronger overall portfolio. Let’s take a closer look at a few of the most well-known restaurants that are closing stores in 2018.
Chipotle (NYSE: CMG) has seen its store base soar up to 2,400 restaurants at the end of 2017 from just 700 a decade before. The taco and burrito specialist still predicts plenty of room for growth from there, but recent struggles with food safety and customer satisfaction have convinced management to take a more critical view of the business. New CEO Brian Niccol’s recovery plan involves marketing and menu changes, in addition to the closing of some underperforming locations. Altogether, between 55 and 65 Chipotle restaurants will shut down over the next six months.
Starbucks (Nasdaq: SBUX) is on pace to miss management’s growth targets for the second straight year, and while the scale of that underperformance has been modest, it was big enough to motivate a significant shift in the coffee chain’s expansion strategy in the U.S. The chain aims to close 150 locations this year, up from its normal average of 50, with most shutdowns occurring in major metropolitan areas. Looking ahead, Starbucks plans to focus its growth in smaller, suburban areas, with 80% of new locations featuring drive-thru capability.
Subway’s sandwich prep stations require very little space, and so it has been easy for the company to aggressively expand its store footprint. Tastes are changing, though, and the chain has struggled to keep up with those moves. Sales dropped in each of the last three years as hungry customers flocked to healthier options. Subway still has a massive global store base, but it plans to close about 500 of its U.S. locations after shuttering 800 last year.
Noodles & Co.
Noodles & Co (NYSE: NDLS) thought it had a defensible niche in the fast-casual dining space, but slumping customer traffic numbers in recent quarters challenged that idea. Management blamed its aggressive expansion strategy for hurting profitability and so its new plan involves what executives call a much more disciplined real estate approach. The noodle and pasta specialist peaked at 532 locations in 2016 but saw its base drop to 478 last year before shrinking to 469 so far in 2018.
Applebees, which is owned by Dine Brands (NYSE: DIN), recently posted its strongest quarterly sales gain in a decade. Yet that success wasn’t enough to change management’s conclusion that many of its worst-performing locations should close their doors. In fact, the company raised its expectations for Applebees closings in early August and it now plans to shut down between 80 and 90 of its restaurants. These moves should boost profitability and cash flow, which is critical given the parent company’s elevated debt level.
Closing stores isn't always a bad thing
Investors often react harshly to news that a restaurant chain is closing some locations. A key growth avenue for these businesses, after all, is their ability to aggressively expand their footprints across the country. However, when a restaurant has entered into less desirable locations, or built up too much density in a given area, it can make sense for the business to close shops so that the remaining portfolio of stores is stronger and more profitable.
Demitrios Kalogeropoulos owns shares of Chipotle Mexican Grill and Starbucks. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool has a disclosure policy.