Maybe you’ve noticed that Red Lobster or Applebees are closing in your town, or that the Boston Markets that used to be everywhere have all but disappeared. What’s going wrong in the restaurant industry?

Economic data and restaurant experts show that there is no reason to worry – the industry as a whole is likely to grow. But changing economic trends and the special circumstances of some restaurants mean that a handful of well-known brands are fighting for survival.

“The restaurant industry is notoriously competitive,” Sara Senatore, a Bank of America restaurant analyst, told Investopedia. “And in the current environment, we are seeing a return to more intense competition.”

Closing time

It’s easy to look at the headlines and hear the hoofbeats of the Four Horsemen.

In June, seafood chain Red Lobster filed for bankruptcy, closing at least 50 stores and asking a bankruptcy judge for permission to close another 100 stores. According to parent company Dine Brands’ latest earnings report, Applebee’s closed 35 more locations than it opened last quarter. In January, TGI Fridays announced the closure of 36 “poorly performing” locations. Boston Market, once a nationwide fried chicken chain, has closed hundreds of restaurants since 2023, and in March it was down to just 27, according to a report. Restaurant businessa trade magazine for the industry.

But while some companies are struggling, others are catching up. For every Red Lobster that closes, there seems to be a Chipotle: The fast-food burrito chain opened 52 locations in the second quarter alone, the company said in an earnings report in June.

Overall, restaurants are gaining more ground than they are losing, the data shows. The National Restaurant Association, an industry trade group, predicts that restaurants will generate record $1 trillion in sales in 2024 and create 200,000 new jobs. Census Bureau data on retail sales also show growth in the industry: Sales at foodservice establishments – which include restaurants – rose 6% in the first six months of the year compared to a year ago.

Are closures a diversionary tactic?

If the industry is doing well, why do store closures attract so much attention?

The closures are perhaps particularly troubling because they are so sudden. For example, Red Lobster, a private company, was not required to provide disclosures to its shareholders, so the public had little idea that a storm was brewing. On Red Lobster’s press website, the last press release before the bankruptcy filing was headlined “Red Lobster Releases Music Tracks As Fresh As Their Cheddar Bay Biscuits.”

According to press reports, Red Lobster subsequently struggled with a number of unique problems, including questionable management by the private equity firm that owned the company and a promotion for “Endless Shrimp” gone awry.

“These are not things that just come out of nowhere,” Senatore said of the mass restaurant closures. “There is a longer-term pattern that leads to this. But they seem to be more sudden, whereas openings don’t happen all at once.”

The fight is real

The economic upheavals of recent years could also be a reason for the recent wave of closures, even if it does not amount to an apocalypse.

In the immediate aftermath of the pandemic, the restaurants that made it through thrived. Diners had plenty of money in their pockets thanks to rapid wage growth, and a “revenge spending” mentality drove people to spend money on restaurant outings and other luxuries they had missed during lockdowns.

But that wage increase has been a double-edged sword, as restaurants have had to raise wages themselves to attract and retain staff, and have also struggled with higher food and other expenses. Now, with household budgets suffering from higher-than-average inflation and increased loan rates, customers may be stretched to the limit to pay increasingly expensive restaurant bills. Restaurants that have not adapted to the new economic realities will be left behind, Senatore said.

There are signs that lower-income customers are eating out less and going to cheaper restaurants instead, says Evert Gruyaert, restaurant and foodservice expert at Deloitte. And restaurants cannot raise their prices enough to cover their increased costs or they will lose even more customers.

“They can’t really control price anymore,” he said. “And in this battle for customers, they have to get pretty creative with value, offers and promotions.”

But these promotions can be costly – think endless shrimp.

“The combination of all these things puts pressure on brands, which unfortunately has led to some of the announcements you’ve seen,” he said.

There are several other trends putting financial pressure on restaurants, says Gruyaert. The industry has made major investments in recent years, including building renovations, purchasing self-service kiosks, upgrading kitchen equipment and other improvements. The debt taken on for these investments is becoming increasingly tough due to high interest rates, a result of the Federal Reserve’s campaign to fight inflation.

“I invested for the long term and now I may see the benefits: better customer experience, more efficiency and all that,” Gruyaert said. “But the reality is that just the interest I have to pay every month on all these investments is putting a huge strain on my business from a cash flow perspective.”

The current situation is likely to be particularly difficult for sit-down restaurant chains, known in the industry as “casual dining” restaurants, says Michael S. Kaufman, a restaurant consultant and professor at Harvard Business School. Meals at such establishments could be among the first casualties for people looking to cut costs.

“Consumers, as McDonald’s and others have indicated, are now looking more critically at their spending on what they don’t want. What’s a restaurant to do?” he said. “Consumers are saying, ‘We’re struggling, or we’re starting to struggle, or we’re thinking more carefully about what we’re spending.’ And this combination of Applebee’s, Chili’s, TGI Fridays and maybe even Outback is bound to be more challenging for the middle market.”

In an economy of high wages and high inflation, the chains that are succeeding are those that have relatively low labor costs or that have found ways to save money, such as by switching to electronic ordering, Kaufman says. But there will likely be more casualties.

“I don’t think we can continue to maintain the large chain stores of traditional casual dining restaurants,” he said.