Bennigan's, Steak & Ale Go on the Chopping Block

Plano, Tex. (Blue MauMau) - S & A Restaurant Corp., a subsidiary of Metromedia Restaurant Group announced yesterday that its two restaurant chains will file Chapter 7, a bankruptcy filing procedure marking the intent to liquidate some 150 company-owned Bennigan's as well as its Steak & Ale restaurants. Metromedia is a franchising conglomerate that also franchises such brands as Bonanza & Ponderosa steakhouses.

The franchising arm of Bennigan's and Steak & Ale concepts was quick to announce today that franchise owners were independent companies and not part of the Chapter 7 filing. The 138 domestic and international franchisee-owned restaurants will remain open and fully operational.

The company announced that Bennigan's Franchising Company, L.P. and Steak & Ale Franchising Company, L.P. will continue to provide high quality support services to its franchisees and remain focused on maintaining and maximizing the value of the franchise brands for its franchisees and their loyal customers.

Bruce Shaeffer, an attorney specializing in tax and company valuation issues, emphasizes that Chapter 7 liquidates the company as opposed to Chapter 11 in which the management of a firm seeks protection from bankruptcy by the court. Shaeffer conjectures, "My guess is the Chapter 7 trustee will try to sell off assets including its trademarks and goodwill. My other guess is that the franchisees will find it in their best interest to buy the chain."

"This has happened before," agrees Craig Tractenberg, a partner with Nixon Peabody LLP who specializes in franchise mergers and acquisitions of distressed franchise systems. "My firm was counsel to franchisees who bought the operating assets out of the Ground Round bankruptcy. They cherry-picked the best corporate stores that were closed by Ground Round. That is one of many strategies that can be exercised [by the chain's franchisees]."

Ground Round Inc. is a casual dining chain founded by Howard Johnson's that nearly collapsed from an overextension of restaurant units and then was bought out by a group of franchisees joining together.

Technomic, consultants and analysts for the food industry, thinks the difficulties facing S & A Restaurant Corp. and many other casual dining chains have been apparent for some time.

Bennigan's and Steak & Ale have had lackluster menu concepts with little recent innovation. That helped exacerbate their problems wrestling with high food costs and a soft economy. Credit has also been tight.

Technomic thinks that Bennigan's may not be alone. The top 20 casual dining chains in the same category that Bennigan’s operated had unit growth of 45 percent during the most recent five-year period, well beyond the growth in demand. “These restaurants share many subtle and complex challenges that extend beyond this difficult economic climate,” says Ron Paul, president of Technomic. “To some extent, they’ve become victims of their own success—a mature category with too many units and not enough differentiation, at least in the eyes of consumers.”

Nonetheless, the consultancy feels that strong unit economics, excellent execution in food quality and service, and the ability to convey a strong price/value perception with consumers, regardless of the total amount spent is what makes some restaurants in the casual food sector stand out.

“In terms of achieving differentiation, it’s hard to underestimate the importance of the food element,” says Paul. “Consumers are naturally drawn to unique, signature menu items. When the chain can also layer in excitement through new or limited-time offerings, they help create an environment where consumers want to come back. A good experience can generate all-important buzz around the concept.”

Still, industry-watchers expect more restaurant chains to follow Bennigan's. The question is who.

Mr. Tractenberg hints that there may be more trouble to come but identifying who will be next is difficult. "I don't think anyone can identify a single restaurant brand any more than they can pick a single retailer who will go under. It's just a bad economy for retail."