Bankruptcy, where we go from here?

What happens to franchise owners when their franchisor goes bankrupt? The owners of Bennigan are soon to find out. On July 29, the pub-themed casual dining restaurant chain filed a Chapter 7 bankruptcy. It chose to cease operations and liquidate its assets rather than reorganizing. Bennigan’s closes all company-owned locations and plans to sell their assets. 138 remaining franchisees are still operating but face a tough road ahead of them.

The first challenge for franchise owners was to let their customers know they were still open even after the closure of corporate restaurants.

"We immediately went to local news coverage," says Larry Briski, president of the Bennigan's Franchise Operators Assn. and owner of four Bennigan's in the Chicago area. "Most of our franchisees did the same thing in their local markets."

Franchise owners were surprised when S&A Restaurant Corp, the owner of Bennigan’s and the Steak and Ale chain collapsed. S&A is part of Metromedia, a large and private conglomerate run by billionare chairman John Kluge. Kludge’s company had interests in media, energy and other sectors. Briski says there was no indication that the chain was on the brink of bankruptcy during the meeting with company officials last month.

Margin Squeeze

Briski expects vendors to honor their contracts and the sales at his restaurants haven’t been affected by the bankruptcy. "We're moving forward. We're excited about the brand," he says.

But analysts say the future for Bennigan’s franchisees in the casual dining space doesn’t look good. Gas, labor costs, expensive food are squeezing the restaurant’s margins while leaving customers less amount to eat out.

"This marketplace has grown significantly, which means there are a lot of restaurants and a lot of seats and not enough people to fill those seats," says Darren Tristano, executive vice-president of Chicago food industry consultant Technomic. He says the number of casual dining restaurants from major chains has grown at a 7% to 8% year-over-year pace since 2000, while unit growth in the restaurant industry as a whole has been more like 1%.

Bennigan's franchisees are still operating, but the uncertainties they face are heightened by cost pressures and the drop in diners' disposable income.