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As if eating out wasn't already expensive enough, U.S. restaurants are now facing the challenge of record-high food prices. A rise in food costs is problematic because consumers are alright watching their money, restaurants have high levels of debt, and profit margins are razor thin.
In just the last year, Fuddruckers, Charlie Brown's Steakhouse and Uno Chicago Grill Pizza declared bankruptcy, and more are likely to follow, Reuters reports. And with the increase in food prices, 2011 could be even worse, with companies like Sbarro, El Pollo Loco, Perkins & Marie Callender's Inc, already on the brink.
"For companies that are teetering on the edge though, it's just one more pressure point that they are going to experience as it relates to profitability and their ability to service debt," said Steven Simms, a senior managing director at FTI Consulting.
Although a restaurant bankruptcy is often viewed as the end of the business, it is frequently simply a restructuring that brings in certain legal advantages. For example, a restaurant that goes into bankruptcy court can terminate leases at underperforming locations, which can save money for a restaurant that has over-expanded.
"It's not impossible to do an out-of-court deal but the more widely held the (debt) issuance is, the more difficult it is to get 100 percent agreement," said Lisa Donahue, co-head of the turnaround and restructuring services at advisory firm AlixPartners, Reuters reports.
Just this year, the food prices of wheat are up 60 percent along with rises in the price of fruits, vegetables, beef, cheese, cooking oil and more. What that will mean for restaurants as well as their already cash strapped consumers remains to be seen.