Could Atlanta's Restaurant Scene Be Close To Capitulation?

Atlanta's independent restaurant owners' business grew again by the end of last year, even beating the national average. But, as one Atlanta restaurant watchdog put it, that is “cold comfort” as the industry struggles to fill a growing number of new restaurant seats.

Restaurant sales volume grew just 0.7% in Q4 over the same period in 2015, according to a quarterly survey by Atlanta-based NetFinancials. And for the same period, restaurants across the country saw sales drop by more than 2%, according to data firm Black Box Intelligence, the fourth consecutive quarter of sales declines in the U.S.

NetFinancials' survey involves more than 100 independently owned restaurants in Atlanta with a sales volume exceeding $300M in total. While Atlanta independent restaurateurs are bucking a trend, NetFinancials' Bob Wagner said that was “cold comfort” to operators “accustomed to healthy annual sales increases."

"Barely positive sales growth is a new experience," he said. "In many instances, loans were taken, facilities built and teams hired in the anticipation of robust sales growth, which has not materialized.”

Sales need to either return to prior levels, Wagner said, or the industry could be getting close to a tipping point, in which many restaurants could shutter in the metro area. The biggest problem, industry watchers said, is the sheer amount of new competition, a plethora of new restaurants opening — independent, franchises and chains — across Atlanta.

According to Foodservice Research Associates' Carl Muth, more than 650 new restaurants, from fast casual to fine dining, opened in Georgia last year, 80% of which were in the Metro Atlanta area. Those include Anh's Kitchen in Midtown; Cactus House, which opened at the base of the residential tower Azure on the Park in Midtown; Blaze Fast Fire'd Pizza in Decatur; and Darwin's Burger & Blues in Sandy Springs, according to Muth's report.

Increasing competition was one reason Atlanta restaurateur Jay Swift shuttered his 4th & Swift restaurant in Midtown Atlanta's Old Fourth Ward and headed to the suburbs. Swift now owns and operates Noble Fin, a seafood and steak restaurant in the affluent northern Atlanta suburb of Peachtree Corners, which he said has been met with strong business since opening last year.

“It's all the mixed-use development,” Swift said. “Every day, you hear of 10 new restaurants opening. It's crazy.”

The Shumacher Group's Harold Shumacher — one of the city's top retail brokers — said despite the data, interest in opening new restaurants in Atlanta remains elevated, especially among national players. Still, he admitted the data behind Atlanta's restaurant performance has been lackluster. New competition could be one factor, but another could be a deluge of chef-driven restaurants with common themes.

“There's a lot of seats chasing fannies right now,” Shumacher said. "I mean, how many places do you need to serve shrimp and grits? Has it become a little clichéd?"

Restaurants, especially the chef-driven, independent concepts, have become the darlings of retail developers across Metro Atlanta, said SRS Real Estate Partners' Ray Uttenhove, another veteran of Atlanta's retail leasing scene. And that has led to an explosion of new locations around town.

“There's no question, with that many new restaurants coming online, it doesn't leave a lot of room for error,” Uttenhove said. “When you're trying to build as many restaurants and there is this kind of demand, if it's a location that's just off the mark, if it's not prime, if it doesn't have the critical mass that doesn't generate a kind of excitement, it could be at risk. It's a big location question.”

“There's concern in the industry,” Wagner added. "Have we really gotten ourselves into a situation where we have more capacity than is good?"

If that is the case, the restaurateurs who are higher leveraged will be the ones in most need of strong sales growth, or they could wind up shuttering.

According to NetFinancial's report, restaurant sales growth has fallen below 2% for the past seven quarters, with 2016 sales growth 1.7%, the lowest annual growth level the firm has tracked since the survey began in 2010. Even more alarming was that more than half of the restaurants surveyed by NetFinancials reported negative sales growth in the fourth quarter.

“Quarter four was the most challenging quarter of the most challenging year that we have seen,” Wagner said.

There were some bright spots. Businesses with lower check averages, such as pizza, BBQ and Mexican-themed restaurants, reported better-than-average comp sales last year, according to NetFinancials. And Shumacher said Atlanta's job growth — more than 60,000 new jobs last year — should help buffer restaurant demand.

“We have the benefit right now of two to three years of continued job growth. And many of those people coming are dining out more than three times a week,” he said.

"There's a bit of a bubble” in Atlanta's restaurant scene, Swift said. But he does not expect the shakeout to be overly dramatic. Still, he said, “I don't know anybody as busy as they used to be.”