Two Big-Brand, Multi-Unit QSR Franchisees Declare Bankruptcy on the Same Day

Two major QSR (quick-service restaurant) franchisees filed for Chapter 11 bankruptcy last week. 

River Sub, a Subway franchisee operating 48 stores in Texas, filed for Chapter 11 bankruptcy on June 20 following the denial of an appeal to vacate a nearly $3 million wrongful death award. The award was granted after Marisela Cadena, a manager at River Sub, was murdered by her ex-boyfriend in 2021. The company had allegedly failed to transfer her or take further security measures following a kidnapping incident involving the same individual.

The substantial liability from this case, combined with a significant drop in sales due to the COVID-19 pandemic, precipitated River Sub's financial crisis. At its peak, River Sub operated 69 stores, but sales plummeted by 80% during the pandemic, with the remaining stores generating about $30 million last year. The franchisee employs approximately 454 people but owes Cadena’s survivors nearly $3 million, vastly overshadowing its next largest creditor at $78,000.

Miracle Restaurant Group, a 25-unit Arby’s franchisee, also declared Chapter 11 bankruptcy on June 20. This marks the second bankruptcy for the group since 2010. The company, which operates restaurants across Illinois, Indiana, Texas, Mississippi and Louisiana, cited several reasons for its financial distress, including the lingering effects of the COVID-19 pandemic, inflationary pressures, negative same-store sales and delays in receiving over $3 million in Employee Retention Tax Credits from the IRS.

Despite efforts to sell underperforming stores and seek relief from landlords and Arby’s, Miracle could not stave off bankruptcy. The group plans to sell 17 stores across Texas, Illinois and Indiana to focus on its remaining locations in Louisiana and Mississippi. Economic conditions have worsened, with rising labor and commodity costs outpacing price increases, eroding cash reserves and profit margins.

These bankruptcies underscore some of the critical financial pressures QSR franchisees face in today’s market, including the impact of significant legal liabilities, declining sales and rising operational costs. Key takeaways for franchisors and franchisees include:

• Proactive Risk Management: The importance of addressing employee safety concerns and implementing robust security measures cannot be overstated. Failure to do so can result in substantial legal and financial repercussions, as seen in River Sub's case.
• Financial Resilience: Franchisees must build financial resilience to weather economic downturns and unexpected expenses. Diversifying revenue streams and maintaining cash reserves can provide a buffer against such challenges.
• Operational Efficiency: Constantly evaluate and improve operational efficiency to manage rising costs effectively. This includes optimizing labor and commodity expenses and ensuring that price adjustments keep pace with inflation.
• Adaptability and Flexibility: Be prepared to adapt business models and strategies in response to market changes. This might involve selling underperforming units, as Miracle Restaurant Group attempted, or seeking strategic relief and support from franchisors and landlords.
• Transparency and Support: Franchisors should offer transparent financial performance data and support to help franchisees navigate financial difficulties. This can foster a more resilient and informed franchisee network.

For more information on bankruptcy and departed brands, check out these related 1851 Franchise articles:

• Where Did Subway Go Wrong?
• Franchisee Bankruptcy: Implications for Franchisors
• RIP: The Top 5 Franchise Brands that No Longer Exist