A Buffet of Financial Troubles: What’s Really Cooking in the Casual Dining Sector

After weathering a global pandemic, supply chain disruptions, and a labour market in flux, one might expect the restaurant industry to have finally found its footing. Yet 2025 has brought little relief.

Insolvency filings across North America are rising sharply, especially in hospitality, where business models dependent on thin margins and discretionary consumer spending are buckling under pressure.

Nowhere is this more evident than in the casual and full-service dining segments, where operators are confronting the hard truth: despite top-line recovery, profitability remains elusive, and in many cases, unattainable.

The Cracks Beneath the Surface

New data from Restaurants Canada paints a sobering picture: as of early 2024, 62% of restaurants are operating at a loss or barely breaking even. This figure suggests a business model under siege—up from 53% in mid-2023 and a mere 10% pre-pandemic. Insolvency statistics only further substantiate this trajectory.

In January 2024 alone, restaurant insolvencies in Canada rose 112% year-over-year, reaching 121 filings—the highest monthly count in over a decade. For context, the pre-pandemic monthly average stood at just 44.

This is not merely a statistical trend. It is an unfolding industry crisis. Restaurants now account for nearly one in six insolvencies in Canada.

The Economics Behind the Downturn

The causes are complex but remain interconnected in economics.

First, consumer behaviour has shifted. With household debt at record highs and real incomes strained by inflation, discretionary spending has declined. Dining out—often one of the first expenses to be cut—has taken a hit. Despite nominal increases in foodservice sales, real growth is flat once inflation is accounted for.

Second, input costs continue to climb. Food prices remain volatile due to global supply constraints and climate-related disruptions, while wages—driven by minimum wage hikes and labour shortages—have risen faster than menu prices. Fixed costs like rent and utilities, once justified by consistent traffic, are now increasingly misaligned with economic realities.

Third, the end of pandemic-related government support has exposed structural weaknesses. From 2020 to 2022, emergency relief programs and forbearance arrangements provided a temporary lifeline. Without those buffers, highly leveraged restaurants are now struggling to manage debt loads assumed under far more optimistic assumptions.

Real-World Insights: On the Ground with Operators

To better understand the distress, I spoke with Sia Mizrahi, owner of Canam-Appraiz Inc., who has appraised numerous restaurant businesses across the GTA. He identified the following key challenges facing the casual dining sector:

• Permanent Shift to Takeout: Consumer habits have migrated toward delivery platforms like Uber Eats and SkipTheDishes, reducing the relevance and profitability of large dine-in spaces.

• Labour Shortages: The industry continues to struggle with finding and retaining staff. Many owners, particularly retirees with no prior foodservice exposure, are ill-equipped to manage high-turnover teams.

• Debt Burdens and High Interest Rates: Small restaurants often have fragile capital structures. The current interest rate environment compounds balance sheet vulnerabilities.

Some experts in the franchise sector also note that tight franchisor control combined with inflexible landlords often prevents meaningful restructuring efforts, particularly when replacing restaurant operators during insolvency proceedings.

Case Studies in Collapse: Red Lobster and Hooters

The recent bankruptcies of Red Lobster and Hooters underscore how even iconic chains are not immune.

Red Lobster’s bankruptcy filing in May 2024 followed years of traffic declines and strategic missteps—including the now-infamous “Endless Shrimp” promotion, which transformed a successful limited-time offer into a permanent, money-losing menu item. Coupled with supply obligations pushed by equity sponsor Thai Union, the move cost the company $11 million and further strained an already thin cash position.

Financially, the chain's liquidity plummeted from $100 million to under $30 million in just six months. EBITDA dropped more than 60% during the same period. Despite generating $2 billion in revenue, the model became unsustainable.

Hooters followed suit in March 2025, filing for bankruptcy protection under $376 million in debt. The chain blamed inflation, rising lease obligations, and brand stagnation. The bankruptcy process is now facilitating a founder-led buyout of its corporate locations—highlighting how survival increasingly requires strategic reinvention, not just financial restructuring.

What Should Operators Do?

While each situation is unique, several principles apply across the board in this space:

• Review the Cost Stack: Align expenses with current volume realities. Identify savings that preserve the core customer experience.

• Deleverage: Avoid excessive debt. Where repayment is unsustainable, engage lenders early to explore options.

• Renegotiate Leases: Pandemic-era optimism often led to over commitment. Renegotiating or exiting burdensome leases can free up vital cash flow.

• Keep It Simple: When facing a crisis, prioritize pragmatic, executable solutions. A flashy new concept is no substitute for restored liquidity.

• Right-Size Compensation: Owner compensation must reflect business performance. Draws that deplete working capital endanger long-term viability.

Put simply, sound financial hygiene and early intervention can mean the difference between restructuring and shutting the doors for good.

Looking Ahead

There are early signs of cautious optimism. The Conference Board of Canada projects a 4.9% increase in full-service restaurant sales in 2025. Still, this signals a slow and fragile recovery, and not a return to pre-pandemic stability.

For distressed asset investors and turnaround professionals, the current environment offers more runway than it has in years. For example, restaurant failures are rising, but so are opportunities to restructure operations, consolidate industry share, and reposition assets for long-term value.

Accordingly, this may be less a crisis than a necessary course correction. Saturated markets are shedding weaker operators, creating openings for stronger players. In urban centres, the supply-demand balance is shifting, offering rare chances to acquire prime locations at lower rents or take over fully built-out spaces at a fraction of replacement cost.

In many ways, the ingredients for renewal are already on the table. As any great chef knows, extraordinary results often come from limited ingredients and high pressure—so too with restructuring. In the right hands, insolvency is not an ending, but a reinvention.

By Divi Dev. Divi is a restructuring lawyer and the founder of Divi Distressed Investments, L.P., specializing in business rescue and distressed corporate investments advisory. Divi provides legal services through a professional law corporation. The views expressed are personal.