Shells' Woes Go Beyond Economy

Shells Seafood Restaurants became the latest casual-dining chain to fall victim to the sour economy earlier this week when it filed for Chapter 11 bankruptcy and closed eight of its 22 Florida restaurants. But there's more to the story than the fact that Americans are dining out less frequently.

Since its heyday in the late 1990s, Shells has struggled mightily to find its identity and set itself apart from the competition, as evidenced by its financial results. The chain has posted an annual profit only once over the past nine years, earning $677,000 on revenue of $47.2 million in 2002.

Management turnover has also dogged Shells. The latest shake-up came in February when Leslie Christon resigned as president and CEO. Executive VP and CFO Warren Nelson replaced her on an interim basis, but he left the company just a week before it filed for bankruptcy.

Shells appeared to be headed in the right direction in July when it overhauled its menu with more than 20 new items and reduced prices. It's even testing a new, more upscale concept dubbed Rock Beach Grill, which opened in Pembroke Pines, Fla., on Aug. 1.

But an unfavorable economy has a way of exposing beleaguered companies. Shells reported revenue of $19.6 million in the first half of 2008, down 21 percent from last year.

The economy isn't the only external factor contributing to Shell's woes. One overlooked cause of the casual-dining segment's tribulations is its unprecedented, and unsustainable, growth until recently. The top 20 casual-dining chains saw overall unit growth of 45 percent from 2002 to 2007, well beyond the growth in demand, according to Chicago foodservice consultant Technomic. Additionally, the emergence of the fast-casual segment has hurt casual dining - Americans are seeking value and convenience.

Casual chains "share many subtle and complex challenges that extend beyond this difficult economic climate," says Technomic President Ron Paul. "To some extent, they've become victims of their own success - a mature category with too many units and not enough differentiation, at least in the eyes of consumers."

It's not over for Shells, but the chain faces a long road ahead. Differentiating itself in the fiercely competitive casual-dining arena will be the key to its survival.

Best regards,
Steven Hedlund
Associate Editor
SeaFood Business


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