DownWithTyranny!: Digestive-aid stocks plummet at news of latest Sbarro bankruptcy -- but there might be "good news in its decline"

Says Dunder Mifflin Scranton manager Michael Scott (Steve Carell): "I always like to come to New York a little bit early and hit some of my favorite haunts, like right here, my favorite New York pizza joint -- and ah'm gonna go get me a New York slahce."

"The last time I ate at one of [Sbarro's] 800 locations was in an airport where the next best alternative was a turkey wrap that looked as if it had been in the chiller even longer than the Sbarro pizza had been under the heat lamp."

-- from Neil Irwin's NYT "Economix" blogpost,
"This Is the Real Reason Sbarro Is in Bankruptcy"

by Ken

First, my apologies for the dreadful quality of the picture above, a screen grab from a mediocre embedding-disabled video clip. Second, a hat tip to Thrillist's Kristin Hunt and to tweeter Caroline Moss (@socarolinesays), whose tweet is included among Kristin's "10 Best Twitter Reactions to Sbarro's Bankruptcy" ("As if the Taco Bell Grilled Stuft Nacho's death wasn't enough, the people of Twitter were forced to confront their own mortality yet again when Sbarro announced it was filing for bankruptcy"). The reaction embodied by Caroline's tweet finished at No. 7:

7. They fought through the tears with a classic Steve Carell bit.

[Here's the working YouTube link again.]

And I'm personally grateful to the Times's Neil Irwin, first for noting --

The food at Sbarro, the pizza-and-pasta chain, isn’t very good. The pizza crust manages to be both thick and limp, the tomato sauce bland, the cheese the victim of sitting for too long under heat lamps.

And then, perhaps more important, for establishing that there is nevertheless a sort-of-sane reason why some of us actually repeat the seemingly insane act of ordering a Sbarro's slice. In my case it was also at the airport, at the Fort Lauderdale terminal where I usually caught return flights while I was making frequent trips to try to help my mother during her long decline. I often arrived at the airport hungry, and sized up the options pretty much the way Neil describes, with the added stipulation that his description of the quality of the pizza is on the generous side, at least judging from my experience, which usually entailed attacks of gas and nausea. Which calls to mind the Twitter reaction to the Sbarro news which Thrillist's Kristin Hunt's Twitter put at No. 9:

9. They worried how the Dow would take the news.

Yet somehow each time I managed to persuade myself that the slice couldn't be as nasty as I was remembering it, and each time I was wrong.

Perhaps the most alarming reaction to the Sbarro news is a near-terminal outbreak of punning, which accounts for Kristin's reactions No. 5 through No. 3:

5. They unleashed the puns . . .

4. . . . with great veneance.

3. Seriously, they couldn't help themselves.

Naturally the people maintaining this vigil over the wounded Sbarro are poignantly aware that this is the second time in three years that the company has filed for bankrupcy.

8. They recalled that other bankruptcy filing.

But it's important to remember that the bankruptcy is a Chapter 11, not a Chapter 7, meaning that it's aimed at reorganization rather than liquidation. Last month, you may recall, Sbarro announced that it was "Closing 155 North American Locations in Comeback Effort" (as Bloomberg put it), meaning an effort "to improve the company's profitability." (Bloomberg also noted: "Even as it scales back operations in its home country, the company added South American locations last year.") As Reuters reported Monday:

The pizza restaurant chain Sbarro filed for bankruptcy protection for the second time in three years after struggling with too much debt and fewer customers in malls that house many of its restaurants.

Lenders would take control of Sbarro, which is based in Melville, N.Y., under a prepackaged Chapter 11 reorganization. The company on Monday said that could allow a "quick exit" from bankruptcy, before May 7.

Sbarro expects to cut its debt load by more than 80 percent, and said nearly all its lenders supported its restructuring, which requires court approval. The company will invite other buyers to submit better offers.

In all, according to the Bloomberg report:

The company said it recently closed more than 180 money-losing restaurants, and expected to close about 50 more. It said it now had 799 restaurants in more than 40 countries, employing about 2,700 people. Sbarro said the bankruptcy did not affect the 582 restaurants owned by franchisees.

Sbarro fans weren't taking the threat lying down.

10. They valiantly tried to save their fallen compadre.

6. They readied their picket signs.

IS SBARRO FIGHTING A LOSING CAUSE? AND MIGHT
THERE BE "GOOD NEWS BURIED IN ITS DECLINE"?

Which brings us back to Neil Irwin's nytimes.com piece, which is presented as "a preview of The Upshot, a New York Times site dedicated to demystifying politics, economics and other subjects" which is coming to nytimes.com "this spring." Neil is the one who sees the possibility of "good news in [Sbarro's] decline." To begin with, he points out that "plenty of fast-food places serve food that isn't very good," facing bankruptcy.

The reason Sbarro is having a rougher time than other, more solvent purveyors of not-good food goes to the root of its business: You eat Sbarro not because you want Sbarro, but because it is the food that is available at the moment you want some food. . . .

The company is in financial trouble because one of its big bets on real estate -- that Americans will keep going to mall food courts en masse - has turned out to be wrong.

And there's an "underlying problem," says Neil, "with a strategy built around selling mediocre pizza at the right place and right time."

It means that owners of the real estate in question can extract much of the value of the crowds they attract, not the restaurant chain.

Other fast-food chains may offer mediocre food, but their real estate strategies are less exposed to the epic decline in foot traffic in the nation’s malls. As people do more shopping online, fewer are visiting the mall -- and more seem to be putting a bit more thought into their food.

I don't go to malls much, but when I do, and I think it might be nice to have a little something to eat, I get the same sticker shock I do at the airport.

And then I remember that the prices must be a function of the rent they're paying for space in those malls and airports. What Neil is pointing out here is that the "extra value" that comes from having us would-be eaters as hostages in malls doesn't go to the food vendors, it goes to their landlords.

But what if those landlords are no longer in a position to gouge their tenants -- and by extension the tenats' customers (i.e., us)?

Tyler Cowen, a George Mason University economist and prolific writer on food, argued in his book An Economist Gets Lunch that the best way to get delicious food at a good price is to seek out low-rent districts. There, restaurateurs can afford to experiment and take risks. In effect, the harder a restaurant is to find, the lower the rent is likely to be, and the more the restaurant will be seeking to attract customers with the quality and value of its food rather than mere convenience.

So the good news buried in Sbarro's decline is that if consumers' inclination to shop at malls keeps declining, and landlords must slash rent charges to keep them full, rents could fall low enough to invert the entire food-court business model. With low enough rents, the food court could become the new hotbed of innovation, the place where entrepreneurs find the space to try a new concept, with a bit more upfront expense than a food truck but less than a standalone restaurant.

AND SO IN THE END, SBARRO FANS . . .

. . . may have to follow the lead of those who have already taken matters into their own hands.

2. They desperately sought alternative fixes.