Beer and a pretzel at Granite City.
Granite City Food & Brewery

Granite City has a $7.5 million deal in place, it says.

Granite City Files for Bankruptcy to Facilitate Sale

The beer-focused chain also shuttered seven restaurants.

After “an intensive review of strategic alternatives,” Granite City Food & Brewery Ltd., the parent company of its eponymous concept and sister brand, Cadillac Ranch All American Bar & Grill, filed for Chapter 11 bankruptcy protection in an effort to reorganize its business and facilitate a structured sale.

The company said it has a “going concern sale” to KRG Granite Acquisition LLC for aggregator consideration of $7.5 million in place, a deal that includes certain liabilities. But this restructuring could only be accomplished by declaring bankruptcy, Granite City said in a release. It expects the transaction, still subject to bankruptcy court approval and an auction process, to conclude in February 2020.

Granite City’s filing revealed it shuttered seven restaurants ahead of Chapter 11. There are now 25 locations, as well as four rock-and-roll-inspired Cadillac Ranch restaurants. The company also owns a centralized beer production facility in Ellsworth, Iowa, which enables each unit to brew beer on-site (the production facility generates the “wort” that’s transported to fermentation vessels at Granite City locations).

The company, which employs more than 2,200 employees across 15 states, secured a $5 million debtor in passion loan to fund operations through the auction and sale process in hopes of stemming further closures. It continues to operate as a “debtor in possession” subject to the supervision of the court. Granite City said it expects to continue operations without interruption during the Chapter 11 case.

"The Granite City Board of Directors and management team have thoroughly assessed our strategic options and financial situation and unanimously agree that this structured sale process represents the best possible solution for the company," said Richard H. Lynch, chairman of the board and CEO of Granite City, in a statement. "We believe pursuing this path will provide value to our creditors, enable one or more future restaurateurs to operate our locations, and preserve hundreds of jobs.”

During the proposed auction process, interested parties could submit binding offers to acquire sustainably all of Granite City’s assets, free and clear of the company’s indebtedness and liabilities.

Granite City Restaurant Operations, Inc., Granite City of Indiana, Inc., Granite City of Kansas Ltd., and Granite City of Maryland, Inc. all filed voluntary petitions under Chapter 11 as well. The company filed a motion seeking to bring all of those bankruptcy cases together.

In an affidavit filed December 17 by Lynch, the company credited “increased competition in the casual-dining sector” for negatively impacting its operating performance and margins.

“In addition to longstanding casual-dining chains with somewhat similar menu offerings [i.e. Applebee’s, Ruby Tuesdays, Houlihan’s, Outback Steakhouse, etc.], the [brand was] forced to compete with emergent and inexpensive fast casual outlets such as Chipotle Mexican Grill, Inc. and Panera Bread Co.,” Granite City wrote.

Additionally, “the number of new entrants into the craft beer and brew pub space exploded during the second decade of the new millennium.” Granite City, founded in 1999, was an early entrant into the craft beer market sector, but now it “suddenly faced competition from hundreds of new brewpubs and craft brewers.”

Many of Granite City’s locations were located in or near shopping malls and locked into long-term leases the company said appeared favorable at the time, typically with options to renew. It simultaneously spent heavy capital building out restaurants “in a manner that featured those distinctive characteristics associated with the brand.” Units are typically 9,800 square feet with interior finishes that incorporate granite and other rock materials and natural woods and glass. Granite City restaurants are open-concept and have outdoor patios.

“As a result of the Great Recession that began in 2008, consumer income growth stagnated for nearly a decade. This led to an overall decline in consumer spending, including retail spending and spending to eat out,” the company said.

During that same period, consumer preference shifted toward online shopping, Granite City said. That led to more consumers eating takeout or ordering delivery, “as opposed to spending time for a sit-down meal at a casual-dining location.”

The result: declining foot traffic in shopping malls and retail outposts where most of Granite City’s locations are or were located.

“The confluence of these factors: increased and evolving competition, the proliferation of brew pubs and eating establishments featuring craft beer offerings, and changes in spending patterns and consumer preferences, all negatively impacted the profitability [of Granite City],” the company said. In-store sales and revenues shrunk in response. As foot traffic in malls dropped, so did Granite City’s guest counts such “that seemingly favorable long-term rental rates the [brand] had negotiated gradually morphed into above-market rates.”

Granite City said its same-store sales declined in 2018 and year-over-year comps fell similarly during the first quarter and half of 2019, exacerbated by severe winter weather in the Midwest.

Today, the company owes Citizens Bank $40 million in principal together with accrued interest, fees, and other amounts payable under the Citizens credit facilities. It also owes Great Western Bank more than $1 million.

Granite City has tried to reroute traffic and sales declines this year. In February, it introduced a menu and guest experience relaunch in six of its markets. By July, it expanded to 17 additional locations. It also attempted to improve financial performance and enhance liquidity by pursuing lease concessions and seeking extensions of the time afforded to pay food and beverage suppliers.

Consultations with advisers and discussions with Citizens led the company to explore strategic alternatives.

Granite City closed its Downtown Indianapolis location on August 21 and then shuttered six more on October 25 (Carmel, Indiana; Orland Park, Illinois; Northbrook, Illinois; Peoria, Illinois; Lyndhurst, Ohio; and Mishawaka, Indiana).