Why Do Restaurants Fail? Tips For Restaurant Owners
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The restaurant industry is extremely competitive. There are so many options out there. Not only are there different restaurants serving similar meals, but there are also many different cuisines. Sometimes people want pasta, sometimes they want Mexican food, other times they want a burger. There are just so many choices.
Not only that but restaurants are also in competition with simply cooking at home (hopefully using one of our recipes)
The restaurant business is considered a high-risk one. Restaurants often fail in the short run. Even if you make it past a few years the restaurant failure rate is still high. The restaurant failure rate is high. According to CNBC 60% of restaurants fail in the first year and 80% of restaurants fail by year five.
There are, of course, some basics when it comes to operating a restaurant. Most business owners believe everything is about the food. Indeed, the food matters, but there is much more than that.
Quality services and products are basic. You need a proper offering, but also enough work to turn your restaurant into a trustworthy brand.
Why Do Restaurants Fail? There are many reasons why restaurants fail and why the restaurant failure rate is so high. Even with great food, restaurants close.
The restaurant industry is predictable in one way: it is tough to predict. Sometimes the area you are in changes. Good or bad publicity can affect you, especially with the rise of social media and influencers. The workforce changes. Food cost can (and are) increasing.
So, what do you need to do to run a successful restaurant, and what kind of solutions make the difference between failure and success?
Table of Contents
Lack of vision; Lack of a Business Plan
The mission statement and vision of a restaurant are more than its concept and menu. They are at the center of all business decisions. Mission and Vision guides marketing initiatives in the best possible way. A business plan is critical.
The simple fact is many people can cook. But the difference between a failing restaurant, an average restaurant, and a successful restaurant comes down to planning and executing on that plan.
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A restaurant concept needs to become a business concept. A business plan is necessary. Creating one also helps develop your business sense and your business skills.
Poor Restaurant location
Like it was said: Location. It will impact how you operate and your costs. Taking into consideration factors such as cost of commercial space leasing, permits, renovation and building inspection, finding the correct neighborhood to open a restaurant is a vital part of your restaurant’s future profit potential.
What is the most common reason a food business fails? A poor location is a reason for many failed restaurants. Customers prefer an easily accessible restaurant. Choosing the wrong location is a nail in the coffin and a reason for restaurant failures.
A location based on foot traffic is another great way to attract customers and repeat visits. A bad location is nearly impossible to overcome. A good location can be all of the difference.
You have no idea what is going to happen tomorrow – not to mention a month later or a few years from now. An unexpected slump could close your business overnight.
A critical move is to have enough money in your reserve fund before starting so you can weather the strom and stay in business. You always have the option of a restaurant loan, but having your own money is safer so you don’t have to pay interest.
Generally speaking, restaurant owners need about a year to break even. Until this time frame is over, you will need a solid fund.
The median restaurant startup price was $375,500. Restaurants are expensive. Many owners have mistakenly spent all their money opening an amazing restaurant with Instagrammable bathrooms with brand new kitchen appliances. But they don’t have enough for operations or to weather the inevitable storms.
Besides, you should never get carried away with overnight success. A new place in town will always be popular, but things may change if you cannot raise your customers’ expectations.
You don’t meet your suppliers
Your supplier has a major impact on your business at your restaurant. You may not be doing enough to keep the situation at an acceptable level.
Healthy relationships with your suppliers is critical to a restaurant’s success. This is especially true as food costs continue to rise.
You order without setting a budget
Other reasons for restaurant failure are attributed to decision-makers who do not know business stats and how to interpret them properly. Restaurateurs could mistaken interpretation of profit and loss statements.
A detailed weekly budget could make your meals more expensive. This gives you and your staff the goal to stay in the order to modify orders and reduce costs. At your team meetings (which are necessary), review your numbers for the last week and create a budget for the next. You’re now ready to make more efficient purchases.
You don’t keep a Food waste log
Wastes happen. Food will spoil, dishes will drop. Tracking waste can be a useful method for decreasing food costs. Inventory management and tracking food waste lets you know if you should change menu items or portion size.
It also helps you better manage your food quality. You don’t want to serve food past it’s life span. When thinking about your menu, focus on dishes that use the same ingredients.
Paying attention to what you are throwing away will help you lower your food cost, improve your menu, and keep your doors open.
You chose the wrong technology for your restaurant
In terms of restaurant development, technology is an option. Software is a great way for people to manage staff or manage food budgets easily and quickly. A POS system can help streamline sales.
There are many ways to automate critical processes like inventory management, tracking food waste, creating inventory reports, staff management, optimizing menu pricing, etc. Accounting software is also necessary to find ways to improve profit margins.
You’re trying to expand without a solid foundation
On your first visit there was an eye on location #2. But a failure in the establishment’s restaurant could also cause a loss in the first place. How can you monitor two spots without looking at them?
Make sure you have an adequate foundation before expanding Grow at a pace that you control. Just because you’ve had some initial success or have another unique concept doesn’t mean you are ready to grow.
High staff turnover rates
It is no wonder three in five chefs have cited hiring as being a main struggle for running restaurants. Restaurant employees can be scarce and often lack experience. It’s even tougher for new restaurant owners.
Wages tend to be relatively small, roles are often seen in the industries largely as temporary jobs instead of careers and employment opportunities are always plentiful in the restaurant industry. With poor staff management and poor leadership even the best restaurant is bound for failure.
Failing to adapt
You may have inherited an old family restaurant who is struggling to attract new customers for the first two decades and is not being profitable. Restaurants that have not adapted are prone to failure.
A Poor Customer Experience
If your guest experience is negative then they won’t come back. Repeat customers are critical to your success. Not only do they routinely buy from you, but they also spread the word.
If the customer experience is poor, than not only are you losing out on their business but their negative reviews may be crippling. So many restaurants have great food, great locations, but a poor customer experience.
Some Tips To Increase Your Chances of Success
Now that we have looked at many of the reasons why restaurants fail, let’s think through some tips.
Keep your costs under 60%
This is a general rule, but many restaurant owners try to stick to it. Some people stick to a higher percentage, while others push themselves to a lower one.
Sticking to this rule will ensure your restaurant is healthy and profits are constant. You want to be able to improve it based on your customers’ needs, but also to get a decent reserve fund.
When prime costs raise to more than 70%, you start asking yourself questions. Profits are not too obvious, and things could get better.
You will find yourself in need to make all sorts of adjustments – some of them will work, while others are more like trial and error.
Aggressive promotion helps
You do not have to be shy when it comes to promoting your restaurant – both online and offline. You want brand recognition and to manage your restaurant’s reputation.
A new restaurant in town will definitely draw some attention, but people need to know you exist.
Publicity is expensive, though, but there are things you can do yourself. Go to crowded places and give everyone leaflets. Make sure the design is nice and catchy – include a menu too.
Start a website and social media profiles, share stunning pictures of your food everywhere. Such things can be done without any major expenses.
Surround Yourself with Smart and Experienced partners
Once your restaurant gets a bit of attention, it is time to focus on keeping steady growth in the long run. There are many great restaurant concept ideas out there, but only some of them will work.
Find smart people with industry experience and partner up with them. Make connections with people with restaurant management experience or experience in other areas of the hospitality industry.
Learn from them and develop relationships with them. They can also help you make informed decisions. Partnering with the wrong people can be a problem though.
Most people overlook connections in this industry, but it is crucial. For instance, influencers with restaurant experience are great when it comes to promoting your restaurant, so look after them.
If you happen to meet marketing specialists, become friends and get some ideas or advice from them. Anything helps at this point, and small things often make the difference.
Running a restaurant is not easy. A restaurant takes more than knowing how to cook, it also takes business sense and management skills. Most restaurants fail, and only a few restaurants succeed.
There are plenty of small things that could make or break your business, so you need to be flexible and adapt based on your customers’ needs.
Keep in mind that most new restaurants will have a decent start – people are excited about something new. However, you need to maintain this vibe, rather than let it fade away. Don’t lose sight of how high the restaurant failure rate is and the reasons why restaurants fail.
The longer your restaurant rides the wave, the more successful and appreciated your business will be in the long run.
Greg is a Chartered Financial Analyst (CFA) with 22+ years experience in Financial Services. He has held numerous FINRA Securities licenses (series 7, 63, 65, and 66), and is an expert on Investment Products and Financial Planning. Greg has 22+ years experience as a real estate investor and degrees in Psychology and Philosophy.
Greg has been quoted/interviewed in Yahoo Money, Yahoo Finance, USA Today, Authority Magazine, Realtor.com, Business Insider, and others.
Greg is an avid runner, and the father to identical twin girls and their awesome brother. His love of budgeting and his kids led him to join The Great Resignation in 2021.
Disclaimer: Any Financial Tips on ChaChingQueen are general and informational. Speak with a professional about your specific situation.