Top reasons for restaurant failure

Various statistics are being thrown on restaurant failure rates, some claiming as high as 80% -90% within an year. This 90% is attributed to the American Express commercial many years ago. However, various studies have busted that myth.

National Restaurant Association of US places this number close to 60% within the first three years of operations. A study by Ohio State University in 2005, places closure rates at a similar percentage with 80% going out of business within five years. Forbes cites a conclusive study done with larger data set in 2014 and puts the rate at 17%, nothing very different from other service industries. A good samaritan has also compiled a list of closures by restaurants that appeared on Restaurant Impossible.

Let us look at some of the top reasons contributing to failure by taking different reports into consideration.

1. Business Acumen and Financial Management

According to Lightspeed POS, a restaurant technology company in USA, a lot of owners lack business and financial acumen. They enter with “their hearts than with the business sense necessary to make it happen”.

Chef Robert Irvine, the English celebrity Chef states “inexperience of well meaning owners” as the primary factor and adds, “Potential restaurateurs do not realize or appreciate the specific set of demands that come along with owning and running a restaurant. Once realized, it is often way too late.”

Often, we see many wanting to start a restaurant due to their passion for food or being enamored by the glitz and glamour. They assume that this business is a high margin one, without knowing the reality. In USA, net profit is less than 10%.

Unfortunately, in most cases, an entrepreneur’s passion exceeds one’s competence. A study by researchers at University of Central Florida calls it “Entrepreneurial Incompetence”.

Some ways to overcome your limitation in skills or competence is to either find a partner who possesses those complementary skills or engage a consultant/expert on a regular basis. In Bangalore, I have seen Chef Manjit and his team guide many top notch restaurateurs right from inception to setup till execution. There are many talented and experienced consultants in this industry who can help where you lack till you learn the tricks of the trade. Of course this comes at a cost, but it will be worth the investment.

2. Accounting and Food Costing

Steve Zagor, Dean at ICE (Institute of Culinary Education) explains in this video, that the number one thing you need to know to make profit is to “know your food and labor cost”. Chef Robert Irvine confirms this by saying, “So many times on the show – when asked about food cost, labor, and P&Ls [income statements] – the owners just look at me dumbfounded,”

There is an element of naivety in this business, most owners don’t know their food cost and fix their selling price by comparing with other restaurants in their locality. Often this leads to depleted margins and worse yet the owners wouldn’t even know why. Even in technologically advanced countries such as USA, most restaurants still don’t cost their food properly, they just “make it up”, leaving money on the table as per Brian Buckley, Culinary Instructor at the ICE.

As theft and pilferage is rampant in this industry, proper controls to track inventory regularly should be in place. A popular celebrity restaurant in Buffalo, New York has reported food cost
exceeding 56% which is almost twice the industry average. It is needless to say that this
particular restaurant has failed within 2 years of opening because of poor cost controls. Similarly
the failure of a popular nationwide restaurant chain, Victoria Station, was attributed to its high
food cost resulted from selling prime ribs on its menu.

3. Customer Experience

It is easier said than done. “I don’t typically give restaurants a second chance if I’m not given a great experience the first time around,” says Chef Irvine. Lightspeed quotes, “Customers need to feel that their hard earned money has been spent in an establishment that appreciates their decision to come eat there”.

Key here is “experience”. People dine out at an establishment for that wonderful experience, to feel like a king or a queen. And in order to offer a consistent experience, service standards must be established, delivered consistently and reviewed regularly. According to Lightspeed, studies have shown that aiding staff with tools such as continuous product training and mobile POS (mPOS) systems, gives them the opportunity to perform consistently, and at a high level of service.

Zach Suhl notes that “guests can be served very mediocre food, but if they really feel special and feel good about the way they were served — they will have a great time and come back.”

It is a widely known fact that acquiring a new customer is far more expensive than retaining one. Customer service is the number one element that requires most attention as it can have the greatest impact on your success.

4. Food quality and Execution

Chef Irvine says, “More often it’s because of a breakdown in the chain of command and quality control. Day-in and day-out food preparation and presentation becomes routine – sometimes almost a factory-like motion – and can lead to steps being skipped and key ingredients missed over a period of time.”

He goes onto add, “It’s key to consistently re-evaluate dishes and the quality control measures that were set into place. I also insist on regular tastings before service to make sure that the quality of the product is top notch!”

Lightspeed report states, “A restaurateur should be honest with themselves and the customer when communicating the value of their restaurant — which is often done through the price of the food offering. As food prices rise for restaurants, so do the prices for customers, but this only means that price growth must be validated. Your establishment should not be overpriced based on what you’re offering, which will go a long way to building and maintaining credibility.”

I spend a lot of days at customer locations to see why their are so successful and why their execution stands out. A lot of effort goes into perfecting the recipe through trials before being officially placed on the menu. I have often seen Chefs take feedback in their stride and perfect the offering.

5. Staff and Management

Staff turnover is a huge issue in this industry, across the globe. Recruiting and training a new person is far more difficult and expensive than retaining.

“Managers who have walked a mile in the shoes of the people they are overseeing are more understanding, compassionate, and seek like-mindedness while providing insight into how best to relate to, approach, and motivate each member of their team”, says Chef Irvine. This more or less relates the experience factor too.

With the long (and often irregular) hours demanded by the industry, many people within the restaurant industry find it too difficult to stay and develop their management skills. Good HR practices, well planned shifts, regular training and timely incentives will go a long way in retaining your best employees.

6. Location and Accessibility

The choice of location is expected to have significant impact on the success or failure of a
restaurant. Success of a location depends not only on its physical site, but also its surrounding
demographics. In other words, location is a complex construct that encompasses geographic, as
well as demographic and psychographic variables.

Changing cultural and demographic factors were also noted as significant factors in the
rise and fall of restaurants, according to a study by researchers at University of Central Florida.

Lightspeed report states, “As a general guideline, your location should depend on the kind of restaurant that you’re opening. “If you’re a cafe, you’re going to rely on a lot of foot traffic, but restaurants rely a lot on being sought out and on reservations”, notes Suhl. Restaurants that are looking to attract the under 25 year old crowd usually sell at a lower price point and need to be accessible on foot or by public transport. For more expensive restaurants catering to the over 25 year old crowd and families, parking accessibility is extremely important and may actually be a deciding factor in whether or not your establishment is successful.

I have covered some of the critical aspects, taking inputs from various resources and also attributed to them. Many reports prioritise one over the other, but what I figured was these were common across most research works. This list, while not exhaustive by any means, should be an indication for current and wannabe restaurateurs.

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