Every day we see a lot of restaurants being born out of passion, but they go south in record time. Moreover, the pandemic has not been very kind to the hospitality industry and restaurants have been shut for months on end, making it highly challenging for restaurant owners to make ends meet.
But even without the pandemic, the restaurant industry has had a reputation for being very risky. Various statistics are being thrown on restaurant failure rates, some claiming as high as 80% -90% within a year. This 90% is attributed to the American Express commercial many years ago. However, various studies have busted this myth about what percentage of restaurants fail.
The 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 a 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.
In this blog, we will be highlighting, in no particular order, all the major reasons that answer the question that haunts many – Why do restaurants fail?
1. Business Acumen and Financial Management
According to Lightspeed POS, a restaurant technology company in the USA, a lot of owners lack business and financial acumen. They enter with “their hearts rather 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 the USA, net profit is less than 10%. Unfortunately, in most cases, an entrepreneur’s passion exceeds one’s competence. A study by researchers at the University of Central Florida calls it “Entrepreneurial Incompetence”.
How to overcome this challenge: A great way 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
The lack of awareness about food costing is a major reason why most restaurants fail. 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. If you run a web search for “what percentage of restaurants fail in India” the numbers are alarmingly high especially because there is very little accounting involved when it comes to the purchases and the food costs. Even in technologically advanced countries such as the USA, most restaurants still don’t know their food costs and end up costing their food randomly. They just “make it up”, leaving money on the table as per Brian Buckley, Culinary Instructor at the ICE.
A popular celebrity restaurant in Buffalo, New York has reported food costs 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 resulting from selling prime ribs on its menu.
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.”
How to overcome this challenge: Steve Zagor, Dean at ICE (Institute of Culinary Education) explains in this video, that the number one thing you need to know to make profits is to “know your food and labor cost”. An easy way is to invest in an inventory management system that helps you keep an accurate account of all your food purchases and closing stock to understand how much of the supplies were utilized in the day. As theft and pilferage are rampant in this industry, having proper controls to track inventory regularly will make a huge difference.
3. Customer Experience
Customer service is the number one element that requires the most attention as it can have the greatest impact on your success. Lightspeed quotes, “Customers need to feel that their hard-earned money has been spent in an establishment that appreciates their decision to eat there”. Chef Irvine sums it up by stating, “I don’t typically give restaurants a second chance if I’m not given a great experience the first time around”.
Most restaurant failure stories start with “their customer experience was very poor”. The fact most restaurateurs forget is that people dine out at an establishment for that wonderful experience, to feel like a king or a queen. The key here is “experience”. And in order to offer a consistent experience, service standards must be established, delivered consistently, and reviewed regularly. It is a widely known fact that acquiring a new customer is far more expensive than retaining one.
How to overcome this challenge: Unskilled staff can make your restaurant service look substandard within seconds and reduce the likelihood of a customer returning next time. Not to forget the negative word-of-mouth publicity that they can unfurl. This makes it crucial to invest in equipping your staff with the necessary skills to handle customers the right way. According to Lightspeed, studies have shown that aiding your restaurant staff with tools such as continuous product training and mobile POS (mPOS) systems, allows them to perform consistently and at a high level of service.
4. Food quality and Execution
This is probably the most common reason why food businesses fail. A customer who finds your restaurant food taste poor has almost negligible chances of returning. Inconsistency in food quality, taste, and service need to be corrected on priority if you want to build a positive reputation for your restaurant. I have often seen Chefs take feedback in their stride and perfect the offering.
Even though a lot of effort goes into perfecting the recipe through trials before being officially placed on the menu, if the customers don’t like it, there is no point in it. 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 become routine – sometimes almost a factory-like motion – and can lead to steps being skipped and key ingredients missed over a period of time.”
How to overcome this challenge: If you want your guests to remember your restaurant for its food and keep coming back, don’t be afraid to get feedback from your customers to understand what they like and what they would like to be improved. This not just makes your guests feel valued but also enhances their overall dining experience. According to Chef Irvine, “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!”
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. This more or less relates to the customer experience factor too. Good staff management is the key to a stellar customer experience. When you are unable to manage your staff, it not only leads to chaos in the restaurant but makes it difficult for you to expect dedication from your staff.
More often than not, poor alignment of goals can cause a restaurant to see a spike in conflicts between staff members. Without setting clear goals and expectations, it can become difficult to have a sureshot way of understanding the root cause of staff conflicts or decline in staff performance. In addition to this, if managers don’t have the necessary leadership skills to manage a team, your restaurant performance will deteriorate faster than you can imagine.
How to overcome this challenge: Think of you and your entire staff as a team. Good HR practices, well-planned shifts, regular training, and timely incentives will go a long way in retaining your staff. Appoint restaurant managers who are leaders, not dictators. “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.
6. Location and Accessibility
The choice of location is expected to have a significant impact on the success or failure of a restaurant. A lot of businesses pick a popular location that is in the public eye but it costs them a fortune to lease the space, get permits to run a restaurant in that space, renovate it & maintain it. The high expenses make it difficult for them to make profits. On the contrary, some business owners do not research their targeted audience before choosing a location for their restaurant. If the location is not appropriate, you will see no footfall and it will lead to a huge loss of money.
It is best to first identify if the type of food you are serving will be appreciated in the neighborhood you have chosen. Secondly, will your customers be willing to come to the area you have chosen? And thirdly, you need to look at your competitors in the location you choose. If there are a lot of similar restaurants, it can mean a lot of competition for you. The success of a location depends not only on its physical site but also on its surrounding demographics. In other words, location is a complex construct that encompasses geographic, as well as demographic and psychographic variables.
How to overcome this challenge: A Lightspeed report states, “As a general guideline, your location should depend on the kind of restaurant that you’re opening. 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 them. This list, while not exhaustive by any means, should be an indication for current and aspiring restaurateurs. With cut-throat competition and a lack of well-trained staff, it is not easy to build a great restaurant business. It takes patience to see steady results, but avoiding these above-mentioned mistakes can prevent you from joining the list of restaurants that close every year.
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