Why Do Restaurants Fail?

failed restaurant chefRestaurants fail for a variety of reasons. The food industry is a huge part of the American economy. Restaurant businesses makes up roughly 4% of the Gross Domestic Product, and the Bureau of Labor Statistics asserts that one in three Americans has worked in food sales and service at some point in their employment history.

Unfortunately, the food industry is also an extremely high-risk area of business. There are a great number of details to perfect, and a high level of competition, which lead to high failure rates. American Express estimates that 90% of restaurants fail in the first year, but Cornell University asserts that a more likely estimate is 60%, with an increase to 80% in the first three to five years of operation. In short, only 10% to 20% of all restaurants get to see the end result of their five-year business plans.

How does location affect success?

Location is essential to restaurant success, and poor location is likely the number one thing that leads to restaurant failure. Look for a location that is visible, has appropriate parking, offers foot traffic, offers venue and ambiance benefits, and is in the right budgetary price range. Avoid locations that are in a bad part of town, that are hard to find or see, and that will not meet your customer’s basic needs.

Is local economy related to failure?

Opening a restaurant in an area that is financially struggling is setting your new business up for failure. If your local economy just gained a major new employer, if the housing market is rising, and if there are other small businesses thriving in the local economy, then the time is right. If employers are laying off workers, housing is at a standstill, and there are empty buildings lining Main Street, then wait for a better local market.

Is word of mouth enough advertising to ensure business success?

Word of mouth is inconsistent and cannot be relied on to build a business. A business needs to know, in advance, what local media it has to work with. Is there a local television station, newspaper, or radio station that can be used to advertise? This is key to the business’s growth.

Can competition be blamed for restaurant failure?

Competition is both good, and bad, for a new business. Be aware of your competition. Find a niche that is not filled by any of the other businesses. Offer dishes that people cannot simply pick up at a local convenience store or deli counter.

Is the name of the restaurant important?

As silly as it sounds, a restaurant’s name has a lot to do with the business’s success or failure. Name the eatery something that is short, easy to remember, and directly tied to local culture.

Is the manager responsible for a business’s success?

Poor management is a major concern for restaurants. The management needs to not only know and understand how to perform every task in the restaurant, but have good basic management skills. Managers who are weak team leaders, who do not offer guidance to those below them, and who are unwilling to pitch in and help wherever necessary will lead to a weaker business structure overall.

What financial concerns are most likely to lead to a restaurant’s failure?

Failing to manage capital well will lead even a well-received restaurant to financial ruin. Spending too much capital before the restaurant opens, setting starting wages too high, and failing to correctly monitor cash flow are all common causes of bankruptcy. Also, restaurants often start without enough capital reserve.

Just because the minimum start-up capital is low does not mean it is wise to start with the minimum. Try to have a significant amount of backup capital in savings before opening the business.

Finally, restaurants are notorious for neglecting to pay taxes. Make sure that tax debts are paid on time to avoid steep fines, garnishments, and business-threatening legal action.

How can customer service improve a restaurant’s longevity?

The key to restaurant success is keeping customers happy, and making sure they want to return. If a restaurant has poor customer service, then the business is bound to fail in the long term. The hostess, wait staff, busboys, and other personnel who actively interact with the consumer must be focused on the customer experience. Simply put, every contact made from the time the customer walks through the front door should be pleasant, welcoming, and clearly intent on giving the customer a great experience.

How should the menu be structured for success?

A restaurant can try to do too much. It is a bad idea to start with an expansive menu. Instead, consider offering six dishes, and making them really well. It is essential that there be focus on getting things just right, and building a reputation for focus when a restaurant business is young.

Failure to focus on a few things will lead to doing many things to a mediocre level, and then the business will become known for mediocrity rather than greatness. This limits its growth potential.

All that matters is flavor, right?

Having food that tastes fantastic is not enough. Presentation is critical to a restaurant’s success. Focus on how the table is set, how the food is presented, and other minor details. People are paying, not only for a good-tasting meal, but for a complete dining experience. If the experience is poorly presented, the reception will also be bleak.

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