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Three Reasons Why Restaurants Fail (The Warning Signs and How to Avoid them)

Ryan Andrews
Ryan Andrews

Mar 14, 2018 5:18:26 PM

For anyone just opening a new restaurant, the outlook might seem grim. According to a 2016 report by CNBC, an estimated 60 percent of restaurants will close in their first year. That number rises to nearly 80 percent by the time the fifth business year rolls around.

While the statistics certainly seem daunting, they’re also not the entire story.

In fact, there seems to be little consensus, even, on how accurate such high failure rates are. Forbes decided to tackle the debate and found that the data is inaccurate because small start-ups (defined as 20 or fewer employers) tend to have high failure rates within the first year, skewing the average success rate. In addition, he argues that “failure” and “closure” is mistakenly used interchangeably.

why restaurants fail

A business may be closed for reasons other than failure.

Still, even taking a more optimistic, and likely, more nuanced analysis which relies on a 2014 study conducted by the United States Bureau of Labor Statistics, the fact is that many restaurants, even with the best management and resources available, are often forced to close down. The same study indicates that the median life of a restaurant is less than five years.

No matter the exact figures, there is more or less consensus that there are several crucial factors that help determine the success - or failure - of restaurants. Here’s a look at them, and how to try to avoid the same critical errors:

1. Location, Location

 While it may seem obvious that location plays the key role in the success of any business, budding restaurateurs may underplay its power to quite literally make or break the first year. Entrepreneur stresses that choosing a location is multifaceted, and suggests that business entrepreneurs in every industry ask four key questions:

  1. Population size: is the population of potential consumers adequate to sustain business? (also consider: is this a region with the potential for high levels or transient, or more regular customers)
  2. What is the local economy like? (Do consumers have the incentive, and ability, to invest in dining out at a new place?)
  3. How do the demographics align, or not align, with the restaurant?
  4. What is the overall economic outlook for the community? (You may want to look into the economic history and trends of the past several years, especially for the restaurant industry)

People fail when selecting a location because they either place too much emphasis on one factor (foot traffic or competition, as an example) or because they underestimate the impact of multiple factors. 

2. Who’s my Competition?

It goes without saying that any current restaurants will impact your business, one way or another. But sometimes it’s hard to pinpoint exactly what is the most optimal conditions.

In general, competition is healthy for a budding business. It has the possibility to increase foot traffic and incentivize innovation. It also has the added bonus of creating a community itself possibly invested in the restaurant industry.

Conventional wisdom might be that opening up a similar restaurant - say a new pizza place beside an existing pizza place would be a bad idea, as it would divide potential customers, and the new restaurant would be essentially competing for an established customer base.

While it’s true there is a notable saturation problem among franchises, independent businesses, on the other hand, may actually benefit from being in close proximity to an established restaurant. The traffic and interest is already there, making the need for less advertising.

The takeaway: know your competition, and study consumer trends in your local area. Understand what the competition offers, and be honest with yourself about what you have to offer.

3. What makes your restaurant unique?

That said, when competing with other established restaurants, it’s also crucial to have some way to distinguish your restaurant from competitors. The biggest mistake here: too much attention on exteriority and too little about how the restaurant is actually run.

What does that come down to? Service.

Dave Scholten, a member of the Gordon Food Service marketing team, suggests a list of things that are most important to focus on to create an unique, and satisfying experience:

  • Ask the customers: Offer incentives to take surveys, to rate everything from menu items to service. You may think your business is running well, but the customers’ opinion is important above all. You might consider analyzing responses using CSAT (a customer satisfaction score). And most importantly, don't underestimate the value of using your restaurant's CRM or reservation system to keep track of all your customer's preferences and details.

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  • Really focus on that menu:You can have the best service in the world, but the food itself is why customers come. Flavor innovation, seasonal offerings, and specials keep the menu fresh. Most restaurants also need to have a variety of offerings for special diets, such as gluten free, vegetarian, and other allergen free options. 
  • Add something special: Following current and local food trends is key, but so to is understanding what your competitors are offering. Instead of offering the same dish, create a twist to yours. Add a special ingredient or two, or invest in high quality or locally sourced ingredients if possible.
  • Be willing to change: Wait Staff, servers, chef, menus, decor, prices….change is vital to a restraunts’ survival, if it is being done according to customer feedback
  • But also stay consistent: That said, consistent service, once it’s been established is important. Invest enough time and resources into staff training to ensure your customers will be getting a similarly satisfying dining experience the next time they eat at your restaurant.

There are countless other reasons new restaurants fail, including underestimating start up costs, failing to properly target and market to potential customers, and even not paying enough attention to a restaurant's aesthetics. It’s far from easy to start up a new business, and in the increasingly competitive food industry, it can be downright daunting. But with proper planning and strategic focus, a new restaurant can thrive and survive past those first five crucial years.

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