The Top Reasons Restaurants Fail...and What to Do About It

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on Sep 27, 2018 8:00:00 AM
Download Now: Today's Changing Restaurant Industry

Search the rate of restaurant failure on the internet and you’ll find statistics that range from 17 percent to 90 percent in that first critical year. The truth probably lies somewhere in between. What we do know is that opening any type of business carries with it substantial risks and that the longevity of a restaurant often falls into the five-year range. 2017 saw almost 11,000 independent restaurants close their doors.

But don’t let that dissuade you from your dream. The world is awash in statistics. Thank God that Walt Disney and other visionaries ignored them. 

Do, however, take the necessary steps to ensure your success, or at least provide yourself with a fighting chance. As Benjamin Franklin said, “By failing to prepare, you are preparing to fail.”

So, let’s learn from those that have come before—both in their mistakes and successes.

Capital—or Lack Thereof

One of the most common reasons for a new restaurant’s demise is underfunding. While entrepreneurs may have the capital required to open the doors, they fail to prepare financially for the first few lean months. Get out a calculator or talk to a financial advisor regarding the number you need in cash reserves. And don’t forget to include the surprise expenses and additional operating costs that may include broken down equipment or construction overruns. Ideally, you’ve set yourself up financially so that you can cover the first six months of payables.

A report published by The Dick Pope Sr. Institute for Tourism Studies calls this the Taj Mahal Syndrome. Their example was two entrepreneurs in Columbus, Ohio who spent $1.5 million of borrowed money on a restaurant remodel and failed to leave any funds for marketing. The restaurant closed after just six months. 

Mind you, we’ve all heard about the restaurants that opened on a shoestring and stayed the course to financial success. Nicole Ponseca and fellow Filipinos opened up Maharlika with a mere $12,000—in New York, of all places. She made sure that what she lacked in capital, she made up for in experience. While working as an advertising executive, she spent evenings working at restaurants—starting from the ground-floor as a dishwasher and working up to a GM.

Lack of Experience

Now seems to be a good time to throw in the other barrier we often see when it comes to a restaurant’s financial success—months instead of years of preparation in the restaurant industry. We contribute this to the massive influx of popular chef, cooking, and restaurant start-up TV shows that leave viewers thinking, “Hey, I can do that! And, look at that wad of cash!” Hello. Prime time TV viewing does not an entrepreneur make. Once they realize that they’re in over their heads, it is often too late to regroup. Bringing in an experienced restaurateur or consultant is not an inexpensive proposition and should be considered before opening the doors instead of when the doors are hanging by their hinges.

Inconsistency

How many times have you been to a restaurant and raved about the food and service only to return and experience disappointment? I, for one, have been down that road one to many times. As with any business, customer retention is less expensive than customer acquisition—keep them coming back with high-quality food, great service, and a memorable atmosphere. Ensure excellence by setting quality controls in place that keeps food preparation and presentation consistent. Make sure that you or your managers are doing regular food and beverage tastings.

Employee Theft and Other Controls

It’s a sad fact about restaurants--employee theft is extremely common with the bar being one of the top areas of concern. The National Restaurant Association estimates that employee theft is responsible for about 75 percent of inventory shortages. Make sure that your staff understands the consequences and then put controls in place. These could be regular and unscheduled till checks, paying close attention to transactions ensuring orders are put into the system before drinks are served. Check inventory against sales. It’s all too easy to input a $5 beer into the POS system when the guest ordered a $10 beer—pocketing the difference. Other controls include portion control, cost control, waste control and inventory control, to name a few. There are a lot of moving parts in a restaurant operation.

Failing to Modernize

Failing to keep abreast of changing trends and customer demands is one sure way of becoming part of the failed restaurant statistic. Did you add small plate items to your menu when they became all the rage? Do you offer global flavors derived from local, organic sources? When you enter your establishment, do you see a vibrant and welcoming ambiance or a run-down and dated setting?

Data Disorder

There are several key metrics that every restauranteur must know and pay attention to on a weekly basis. Cost of Goods Sold (COGS) and Labor Costs make up your Prime Costs and, at one time, could be held to 60 percent of sales—30 percent in each category. With labor costs edging to 35 percent and occupancy costs often exceeding 10 percent, the once 10 percent profit can quickly dwindle down to 5. Know your numbers. Cost out your menu on a per-plate basis. Know your gross profit and break-even point.

Soft Openings

If you haven’t heard of the term “soft openings”—good for you. At one time, a restaurant opened their doors ever so slightly without any fanfare—working out any glitches before the masses arrived. The problem, these days, is that one bad review in the portals of Yelp, OpenTable, or TripAdvisor can mean some people will never experience your restaurant first hand.

In all fairness, soft openings can work if you start by bringing in friends and family of your restaurant staff. Let them know training is underway and look to their suggestions for improvement before opening the doors to customers.

Location

You’ve heard it said time and again: location, location, location. On the other hand, I know of several out-of-the-way restaurants that have created incredible success stories. Whether in the heart of downtown, a neighborhood eatery, or a planned destination—successful restaurants have these things in common: available parking, visibility, and easy access.

Whether you find yourself in a cursed location, with a misunderstood concept, or a restaurant that just doesn’t seem to have the wow factor, if you have the capital, you can rebrand. While it’s never recommended to hold onto a sinking ship, it’s also important to note that the storms may be many during that first year in business, but for those that can weather the challenges, the rewards can be very sweet.

 Download Now: Today's Changing Restaurant Industry

Topics: Real Estate, Staff, Cost Reduction

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