Many people see owning a restaurant as a dream and the ideal capital move in doing something they will love as a career. Unfortunately, this dream usually guides them into launching a new business, and they need guidance on the fundamental obligations of owning a restaurant, which coincidently leads to failure. If you know the most common reason restaurants fail, you will be able to recognise wrong signals and pay attention to make some right decisions and experience the bad times.
It is difficult to engage yourself in the grind of running a restaurant business and take on such great responsibility daily. Most people see owning a restaurant through rose-tinted glasses and usually only see the operations from the surface or an outside approach: tasting excellent food, designing interiors and enjoying a drink with the patrons. This is not entirely true, although it can become part of it. It’s more likely that you will sweat some blood and tears before it gets to this stage.
So how many restaurants fail – The FACTS and the MYTH
Some time back, the NBC television network in the US broadcasted a program titled Restaurant: A Reality Show. Among other occurrences on this show, an advertisement by American Express claimed, “90 per cent of restaurants failed during the first year of operation.”
To verify the possibility of 90 per cent first-year failure, Cornell University conducted several spreadsheet simulations. The simulations were based on assumptions that roughly parallel the study showed: fifteen hundred restaurants in the market; new-business failures during the first year, 90 per cent (the American Express figure); average industry turnover of 10 per cent per year (similar to Cornell University study’s 1999 finding); the number of new restaurants opening per year, 15 per cent; and average market growth rate, 3 to 4 per cent per year (a US national average as reported by the National Restaurant Association of USA). Therefore, in the second series of simulations, Cornell University replaced the 90 per cent first-year failure rate with a 30 per cent rate, drawn from our study.
Comparing those two calculations over twenty years, it was concluded that if 90 per cent of restaurants fail during their first year of operation, we would see fewer restaurants at the end of each year, a finding contrary to the observed reality in the restaurant industry. In addition, when 90 per cent failure was inserted in the equation, simulations indicated that, in twenty years, the market would shrink from 1,500 units to 254 units or a loss of 84 per cent of the existing restaurants. Taking that simulation to its inevitable conclusion, restaurants would only remain for about ninety-four years.
These results are practically impossible under normal conditions and run contrary to the National Restaurant Association’s observed 3 to 4 per cent growth rate (www.restaurant.org).
On the other hand, the 30 per cent failure rate resulted in the market’s growing by 219 per cent to 3,287 units, a more realistic number. Cornell University concluded that the reported 90 per cent restaurant failure rate is a myth. These results are strongly supported by the outcomes of economic data simulations and by many academic research studies showing that restaurant failure during the first year of operations is about 30.0 per cent.
Indeed, when American Express was asked for its data, it stated in writing that it could not provide data supporting the 90 per cent failure assertion it made.
The percentages of failure still need to be lowered. So when you plan to invest your life savings or borrow against your family home, you want to bring the chances of failure down as low as possible.
HOW to avoid failures
My company, Savvy IQ (Savvyiq.com), has consulted for many restaurants over the past years; many are looking to gain an edge over the competition, some are looking for a turnaround strategy to improve performance, and others want quick results to drive more footfall and revenue. But what has become more commonly asked for by clients and is now a large part of our business is the planning, strategy and concept development for new businesses.
People have come to the realisation that appointing a group of hospitality industry experts from day one is money better spent than trying to re-float a sinking ship.
Suppose you’re planning on opening a restaurant. In that case, you have read many online articles, such as ‘Top 10 reasons why restaurants fail’, ‘Top 5 reasons why restaurants fail’, ‘Top 20 reasons why restaurants fail’, ‘Top 1 million reasons why restaurants fail’, blah blah blah and I could equally make a list of items to give you the reasons as to why restaurants fail. But I believe there is only one reason restaurants fail: NO BUSINESS PLAN.
No business plan
When considering any venture, a solid business plan must be implemented. This business plan is your document and only yours at this stage. It must only be in a format you can understand and focus on.
The business plan should illustrate your vision. For example, what sort of cuisine will you have? Where would you like to open your outlet? How much should your average check be? What style of service are you offering? Where are you sourcing your products? What are your hours of operation? What IT system will you use? How will you advertise? And the list goes on. The business plan will outline all the points you find online regarding why restaurants fail.
From these questions above and many more that you should consider, you then begin to detail the elements of your business plan.
From your vision of food, you will create a mood board on the style of cuisine, look and feel of the food. Building a detailed menu with recipe cards, food costs, and sale prices would be best. Once this is complete, you have your core product, and you will conduct a general competitor analysis on how you are positioned in the market against the competition. The menu price will also define the style of service, décor and ambience. I could go on and on about this subject, but before considering anything else, you must specify the core: your menu.
Once the menu is complete, the décor style defined, and the outlet’s expected size, you must develop a property and location strategy. Location is critical to the menu, most importantly, not the second. Find a place where you have something to offer or where there is high footfall; however, increased traffic flow usually comes at a price.
While your restaurant should be in an accessible and parking-friendly or transport location, you should also be attuned to the neighbourhood’s needs. If you offer something unique, only choose a place with several similar cuisines to your concept nearby. And by unique, I don’t mean just your grandma’s authentic Napolitana sauce, which the whole family loves. It takes more than that to go up against seasoned experts. You will consider your neighbourhood based on your concept offering. So, if you’re promoting yourself as a family-friendly restaurant, don’t expect to succeed in a location where more singles than families live.
So, to consider your location strategy, could you map the areas where you plan to open your outlet and include this detail in your business plan? Once you understand the rents in the areas you are considering, you must ask yourself, what is the maximum rent you can afford? From your assumptions on price points and daily covers, you can calculate your expected rent, assuming a maximum of 10% of your turnover. This information is precious to ensure a profitable outlet.
The next item to consider is hiring the right people. You should develop a detailed recruitment plan matching your business plan’s concept and cuisine. What level of chef and manager is required? What is your budget for the salaries of these critical people? You can develop a staffing schedule based on your opening hours to give you a realistic wage cost. From this, you will have more inputs to place into the detailed budget.
The business plan’s ‘Human Resource’ section should also outline detailed service techniques that make your concept unique. Second to the food, customers will value the service over design, crockery, music or any other feature in your restaurant. Finally, your training plans and staff plan are essential.
The business plan is your main document, so if you have an idea to open a restaurant and begin developing your business plan before you read more on the web about why businesses fail.
Turning Restaurant Problems into Opportunities
Even a good business plan will meet day-to-day problems, so it helps to know how to turn them into opportunities.
While there will be problems with any business, in the restaurant industry, a problem can be a disaster if you allow it to be. Rather than regard a problematic situation as a problem, could you turn it around so it works to your advantage? You can look for solutions to common restaurant business problems that can turn them into opportunities.
One common opportunity in the food service business is downtime. After lunch and before dinner, or between breakfast and lunch, you will have at least an hour when nobody comes through the door. Not only is this bad for your bottom line, but potential diners passing by may think your restaurant is empty because it needs to improve. So, you’ll need to fill those tables as much as possible by inviting people to visit your restaurant between prime hours. For example, you could offer a happy hour with complimentary appetisers or a buffet of chips and dips. A mid-morning brunch special will attract shoppers and passers-by, and once the business community gets wind of it, your restaurant will be the perfect place for an early meeting. You can also have a special menu for those slow hours, perhaps half portions with corresponding prices or unavailable items at any other time.
The weather is another factor that can keep customers from dining out. Your job is to entice them out of their houses, into the heat, cold, or rain and through your doors! This is a fun opportunity to be creative and get your staff involved. Choose a name for your promotion and make it a contest with a small incentive if the employee’s idea is chosen. Many restaurants have promotions during the summer when temperatures are high, and no one wants to leave their air-conditioned homes or offices. They offer a percentage off for every degree over a specific temperature, special menus with discount prices or limited-time exotic drinks. You might offer complimentary iced tea during the hottest days of summer, a complimentary scoop of ice cream after a meal or provide free valet parking or other services to minimise exposure to the heat. In the winter, you can greet your guests with free hot chocolate or apple cider.
Another headache for restaurants is their seating arrangements. Taking advantage of every inch of floor space means that some tables are in less desirable spots, such as near the kitchen, the entrance or a bathroom. You can make these tables the most popular by offering complimentary appetisers, desserts or other perks to people sitting there. Unfortunately, restaurants that turn this problem into such opportunities for their customers usually fill those “undesirable” tables before others!
Another problem that often presents itself is selling out of a popular menu item before the day ends. Customers may walk out and not return if they find various menu items unavailable. Turn this into an opportunity by apologising to the diner and offering them a voucher that entitles them to get the item for no charge the next time they visit. Tell them about other items on the menu that they might enjoy instead. They may find a new favourite!
Before starting your restaurant business, give some thought to the kinds of problems that may arise in the day-to-day management of your establishment. Successful restaurant entrepreneurs find ways to turn these problems into profitable opportunities!
If you would like support with planning a restaurant that lasts, explore our feasibility and business planning services or contact our London team.
I wrote an article in 2014 and posted it in 2015 entitled ‘A Restaurants Business Plan’. See the link below for the details that you should include.
https://www.linkedin.com/pulse/restaurants-business-plan-pavlos-sarlas?trk=mp-author-card
Below are some additional articles I have written that could assist any new restaurant opening. You can just read the following by clicking on the links.
How to start a restaurant
https://www.linkedin.com/pulse/how-start-restaurant-pavlos-sarlas?trk=mp-reader-card
Creating Your Restaurant Concept
https://www.linkedin.com/pulse/creating-your-restaurant-concept-pavlos-sarlas?trk=mp-reader-card
A Restaurants Business Plan
https://www.linkedin.com/pulse/restaurants-business-plan-pavlos-sarlas?trk=mp-reader-card
Top 10 Restaurant Startup Errors
https://www.linkedin.com/pulse/top-10-restaurant-startup-errors-pavlos-sarlas?trk=mp-reader-card
Small Business Success – Easy Tips That Will Help You Succeed
Dangers of Procrastination When Building Your Business
