Starting a restaurant is no easy task, and there are plenty of people who think they have what it takes. With the right know-how, your restaurant should thrive. However, there are a lot of new owners who get into the business unprepared for the multitude of challenges that will face them.
It is often said that the restaurant industry has an extremely high failure rate, but studies by the Daniels College of Business professor H.G. Parsa found that the restaurant failure rate is not that far off from the failure rate of new businesses in general.
According to Parsa, about 59 percent of restaurant businesses fail in the first three years, with 26 percent failing within the first year. Comparingly, if you look at SBA statistics for all business failures, you will see that 30 percent of new businesses fail in the first two years, and only 50 percent survive the first five years.
So, what are the main reasons restaurants fail at all? Here are the biggest culprits:
1. The Restaurant is in the Wrong Location
You’ve heard it before and you’re about to hear it again: location, location, location. A lack of visibility, foot traffic, and a bad parking situation easily translate into an empty dining room. Owners also need to consider whether their concept is appropriate for the market they want to serve, for example, a fine dining spot in a small town with low incomes might struggle to find a customer base. Of course, a bad location can be overcome if you execute all other aspects of the business flawlessly.
2. Failure to Grasp Basic Accounting Concepts
A lot of restaurant owners get into the business because of their love of cooking, not their love of spreadsheets and calculators. But to be successful, restaurateurs need to get up to speed on basic accounting practices or hire someone they trust to take care of the numbers. Making sure you have enough cash flow to cover payroll, for example, is absolutely essential. So is making sure you are collecting meals tax and paying them on time. If you don’t think you are up for the task, find a CPA… stat!
3. Employees Run Amok
Whether it is lack of management or poor hiring choices, a few bad employees can drag a restaurant down into the red. It has been estimated that around 20 percent of bar sales are lost to theft, spillage and free drinks. In addition, many new restaurants often make the mistake of over-hiring, leading to a bloated payroll and a lot of staff members standing around doing nothing part of the time. Make sure you have a great manager in place and put a solid training program in place to help keep employee-related issues from hurting your restaurant.
4. Lack of Marketing and Promotion
A good marketing and promotion plan does not require a lot of money; just effort and creativity. Still, many new restaurants seem to think word of mouth alone will generate business. A solid social media marketing strategy is essential these days and is often the best way to get in front of prospective customers. Restaurant owners who overlook this do so at their own peril.
5. Uninviting Atmosphere
Bad lighting, cheap decor, and unfriendly customer service add up to a horrible atmosphere that will keep guests from wanting to dine with you, even if they like the food. Without overspending, you can outfit your restaurant with attractive reclaimed wood table tops that can give your dining room an instant down-home feel. While the old saying “don’t sweat the small stuff” has some merit, when it comes to creating an inviting atmosphere, the small details do matter.
6. The Food Isn’t Good
Not only does your food have to be fresh and tasty to keep customers coming back, but it also has to be consistent. The key is to maintain quality control and put in place systems that ensure chefs don’t take shortcuts when it comes to preparation and cooking.
7. Overspending on Everything
Sometimes restaurants get carried away and spend lavishly on equipment they don’t need or decor that is just too pricey. Another big expense is food costs, and not being sensitive to prices has resulted in the end of many restaurants. As a rule, a restaurant shouldn’t spend more than 30 percent of its profit on food.
8. Not Having Enough Start-Up Capital
If a restaurant has enough cash in the bank, more often than not they can weather any of the reasons restaurants fail listed above. Having a healthy cushion of funds can give restaurant owners a chance to course correct before it’s too late. Most restaurants will need tens of thousands of dollars in the bank at a minimum to cover expenses until the establishment turns a profit.