Why do restaurants fail?

Why do restaurants fail?

June 26, 2020, 07:16 PM UTC

You’ve likely heard it before and you’ll definitely hear it again: 60 percent of restaurants close or change ownership in the first year of business. That's according to this widely cited Ohio State University study, at least. While there's debate over the exact failure rate (some say it's as high as 95%, others insist it's actually lower than 60%), broadly speaking it's not wrong to say that the restaurant industry is tough and a lot of businesses don't make it.

That grim reality weighs heavy on the minds of new restaurant owners, as it should. But why is the restaurant failure rate so high? Better question: Where to begin?

Bad location

There’s a reason realtors repeat the words “location, location, location” when selling a property. Where you locate your business can be a make or bread deal and too often restaurants realize this after they’ve put the open sign in the window.

Poor management

Good management doesn’t just mean getting along well with staff. It requires careful profitability analysis, cost controls, and inventory tracking. Ensuring that the amount of ingredients for each menu item is itemized, logged, and ordered is critical to keeping tabs on stock. Failure to do so is a recipe for closure.

(If you're a restaurant manager looking to improve your hospitality acumen, this guide might come in handy!)

Inconsistent food

This seems like a no-brainer but you’d be amazed by how often a lack of food consistency shutters a restaurant. If dishes run the gamut of great to gnarly week to week, you’re going to lose customers faster than you can say “today’s special.”

Poor customer service

Customers have little patience for poor service, just look at any negative Yelp review for confirmation. So how can you make sure your clients are pleased? Ask them. It’s that simple. A feedback card can offer loads of insight into what customers are thinking and they’ll feel heard by be given a chance to respond. From there, the choice is up to you how you use their feedback to make improvements.

Too many staffers

You want to irritate guests? Have too many front of house staffers check in on them minutes after they’ve been seated. Not only will it drive your customers bonkers, it’s going to be punishing on your pocketbook. Overstaffing during a slow time can sap cash flow not to mention the overflow of the floor. Scheduling week-to-week can help avoid this restaurant closure pitfall. And if you can’t forecast traffic, go ask a neighboring restaurant for advice.

Server shortage

Equally stressful is the all too common scenario of a staffing shortage. If you find yourself short staffed, especially when the holidays hit, it can be financially disastrous. Temporary staffers — like college kids in a seasonal community — can often fill in the gaps, but of course they'll need to operate at the caliber of traditional staff to maintain your restaurant’s credibility.

(Wondering how to staff a restaurant right? Check out our guide!)

Poor accounting practices

To successfully run a restaurant before you serve the first plate of food, you need to have a business plan in place with thoughtful projections of how much you expect to make. Once that’s in place, you can work with your accountant to adjust your costs based on income flow.

Miscalculated food costs

Finding the perfect food costs formula is the silver bullet to maintaining a successful restaurant. This is no time to go on guesstimates. Keeping a weekly inventory can give you the right numbers to adjust food costs to avoid the dreaded failure statistic rather than blindly placing orders.

(If you're looking for help on this front, be sure to check out our guides on food costs, inventory management, and margins!)

Not enough capital

Start up costs are not to be ignored. Just cashing out your savings may help you get your restaurant doors unlocked, but if you don’t have the cash for unforeseen issues (think walk-ins breaking down, grease traps failing) you’re in for a world of hurt. Make sure you have a savings cushion to draw from in those emergency moments to avoid a surprise closing.

Ignoring negative online reviews

So someone didn’t love your turkey sandwich. Is it the end of the world? No. Do you still need to respond to their Yelp tirade? Absolutely. To keep your business open, addressing customer concerns is a must and will foster return clients. When in doubt, provide an incentive to get a dissatisfied customer back in the door. A free dessert can pay dividends that just might extend the lifespan of your restaurant.

Ultimately, operating a successful restaurant is a balancing act of keeping a share eye on costs while keeping staff and customers happy. It takes a shrewd business person to make it work. But if you keep your eye on all of the above, you’re well on your way.

[Photo: Miguel Montejano via Pexels]