Why Restaurants Fail

Walk around your city and you’ll probably see at least a few “for lease” signs in empty restaurant windows. According to a recent study by two economists using United States Bureau of Labor Statistics data, only 17% of restaurants fail within their first year – far less than the 90% restaurant failure rate claimed by some experts.

But this low rate of failure may be misleading since a higher percentage of new restaurant openings today are by established, heavily capitalized restaurant groups and franchisees, rather than the more common mom and pop owners we used to see in the past.

And whether restaurants really fail at a higher rate than other businesses is almost beside the point. A restaurant – like any other small business – is risky. Business failures are always painful, and since restaurants are highly visible, they get a lot of attention when they do fail. There’s even a category of news on the Eater Chicago website covering shuttered restaurants.

But what causes some restaurants to close while others see success for years or decades? And when does it make sense to call in a restaurant consultant?

In a previous post, we looked at some of the reasons new restaurants fail. Here we look at common problems that plague restaurants long after the first year.

1. Poor Management

Keeping a restaurant in business takes more than great food and service. And just because the owner has previous kitchen or restaurant experience doesn’t mean they’ll make an effective manager.

When it comes to running a successful restaurant, the owner must learn to delegate tasks and keep an eye on the big picture. Even managing a relatively small restaurant requires long hours and constant vigilance. Rude waiters, disappearing food or alcohol, unclean counters, dirty silverware or nasty bathrooms are all consequences of inattentive or ineffective management.

2. Lax Financial Controls

A restaurant must be able to manage its cash flow to pay employees, marketing expenses and suppliers. This is much easier when the business follows good accounting practices.

A great way to start is with a point-of-sale system that handles a lot of the accounting up front. A good point-of-sale system will generate reports like a profit and loss report that helps the business owner understand what’s driving growth and where there’s waste.

But even the best accounting system requires careful attention. Cashiers can share logins. They can even game the system by leaving out gifts of meals or drinks to friends, or entering the wrong items. And having great data is useless if you don’t take the time to analyze and make course corrections based on the data.

3. Overspending

Don’t spend your money on the wrong things; Get your suppliers, equipment, staff and permits secured first before spending on fancy interior designers, top of the line equipment or fancy furniture.

Many restaurant owners spend on luxury items instead of the basics. But you shouldn’t waste money on the finest cookware and stoves when you can get by with more affordable (even used) alternatives. Also, make sure you have – and build – cash reserves to get you through slow periods, storms, fires, floods or whatever else nature and the market decide to throw at you.

4. Bad Food

This should be a no-brainer, but how many restaurants consistently do a great job with their food? Almost none. Few restaurants survive very long if their food is boring and uninspired.

Some restaurants get away with bland food because they offer low prices and have little competition. But when the competition heats up, they quickly go out of business.

Common problems include:

  • Cold food
  • Over-spicing
  • No spicing
  • Drowning foods in heavy sauces
  • Burned, greasy or overly salted food
  • Soggy salads
  • Stale bread
  • Flat soft drinks
  • Overcooked pasta
  • Sandwiches that fall apart as soon as you pick them up
  • Overcooked, dry fish
  • Fish that’s past its prime
  • Tough steaks
  • Rice dishes that are overcooked in some spots and undercooked in others

There is simply no end to the number of ways you can ruin food.

Instead of ignoring complaints, encourage them. Gather customer feedback through multiple channels – waiters and waitresses, users online, focus groups, etc. But don’t stop at gathering information; be sure to fix the problems as soon as you can.

5. Bad Service

You’ve probably had this experience: you go to a restaurant, you’re seated with menus, but your server never shows. Twenty minutes in, you’re wondering if you should get up and leave. Your server finally comes over, takes your order and you breathe a sigh of relief. Except your food takes forever to come out, and when you finally take your first bite, you find the food is ice cold.

Regardless of how good your meal is, you don’t want to come back because the service was so poor.

Far too many restaurants fail to properly train their staff on how to engage customers, or how to find the right balance between ignoring customers and hovering over them. It all goes back to management; having a solid floor manager who understands what it takes to deliver great service may cost a bit more, but pays ample returns over time.

Well thought out processes help too. A well-designed training and operations manual can’t turn a bad waiter into a great one, but they can’t hurt either.

6. Inadequate Marketing

Every business has to market itself, but for restaurants, the difference between good marketing and great marketing can mean the difference between barely surviving and thriving.

Many restaurant owners seem to think they can just hang up a shingle, have a happy hour once in a while, hand out a few business cards, and the crowds will come. It rarely works that way.

For one thing, the restaurant industry is crowded. According to the Bureau of Labor Statistics, there are now 620,000 eating and drinking establishments in the United States.

A recent New York Times article argues that the unprecedented restaurant growth over the past few years is now slowing down because the market is oversaturated, mostly with money from Wall Street. Big money means big marketing, which makes it tougher and tougher on small operators.

If you want to survive in the restaurant industry, you have to pay attention to trends, and you have to differentiate yourself, not just through food quality and customer service, but also through marketing. That means paying more attention to the channels that work, cutting budgets for things that don’t work, and focusing more narrowly on your most profitable market segments.

These days, most restaurants have an attractive website, and they promote it aggressively through social media, an email newsletter and text messaging service. They also cover the old standards of business cards, happy hours, special events, loyalty cards, public relations, print advertising and even some direct mail.

Anyone who says operating a restaurant is easy has obviously never operated one. The challenges are endless: customers are fickle; trends change all the time; suppliers come and go; competitors appear out of nowhere; regulations (and inspectors) do too.

Furthermore, everybody seems to be a food critic these days, and just one or two bad reviews can cause temporary – or even permanent – damage.

Success in the restaurant business requires staying close to your customers, listening to their feedback, and fixing problems quickly.

If you see warning signs in any of the areas outlined above, don’t ignore them and hope they’ll fix themselves. Try to solve them yourself as quickly as possible. And if you decide to bring in a professional consultant, bring them in sooner rather than later.

About Andrew Clarke

Andrew Clarke is President of Ground Floor Partners. Over the past twenty years he has advised hundreds of small businesses on strategy, marketing, real estate and finance. He is passionate about small business, social and environmental justice, and is a proud member of the American Sustainable Business Council, Food and Water Watch, Green America, Food Consultants Group, and the American Planning Association.

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