According to a report, 60% of restaurants shut down within the first year of operations, and up to 80% close their operations in the first five years. No matter how lucrative the restaurant business seems from afar, running a restaurant business is an arduous task. These figures may make you think, ‘Why do Restaurants Fail?’ that too ever so often. Lack of proper information about what the industry entails ultimately leads restaurants to fail. In this scenario, information is the key area you need to focus on. Most restaurateurs do not know they are doing something wrong until it is too late.
We don’t mean to discourage aspiring restaurateurs out there or to lower the morale of the current ones, but we do believe that prevention is better than cure. So, here we have listed, in no particular order, the top reasons why restaurants fail and the ways to remedy the problem.
Top Reasons Why Restaurants Fail
Having discussed that restaurateurs in the industry are making mistakes they might not even be conscious of, the question remains: ‘What are the top reasons why Restaurants Fail?’
Well, there are multiple reasons why restaurants fail. Poor location, high rentals, and inexperience can push your restaurant costs up, and because of this, your restaurant can end up failing. Lack of owner involvement, internal thefts, and poor resource allocation are often overlooked when considering why restaurants fail. Poor staff handling, lack of reporting, and poor marketing also top the charts regarding reasons for restaurant failure. In short, the top reasons why restaurants fail are:-
- Pilferage and Thefts: Internal thefts and staff embezzlement create gaps that restaurant owners can only detect a little too late.
- Poor Location and High Rentals: You may be located too far from your target audience, or your ideal location may be draining your pockets dry. Either way, it means fewer profits, running into losses, and ultimately shutting down.
- Poor Customer Experience: If your customers do not enjoy their experience at your restaurant, they will soon stop coming. Know how to deliver stellar customer service.
- Poor Staff Management: If you cannot manage your staff, it will lead to a bad customer experience, increased costs, and overall dysfunction. Poor staff management also leads to out-of-control labor costs, one of the most significant expenses in the restaurant business. Here’s how you can handle your staff exceptionally well.
- Poor Allocation Of Resources: If you do not give enough attention to how many resources you need to employ in different segments of your restaurant, it will lead to mismanagement and losses.
- Complex Menu: While a long, all-encompassing menu may sound right for your restaurant, it will only confuse your customers and hinder profits. Learn how to craft an exquisite menu for your restaurant.
- No Involvement Of The Owner: If you leave all your operations to your staff, your restaurant will not be able to grow and will ultimately shut down.
- No reporting and Analysis: If you do not study your restaurant’s performance and have no tool to show you performance stats, you will never know what is and is not working, which will ultimately cause a shutdown.
- No Marketing: Marketing your restaurant is as essential as preparing good food or giving a great customer experience. Failure to market your restaurant right will make you lose out on customers. This is a massive blunder that most restaurateurs make and is one of the biggest reasons why most restaurants fail.
Now that you know the most common reasons restaurants fail, let’s dive in further and understand how they drive restaurants to fail and what you can do to avoid them.
Pilferage And Thefts
First on the list of the top reasons why restaurants fail is due to pilferage and thefts. Often, restaurateurs don’t even realize that inside thefts and pilferage are plundering their restaurants. On-counter and inventory thefts take many forms and can bleed the restaurant dry, becoming the top reason why restaurants fail.
An average fine-dining restaurant can lose up to five crores in five years due to pilferage and theft. Internal thefts add to the restaurant’s food costs, so the restaurateur suffers the same amount twice: once when an employee steals the food and then when they have to cover up for the loss from the restaurant’s profits. According to a survey by the National Restaurant Association, theft represents an average of 4% of a restaurant’s food costs.
How To Avoid
Use a sophisticated POS with robust inventory management and an anti-theft system to keep a complete check on all business transactions and inventory. Assign unique roles and permissions for each job to keep a check on thefts. With the help of Restroworks, you can learn about the theft happening at your restaurant and control it.
Poor Location & High Rentals
The location is a prime factor that can either make or break your restaurant. While a poor location can be fatal if it does not generate enough customer footfall, it is crucial not to overspend. Good locations often come at a high price, and restaurants cannot cover their costs.
How To Avoid
Choose a location based on your restaurant’s format. The rent of your location must never exceed 10% of your total revenues. This is one primary reason why restaurants fail. Your location must be close to your target audience. If a location seems nice but has no competition, don’t get tempted; check why there is no other restaurant similar to yours in such a good location. Take reviews and references from multiple sources and visit the market for your location a couple of times to understand the spending habits of people frequenting the market.
Poor Customer Experience
Poor customer experience almost certainly guarantees that the customer will not return, which is often one of the main reasons restaurants fail. Customers may also post bad reviews of your restaurant on social media and restaurant review sites, which can be highly damaging to the restaurant if not addressed immediately.
Poor customer experience can include anything that makes the customer unhappy, from rude and hostile waitpersons and servers to a delay or mix-up in the orders. A weird smell in the air or too loud music that doesn’t match the theme can also deteriorate the customer experience and contribute to restaurant failure.
Expert Opinion
Robert Irvine is a world-renowned celebrity chef, entrepreneur, and philanthropist best known as the host of the hit television show “Restaurant: Impossible” on the Food Network. In an interview with Business Insider, he talks about the top reasons why restaurants fail in their first year of operation, and one of them is terrible customer service:
“I feel that most people are very much like me in that first impressions determine repeat customership. The way you handle your customers along every step of their dining experience (from being greeted at the door to paying the check) determines whether you will retain that customer, and it is a well-known fact of business that customer retention is much more cost-effective than customer acquisition.”
How To Avoid
Make sure that your staff is thoroughly trained. Even if the customer is sometimes irrational, it is vital to keep calm. Read how to deal with demanding customers here. Well-trained staff not only treat the customer well but also function smoothly, thus avoiding any delays.
It is also critical to analyze the reason behind customer dissatisfaction. For example, if you’re gathering reviews that say the service is terrible, the food took a long time to be served, or something else, figure out why there was a delay.
The Kitchen Display System and POS reports help you analyze the time it takes to accept, prepare, and serve each item on the menu. Gain actionable, easy-to-understand insights with data-driven trends, interactive nested graphs, and performance monitoring with Restroworks at multiple levels to streamline operations and maximize profits.
Employing Tablet Ordering so that the servers can accept orders directly through Tablets or Mobile devices ensures the order is placed automatically. Instant KOT generation reduces service time significantly and also helps optimize Table Turnover.
Inexperience
The general perception that the restaurant industry has no barriers to entry leads to the belief that anyone can open a restaurant. This is far from reality. While there are no industry barriers, poor business acumen, lack of management, and lack of financial planning among first-time restaurateurs are some of the primary reasons restaurants fail.
Industry Insight
According to an article by NerdWallet, a trusted personal finance platform offering expert advice on financial decisions, Inexperience is another significant reason why many restaurants fail within their first year of operation:
“If you are a newbie restaurateur all of the risk factors can be magnified with inexperience. In fact, Stanford researchers who studied small businesses in Texas between 1990 and 2011 concluded that entrepreneurs who failed once in business were more likely to succeed the second time around. If some didn’t reach success on the second go round, each successive attempt at business was garnered more success.”
How To Avoid
Research and analyze! Every stage of your restaurant venture must be carefully planned for at least the next six months. Hiring a restaurant consultant is also a good idea, especially for first-time restaurateurs.
Before you open your restaurant, make sure you have a business plan to ensure you do not miss out on anything important and know how to proceed with restaurant management.
Poor Staff Management
Hiring the wrong people is just as bad as being understaffed, if not worse. Untrained staff can do a lot of harm to your restaurant and ultimately become one of the primary reasons why restaurants fail. Unhappy and disgruntled employees can seriously damage the restaurant’s reputation and drive the customers away, thus leading to a restaurant business shutdown.
How To Avoid
Staff training for every employee is a must. Conduct regular communication meetings with your staff to maintain transparency within the team. Make sure that you create a pleasant working environment for your employees. Doing team-building exercises is just as important as holding staff training sessions.
Setting goals and targets for your employees is also critical for fostering a great work culture. Key Performance Indicators help you measure staff performance and make the employees feel that their role is making a difference to the restaurant’s business. This makes them focused and increases efficiency.
For instance, you can measure the performance of your staff through the ‘Sales by Server’ report from the Restroworks. Similarly, you can assign targets for your Chef to ensure that the food cost doesn’t go beyond 30%. You can fetch such reports from them and develop an internal performance management system. Based on their performance, introduce incentive programs like ‘Employee Of The Month’ or a ‘Star Rating’ for your staff to motivate them to work.
Poor Allocation of Resources
Overspending on the ‘not-so-important’ aspects of the restaurant is one of the fatal mistakes you can make as a restaurateur, leading to restaurant failure. It is irrational to overspend on the furniture and the ambiance if you run short of resources in the inventory department. Similarly, you might be spending a lot on certain raw materials that are not being sold at all, leading to wastage. Not knowing how much to spend where is the leading reason why restaurants fail.
How To Avoid
Financial planning is essential for allocating resources correctly and is critical to a restaurant’s success. Make sure that your restaurant has the basics covered. Create a restaurant business plan, allocate money beforehand, and spend according to it.
Refer to your POS reports to understand the areas that are bleeding money and eliminate them. For instance, the dessert section of your kitchen might not be contributing to sales. It is better to remove that section to save on workforce and operational costs.
Complex Menu
A large and diverse menu is not just confusing to the customers; it is exceptionally tedious to maintain and often the reason behind the wastage of the inventory items. Undue wastage leads to high food costs, which, in turn, leads to losses. It also becomes difficult and time-consuming for the Chef to prepare vastly different dishes, and may also lead to customer dissatisfaction in case of delays.
How To Avoid
It is always better to choose a short and simple menu and excel in what you serve. Design your menu to use the same ingredients in several dishes, which are also readily available. A seasonal menu is also an excellent idea to attract customers and is easy on the pocket.
It is critical to analyze your restaurant’s menu performance consistently. You should remove items with high food costs that are not generating sales. Refer to your Menu Performance Reports to analyze which menu items are not contributing to sales and remove them from the menu. This will help you have a lean menu that sells more of what customers prefer.
No Involvement of the Owner
It is the sad truth that aspiring restaurateurs often forget: the owner’s involvement is crucial to the restaurant’s success. Investing just your money in the restaurant and depending entirely on the restaurant manager can often be fatal.
How To Avoid
You must be aware of your restaurant business, down to every detail. You must evaluate all the details, from sales to inventory reports, daily. Mobile reporting and analytics allow restaurateurs to track their business from anywhere, anytime. Check it out here.
No Reporting and Analytics
A casual attitude toward reporting and analytics can often lead to a restaurant’s demise. Without tracking daily business, you will not know whether your restaurant is making a profit or losing money. Reports also help identify the reason for the loss.
How To Avoid
No matter what the size or format of your restaurant is, you need to document all the business transactions and maintain reports to avoid restaurant failure. The reports need to be reviewed daily by the owner to keep track of the business. Over some time, the reports reveal definite trends in the industry, and report analysis is critical to making informed decisions. You can achieve that through your restaurant POS software. An ideal restaurant management software also provides all the details you need to know.
No Marketing
There is a never-ending debate over this issue between the legacy restaurant owners, who have been running a thriving family business for years with minimal marketing, and the new-age restaurant owners who believe in the power of right marketing. Of course, for established brands, there is little need for advertisement. Still, with extreme competition and customers’ low attention span and loyalty, marketing is an absolute must for restaurants. Your restaurant management software could help you build new marketing strategies around customer data.
How To Avoid
Set aside a budget for marketing from the inception of your restaurant. You can also hire a digital marketing agency or have an in-house marketing team to run marketing campaigns.
Your marketing activities should be based on your restaurant’s strengths. You need to analyze customers’ consumption patterns and develop engaging campaigns. If Nachos are your restaurant’s most popular item, you can create Combo offers or organize a Nacho festival with variations on the menu.
Similarly, you can run highly personalized Loyalty Programs and SMS marketing campaigns to generate repeat visits. However, remember to measure each marketing activity. For instance, if you’re hosting an event with a special menu planned for the day, track the increase in footfall, the increase in Average Per Customer, and the total increase in sales.
Conclusion
Running a successful restaurant requires meticulous planning, strategic execution, and relentless hard work. From managing finances and understanding customer preferences to maintaining operational efficiency, every detail is critical in overcoming the challenges that often lead to failure within the first year. Thankfully, modern technology, such as an innovative POS system, can be a game-changer. It enables restaurant owners to make data-driven decisions, streamline operations, and gain valuable insights into customer behavior, inventory, and sales trends. By leveraging these tools effectively, restaurateurs can address common pitfalls, optimize their business performance, and build a strong foundation for long-term success, avoiding the dreaded early shutdown.
Most restaurants fail due to poor financial management, a lack of a clear concept, subpar customer service, or failure to adapt to market trends. High operating costs and inadequate marketing also significantly contribute to failure.
Restaurants fail due to insufficient capital, poor location choice, inconsistent quality, and ineffective management. A lack of understanding of the target audience and competition further exacerbates these challenges.
No, the 90% failure rate is a myth. Studies suggest about 60% of restaurants fail within the first year, and around 80% close within five years.
The average lifespan of a restaurant is approximately 4-5 years, but this varies widely based on location, management, and adaptability.
Poor financial management, including underestimating costs, overestimating profits, and improper budgeting, is the number one reason.
Restaurants face high failure rates due to intense competition, slim profit margins, high labor and food costs, and the need for consistent quality and customer experience.
Poor customer service is the top reason customers don’t return. A bad experience, such as inattentive staff or unresolved complaints, can drive them away.
Factors like poor marketing, bad reviews, lack of visibility, or an unappealing menu could be why customers aren’t coming. Evaluate customer feedback and improve your offerings to attract diners.
Approximately 20% of restaurants succeed beyond five years, and successful ones often adapt to market trends while maintaining quality and service.
A successful restaurant typically earns a profit margin of 5-10%, though well-run establishments can see margins as high as 15-20%.
On average, it takes 18-24 months for a restaurant to become profitable, depending on the initial investment, location, and operational efficiency.
