Why Do Restaurants Fail? – Restaurant Failure Rate Statistics

The restaurant industry is notoriously challenging, with a staggering study from Ohio State University revealing that 60% of restaurants don’t make it past their first year and 80% shut down before they hit the five-year mark.

Starting a restaurant is more than just a venture for feeding the masses; it’s an intricate dance of creativity, strategy, and determination. The initial steps, such as having a clear vision, identifying the perfect location, and securing ample capital, are fundamental.

However, longevity in this business demands shrewd leadership, a team rich in experience, a captivating menu, and a touch of what many believe to be “magic”. So, why is the failure rate so high? Insightful research from Cornell University delves into this, identifying several preventable reasons.

Conversations with veteran restaurant owners and specialists revealed common challenges, including financial mismanagement, failure to adapt to market trends, subpar customer service, and inconsistent culinary offerings.

The silver lining here is that these hurdles, although common, are completely avoidable. With dedication, adaptability, and a commitment to continuous improvement, up-and-coming restaurateurs can dodge these pitfalls, ensuring a thriving and lasting establishment. The road may be steep, but the satisfaction derived from loyal customers and a thriving business is unparalleled

Reasons why restaurants fail?

1. Lack of vision
2. Not enough industry experience
3. Not enough operating capital
4. Poor location
5. Not knowing the numbers
6. Ineffective menu pricing and planning
7. Failing to adapt
8. Being too trendy
9. High staff turnover rates
10. Inconsistent food and service
11. Not enough repeat customers
12. Mixing family and business

1. Lack of vision

Drawing insights from the Cornell University study titled “Why Restaurants Fail,” it emerges that a predominant cause of restaurant closures is the absence of a lucid and purpose-driven vision from the leadership. The heart and soul of a restaurant isn’t just found in its menu or theme; it’s encapsulated in its mission and overarching vision, which should be the guiding force behind every business choice.

The Path to Success:

To ensure each decision aligns with the spirit of your establishment, it’s imperative to pen down a well-defined mission statement. Initiate this process by introspectively answering a straightforward question: “Why am I passionate about opening this restaurant?”

Consider, for instance, the idea of launching a taco joint. If your underlying motive is purely monetary gains, you might want to rethink your direction—perhaps the financial sector is more your calling. However, if the passion stems from wanting to offer Montreal a slice of the culture, culinary delights, and homely warmth you experienced growing up in Mexico City, you’re on a promising track.

Such a heartfelt mission can shape everything— from your menu, emphasizing treasured family recipes and iconic street-foods from Mexico City, to your core values like hospitality, warmth, and generosity. These foundational principles not only guide the customer experience, ensuring they’re treated with familial affection, but also influence aesthetic elements, such as branding and interior décor.

In the dynamic world of the food industry, the blueprint for success is clear: A restaurant must be grounded in a clear-cut vision and mission that echo in every facet of the business

2. Not enough industry experience

According to Kristen Corral, co-proprietor of Tacotarian in Las Vegas, merely stepping into the restaurant world without prior industry experience can lead to overconfidence, often stemming from the misconception that success will unfold naturally. Corral notes, “Many budding restaurateurs fall into the trap of equating culinary skills with efficient restaurant management.”

Indeed, culinary prowess doesn’t automatically translate to effective restaurant ownership. Navigating the multifaceted terrain of the food industry demands on-ground experience to truly grasp its nuances. Without a comprehensive understanding of restaurant financial management—or the foresight to hire experts in the field—even the most delightful dishes won’t save an establishment from sinking.

Consider this: serving delectable dishes is just one piece of the puzzle. Menu items must be priced judiciously, ensuring that the revenue generated adequately offsets expenses, encompassing cost of goods sold (COGS), labour, and other operational costs.

Operating a restaurant successfully is a multifaceted endeavor, demanding proficiency in business and financial management, marketing strategies, and more. If an aspiring owner lacks these skills, it’s paramount to bring onboard those who possess them. Without such a comprehensive approach, achieving lasting success in the restaurant world remains an uphill battle.

3. Not enough operating capital

Based on research from RestaurantOwner.com, the average initial cost to set up a restaurant is a substantial £375,500.

Establishing and maintaining a restaurant doesn’t come cheap. Numerous restaurateurs have fallen into the trap of investing their entire budget in crafting an aesthetically pleasing space, complete with a photo-worthy restroom and top-of-the-line kitchen equipment. Yet, when sales don’t match these initial expenses, financial strain inevitably follows.

Corral opines, “It’s a common oversight for budding restaurant owners to become consumed with perfecting the visual appeal of their establishment, often neglecting the reality of post-launch operations.

It’s unrealistic to expect every eatery to become an instant sensation. Proprietors must ensure they have sufficient working capital to sustain the business, at least until a regular customer base develops. Spending the entire budget at the outset can jeopardise the restaurant’s very survival in its infancy.”

To Achieve Success:

Launching a restaurant entails a labyrinth of costs. This encompasses everything from the rental agreement, refurbishments, and culinary apparatus, to staffing, promotional activities, and the procurement of ingredients.

Our recommendation is to approach this venture with a foundational mindset. The location of your restaurant will play a pivotal role in shaping several aspects of your business. This includes the potential footfall, which translates to potential revenue per service. Equally, it dictates the scale of staffing required and impacts recurring expenses such as utility bills. Selecting the right locale is akin to laying the first brick; get it right, and it sets the tone for the entire establishment.

4. Poor location

The adage holds true even today: It’s all about location, location, location.

The place you choose for your establishment can significantly influence several aspects of your business – from staffing and utility expenses to marketing efforts and general overheads.

Taking into account variables such as leasing costs for commercial spaces, licensing, refurbishments, and property inspections, pinpointing the ideal locale for your restaurant is vital. This decision can significantly shape your establishment’s long-term financial viability.

Path to Prosperity:

Tom Scarda, the mastermind behind The Franchise Academy, underscores the paramount importance of comprehensive research when choosing a restaurant venue. According to him, this might just be the most consequential decision an aspiring restaurateur will make. Evaluate potential locations with these considerations in mind:

• Competition: How saturated is the vicinity with businesses mirroring your concept?
• Pedestrian Flow: Does the area boast a dense population? Will you predominantly benefit from walk-ins, or will you need a heightened marketing drive to draw clientele?
• Target Audience: Does the locale resonate with the demographic you aim to serve? Is your ideal customer residing or working within this precinct?
• Ambience: Make multiple visits, both during daylight and post sunset. Does your venture seamlessly align with the local ethos?
• Connectivity: How accessible is the venue through public transportation? Are parking facilities available? It’s imperative that your chosen spot resonates with your intended audience, ensuring consistent footfall during operating hours, and that the local demography mirrors your target profile.

Following this, delve deep into the analytics. Determine the seating capacity of the chosen space and compute the requisite revenue per service to balance out your operational costs.

While we won’t delve into those calculations here, you can delve deeper into our blog, which provides a comprehensive guide on zeroing in on the perfect commercial venue.

5. Not staying on top of your business’s numbers

A significant pitfall leading to the downfall of many restaurants is the lack of proficiency among its decision-makers in understanding crucial business metrics and their implications. There’s a tendency for restaurateurs to misconstrue financial documents like profit and loss accounts or payroll summaries, leading to excessive expenditure. Such oversights can substantially erode profitability.

The Road to Triumph:

Consistently monitor the reports generated by your point-of-sale system. It’s essential to base business choices on tangible data rather than mere conjecture. Utilise the reports at your disposal to ensure you’re consistently meeting your benchmarks.

If numerical analysis isn’t your forte, it’s wise to collaborate with or recruit someone skilled in this domain. Being proactive with your financial insights and making astute business judgments is what distinguishes culinary enthusiasts from truly successful restaurant proprietors.

6. Ineffective menu pricing and planning

Typically, around one-third of a restaurant’s income is earmarked for the cost of goods sold (COGS). Another third gets directed towards wage costs, and the remaining portion is set aside for fixed costs, such as property rental and utilities.

After settling COGS, wages, and overheads, the residual amount is identified as profit. Astonishingly, the average profit for a restaurant oscillates between a modest 2% and 6%.

Given these slender profit percentages, there’s little room for misjudgment. Therefore, the significance of menu valuation and managing food costs cannot be stressed enough for a restaurant’s viability.

The Recipe for Prosperity:

To ascertain that each dish on the menu not only recovers all pertinent costs but also contributes to the profit, meticulous calculations are vital.

We have curated content to guide you through this analytical journey:

1. Initiate by determining the optimal food cost ratio.
2. Proceed with an evaluation of your existing menu prices.
3. Revise the pricing of menu items, ensuring a positive return on each transaction.

Furthermore, wastage in the food segment can considerably erode revenue. Aim for a menu design where ingredients are utilised across multiple dishes, minimising waste. An essential pointer: Any expenditure on squandered ingredients directly translates to financial loss. Act strategically to mitigate such financial drains.

Related read: The Complete Guide to Restaurant Profit Margins

7. Failing to adapt

While you might be the proud inheritor of a family restaurant that has seen two generations, facing challenges in appealing to the modern customer base could be daunting. Establishments that resist evolution are often at risk of closure, particularly if their original popularity hinged on a fleeting trend.

Path to Flourishing:

Revitalise your traditional set-up by intertwining innovation with your restaurant’s foundational values and mission. Here’s how to refurbish a seemingly antiquated establishment:

1. Embrace the Digital World: Does your restaurant boast a digital presence? Is your menu accessible and user-friendly online? Have you enlisted your restaurant on Google My Business? Are you engaging with patrons through social media platforms? A “no” to any of these questions signals an immediate need for digital immersion.
2. Rethink Your Menu: Today’s consumers have diversified dietary preferences and needs. While there’s no compulsion to transform your steakhouse into a vegetarian delight, you could make it more inclusive. Labelling dishes as vegetarian, vegan, gluten-free, lactose-free, and so on can amplify your appeal.
3. Tap into Modern Tech: The hospitality sector today is brimming with technological solutions tailored for various operations. Equip your restaurant with a POS system that can churn out insightful data. Collaborate with delivery platforms to expand your reach. Roll out a loyalty scheme to convert one-off visitors into regulars.

Modernising your restaurant doesn’t mean abandoning its essence. It’s about adapting to the times to guarantee its enduring relevance

8. Being too trendy

Fads like frozen yoghurt, cupcakes, and matcha have their moments in the sun. When these trends gain traction, many restaurateurs jump on the opportunity, leading to an influx of themed eateries such as froyo outlets, cupcake boutiques, or matcha lounges. With a crowded market, it becomes imperative for your venture to distinguish itself.

The Blueprint for Thriving:

It’s prudent to be cautious before diving headfirst into the latest trend. Prior to launching, ensure that your locality isn’t already brimming with analogous outlets.

Should you opt to embark on a contemporary concept, arm yourself to outshine your rivals. Harness innovative marketing strategies. Onboard top-tier professionals, placing particular emphasis on leadership roles.

9. High staff turnover rates

With the hospitality sector experiencing an astoundingly high annual staff turnover of 70%, it’s hardly surprising that nearly two-thirds of restaurateurs list recruitment as one of their chief challenges.

The restaurant industry often grapples with retaining skilled staff. This is attributed to generally modest pay scales, the perception of jobs in this sector as fleeting stints rather than long-term vocations, and the ever-present lure of positions in rival establishments.

Blueprint to Flourish:

Managed to assemble your ideal team? Take measures to make sure they remain loyal. This could be achieved by enhancing pay structures (perhaps shifting from gratuity-based incomes to fixed salaries) and fostering avenues for career growth.

When you pour resources and belief into your workforce, they’ll envisage a long-term trajectory with your establishment, amplifying the longevity of your enterprise.

10. Inconsistent food and service

The esteem in which a restaurant is held carries significant weight. Patrons often hinge their decisions on the feedback of others, using these testimonials as a yardstick to gauge whether to indulge in or sidestep your eatery.

The cornerstone to accruing glowing reviews is unwavering excellence in service and culinary offerings; there’s no detour to this. It’s essential to cultivate an environment where every staff member feels a personal stake in the establishment’s triumph.

Steps to Thrive:

Provided that you consistently hit the mark in service and culinary delights, another pivotal strategy is addressing negative online critiques. Data from ReviewTrackers indicates that nearly 45% of potential customers are more inclined towards businesses that proactively address unfavourable online feedback.

However, it’s imperative to approach such reviews with tact. The appropriate response can bolster patronage.

Further, amplifying the reach of commendatory feedback serves as validation of your establishment’s prowess, reassuring first-timers of an unparalleled experience.

With the nod from reviewers, you can employ inventive methods to highlight these accolades and subsequently, augment your patron base.

11. Not enough repeat customers

The pivotal role of returning patrons in the enduring success of a restaurant cannot be overstated. While ensnaring the attention of newcomers is vital (and this is where a sterling reputation plays its part), cultivating a dedicated clientele is just as crucial.

Undoubtedly, the keystones of ensuring returning customers lie in unerring quality of food and impeccable service. Yet, the allure of perks and a robust loyalty scheme can be the nudge patrons need to make their visits to your restaurant a regular affair.

Drawing from insights by the esteemed Bain & Company, a mere 5% uptick in customer retention can lead to a staggering surge in sales, potentially up to 75%.

Harnessing the potential of loyalty programmes can be your ticket to boosting frequent visits. When these programmes are integrated with the restaurant’s point of sale system, it enables restaurateurs to craft tailored offers. An illustrative scenario: automating a campaign where patrons are greeted with an exclusive promotion in their inbox on their birthdays.

The spectrum of opportunities is vast. Dive into the realm of loyalty schemes to devise customised deals and propel patrons to keep coming back.

12. Mixing family and business

Family-run businesses form the backbone of the American economy, contributing to a whopping 64% of the nation’s GDP. Yet, Cornell University highlights a potential pitfall: when familial ties blur business lines, it can spell the end for restaurants.

Their research indicates a pattern. Successful restaurant proprietors tended to be single, divorced, or adept at harmoniously juggling their personal and professional commitments. In contrast, those who faltered typically struggled with the familial sacrifices inherent in the demanding restaurant industry.

How to succeed:

Delegate and trust!

Owning a family-centric restaurant often brings with it the hesitancy to relinquish control and place trust in non-family members. But, for the enterprise’s continued success and evolution, delegation becomes indispensable.

By bringing on board proficient staff to manage the day-to-day rigours, family members can channel their energies towards strategic decisions and broader growth avenues. Additionally, this fosters a healthier work-life equilibrium. A well-rested mind is a productive one; when family members can genuinely detach from work and rejuvenate at home, it amplifies their efficiency at the workplace.

What percentage of restaurants fail?

The percentage of restaurants that fail is 30% of all new start ventures fail within the first year. for independent restaurants, as opposed to their corporate-backed counterparts, the chances of longevity are even more slim. Only 10% manage to see the dawn of their second year, and alarmingly, seven in ten shut their doors between their third and fifth anniversaries.

Yet, these grim figures can also serve as a torch of inspiration. The brighter side is that restaurants that weather the storms and surpass the five-year mark have a markedly increased probability of thriving for at least another five years.

Embrace this data as a clarion call. Rally your squad to put their heart and soul into breaking past that pivotal five-year milestone. The road to restaurant success is laden with obstacles, but mastering the myriad challenges in the initial five years sets the foundation for a more stable and prosperous journey ahead

How long do most restaurants last?

While some restaurants shut down within their first year, others manage to become culinary landmarks lasting for decades. But what’s the typical duration a restaurant stays open? The general consensus is that most restaurants have a lifespan ranging from eight to 10 years.

Why do restaurants fail? Our top takeaways

In conclusion, the restaurant industry presents a myriad of challenges, from fierce competition to the intricacies of staff management and the delicate balancing act of maintaining profitability.

The high rate of failure within the first year of operation underscores the complexity of running such a business. However, the experiences of past restaurateurs serve as both a cautionary tale and a treasure trove of wisdom.

By being vigilant of these common pitfalls and proactively addressing them, aspiring restaurant owners can significantly enhance their chances of success and longevity in this demanding industry.