The restaurant industry is a notoriously difficult business. Chances are you’ve already heard the frequently quoted adage which states that most new restaurants don’t even make it past the first year. In fact, this statement is born out of a study done at Ohio State University which found that 60% of restaurants fail in the first year and 80% close within the first five.
Although these statistics seem overwhelming, one shouldn’t forget about the countless successful restaurants opening every year. The truth is that the ones which fail often make the same key mistakes. If you can avoid the following pitfalls, you just might see your new restaurant become the next big thing.
6 Reasons Why Restaurants Fail
We know that a high percentage of restaurants end up failing within the first few years of business. Now let’s take a look at some of the reasons why restaurants fail so that you can avoid making the same mistakes that they did.
Many new owners have dreamt for years about opening a restaurant without having spent their careers in the industry. From the outside, the restaurant industry may seem straightforward but it is a complex machine with many moving parts. A lack of understanding about the industry on the owner’s part is a major reason why many new restaurants fail.
If you’re unfamiliar with the hospitality industry, partner up with an industry expert to get the insights you need to make your business a success.
A good location is absolutely essential to restaurant success, particularly in urban areas. Many new restaurants fail because the owner has chosen a location with no foot traffic, poor visibility, or no parking. Walk-in traffic makes up a significant percentage of restaurant revenues so make sure you’re positioned to take advantage of potential customers passing by your front door.
Keep in mind that rent or property taxes will take up a significant part of your operating budget and plan to dedicate the necessary funds to find the right location.
Because of the complexity of the restaurant industry, the intricacies of accounting should not be underestimated. Unlike in other businesses, restaurant owners have to account for food costs, tip pools, comped items, spillage, breakage, and order errors. All these little details mean you can easily start to see cash leaking out the corners of your business.
Without a really good handle on the accounting and cash flow, it’s easy for restaurant owners to watch their income dwindle without knowing exactly why. Invest in hiring a good accountant with experience in the restaurant industry to track every penny.
High Upfront Costs
When opening their new restaurant, many owners find themselves overwhelmed and over-budget before the location even opens. Opening a new business almost always costs more than anticipated, whether it’s due to unexpected expenses or construction delays, so keep that in mind when planning your initial budget.
Make sure to incorporate a healthy contingency fund and look for places where you can save. For example, don’t make the mistake of thinking you need to buy entirely new equipment. Save some money by buying gently-used appliances at auction.
Not Enough Marketing
In today’s economy customers are overwhelmed with choices, making it more important than ever for a new business to stand out from the crowd. A strong marketing campaign is essential to helping a new restaurant succeed. Don’t make the mistake of skimping on your marketing budget or relying solely on word of mouth to spread the news. Invest in a marketing team or PR company that has experience working with restaurants and take advantage of promotional opportunities in your area.
For example, participating in a local food festival can help introduce your cuisine to a new audience. An effective marketing campaign that includes both traditional and new media can be the deciding factor in making your new restaurant the next hot spot.
Weak Customer Service
The backbone of any successful restaurant is repeat customers who bring in new business through word of mouth. Exceptional customer service is essential in cultivating this loyal clientele. Establish customer service policies early on and make sure your management team is on the same page. Don’t be afraid to handle customer complaints yourself since many guests feel respected, validated, and satisfied when given the chance to speak with the owner.
This is one area where giving away a free meal or a gift card for a return visit can make you more money in the long run by building a loyal customer base.
The restaurant industry is intricate and challenging, but it is also incredibly rewarding. With proper preparation and an experienced team behind you, there is no reason why your restaurant can’t develop a lasting legacy and familiar presence in your local community.
Want more tips on keeping those restaurant doors open? Check out our article on 5 Potential Threats To Restaurants In The Future.