How many restaurants fail each year?
One of the first things you may have learned in your high school economics class is that some outrageous number of small businesses close in their first year – something like upwards of 90 percent. Research suggests the failure rate for restaurants is around 17 percent in the first year, and the median lifespan is roughly 4.5 years.
Although this is similar to other service-providing startups, it still means that nearly one in five restaurants will fail in the first year, and more than half will fail within five years. It’s hard to pinpoint any one single cause for why restaurants fail, as failed businesses typically make more than one fatal mistake at a time. Check out our list of the top 12 reasons why restaurants fail.
1. Insufficient Marketing
One of the biggest mistakes a restaurant owner can make is not investing enough in marketing. In 2018, there were over 660,000 restaurants in the US – it’s inconceivable for a restaurant to survive without marketing given the competitive landscape. Successful restaurants often have an integrated marketing plan that gives customers different ways to discover, access, and interact with them. Most restaurants can’t get by on word of mouth alone – investing in marketing is, if anything, a way to amplify it.
You don’t need all of the bells and whistles to be successful, but a meaningful investment into marketing your business and getting customers in the door goes a long way for your profit margins. With such fierce competition for space in your customer’s stomachs, standing out from the crowd is crucial. Resting on your laurels, however, can be a death sentence.
Here are some tips to get your marketing program off the ground:
- Update your website
According to a report by Facebook, mobile ordering will generate $38 billion in 2020. Combine that with the fact that 82 percent of millennials look online to plan their next meal, and it’s clear that having a discoverable presence online is crucial to getting customers in the door.
- Work on your social media clout
Approximately 77 percent of the US used some form of social media in 2019. They’re using Pinterest to find recipes, Instagram for #foodporn, and Facebook to find coupons, deals, and events. Social media is an excellent way to generate local business, whether you try your hand at food photography or you’re giving out coupons on Facebook.
- Build a community
With so much competition for screen time and stomach space, building a community around your restaurant can help drive customer acquisition and retention. You don’t have to go so far as to make commercials that say “when you’re here you’re family,” but creating a hashtag for your customers to use helps create a welcoming environment people want to participate in and return to.
- Focus on influencer marketing
These days, influencer marketing is all the rage – they’re a cost-effective way to create word of mouth buzz at scale. However, authenticity is the name of the game in the world of influencers, so when you contact social media mavens, make sure they’re local, real, and can offer a genuine review of your food. Some good plating and lighting won’t hurt either.
2. Inefficient Marketing
Your marketing may check all the boxes, but may not be good enough to convince new customers to come through your doors. Having a website isn’t enough: it needs to work, and work well. Having a brand, or a logo, or flyers, isn’t enough: they have to look good, read well, and effectively communicate your restaurant’s value.
Start setting goals, testing different messages, and planning campaigns around events, debuts, or new menu items. Especially in the post-COVID world, wherein many consumers are staying at home and cooking their own meals, making your food look as appealing as it tastes is key. Your restaurant doesn’t have to be quite instagrammable, but your marketing should look good.
Inefficient marketing can often lead to your business being passed over when consumers decide where they want to eat, especially in a mobile-first world. Standing out from the crowd, especially in a fiercely competitive market, takes going above and beyond the competition.
3. Poor Customer Service
In the age of social media and google reviews, there’s hardly an excuse for poor customer service. Some restaurants have even failed because a rude server, an angry owner, or a spiteful chef messed with the wrong Yelp power user. That’s not to say that customers have all the power now, or that you’re not entitled to run your restaurant as you see fit, but consistently poor customer service will destroy your business.
In fact, consistently poor reviews are often revelatory of deeper problems with your restaurant – and your customers will notice. Here are some examples of bad customer service:
- Late orders
- Wrong orders
- Inability to accept criticism
- Rude staff or management
- Long wait times
- No greeters
- Hostile environment
Anything that negatively contributes to the customer experience is a knock against your restaurant, and in this business, first impressions count. A poor customer experience can find its way to review aggregate sites before you can even close your doors for the night.
4. Not Being Mobile-Friendly
In the world of UberEats, Seamless, and Yelp, it’s easier than ever before for a hungry customer to get restaurant-quality food with the push of a button. Mobile ordering and delivery has helped even the playing field between restaurants, while simultaneously amplifying the competition. Anyone can type “Indian Food” into their favorite delivery site and find every possible restaurant in their area to deliver.
You don’t necessarily have to adopt a mobile-first approach (although the COVID-19 pandemic made it necessary for a lot of us) but you should be available where your potential customers are looking.
Being available for mobile ordering and delivery is a no-brainer to win new customers. At the same time, being inaccessible by google searches, Yelp, or delivery apps can unnecessarily hinder your business. Considering over 60 percent of Amercians order delivery or takeout every week, and mobile ordering is growing over 300 percent faster than dine-in, getting online is more important than ever before.
5. Bad Business Strategy
Let’s face it: not everyone is meant to run a business. Some lack the business acumen, others lack the patience, and some of us just don’t have the luck to make it. Running a successful restaurant requires good tasting food, a pleasant atmosphere, and perhaps above all else, a competent business strategy.
We can break down poor strategy into three (non-exhaustive) categories:
Making sensible adjustments to your menu, offering seasonal items, or manager’s specials are smart ways to take advantage of trends, offer exclusive meals, and to differentiate your restaurant. However, there are plenty of ways an overzealous approach to your menu can doom your restaurant. Having too many items, or even too few items, can unnecessarily waste money and time. If your restaurant is known for a certain style of cuisine, pivoting to another unrelated style might not be the smartest move without a strategy behind it. Jumping on the latest food trends may seem like a good idea, but devoting unnecessary resources to it can easily put you in the red.
Overpaying or underpaying your staff can waste resources or lead to negative customer experiences. We’ll talk more about the consequences of this from different angles later, but strategically, the way you treat your staff speaks volumes about your business. Overpaying staff can lead to high payroll costs that can needlessly harm your bottom line. Underpaying them can lead to a “brain drain” of good talent, while limiting your access to friendly or competent employees.
Lavish overspending or needless belt-tightening are two sides of the same coin – either is reflective of an ineffective financial strategy. Investing in your restaurant is a great idea if it will yield results, but you can be strategic about what money goes where. No, maybe your family Italian restaurant doesn’t need a gold toilet, but fluorescent lighting might help the ambiance.
6. Staffing Problems
Your staff plays a huge role in your restaurant’s health and long term profitability. Efficient waitstaff, friendly servers, and competent management can help overcome other areas your restaurant lacks. On the flipside, rude or untrustworthy staff can bleed your restaurant dry. They can drive away customers, leech out your inventory, or even drink away all the alcohol at your bar.
Hiring staff requires as much care as every other aspect of your business. Believe it or not, hard workers are not hard to come by – but fair wages often are. Consider how your wages, tips, and working environment affect your staff when recruiting or evaluating your team, and identify areas that need improvement. And of course, don’t be afraid to let rude or unruly staff members go if they’re seriously affecting your bottom line.
7. High Food Costs
Inordinately high food costs can eat away at your restaurant’s profitability and long-term financial health. And if you’re not consistently tracking and calculating your food costs, you could very well be hemorrhaging money needlessly.
Food costs, defined as the price your restaurant pays for food, make up a large portion of your restaurant’s bottom line. Spending too much on ingredients for menu items that are inappropriately priced or rarely ordered can bleed your bank account dry. Keeping tabs on your food costs is critical to your restaurant’s survival. It helps you make educated menu and pricing decisions, identify where to get better deals on supplies, and even helps you understand the impact food waste has on your bottom line.
Failing restaurants often do not have enough of a handle on this: whether their prep cooks are wasting ingredients, their menu items are priced too high or too low relative to their food costs, or they simply aren’t getting good enough deals on their inventory, it all adds up in the end.
8. Poor Inventory Management
Poor inventory management can often be the root cause of excessively high food costs. Wasting food, letting it expire, or not ordering enough ingredients can lead to long term difficulties in your restaurant’s operations. Any successful and efficient restaurant operation runs clean books, whether that means hiring an accountant to keep tabs on inflows and outflows, or leveraging a sophisticated point of sale system to automate your inventory management.
Either way, restaurants that don’t keep tabs on their inventory can quickly lose control of their finances. It’s okay to run out of the prime rib on Sundays, but it’s not okay to run out of staples over a long period of time. In the same vein, throwing out rotting or expired ingredients because of neglect or over-ordering is a needless drain on your finances.
9. Lack of Startup Capital
Opening a restaurant can require hundreds of thousands of dollars, depending on the type of restaurant and the location. Covering payroll, food costs, rent, decoration, vendors, and equipment is crucial to your operations, but be careful not to overspend before your business can start turning a profit.
At the same time, a lack of startup capital before your restaurant can get off the ground can spell doom before you even have a chance to open the doors. If you can’t cover payroll, or have enough food to serve a consistent menu, there’s hardly a point to trying. Be sure your financials are in order, and stick to the plan as best you can before over-committing your limited resources.
10. Poor Restaurant Design and Layout
Your restaurant’s layout and design are core to the customer experience. It’s not just about how pretty it looks: it’s how approachable, accessible, and enjoyable the atmosphere is. Your restaurant may have a particular theme, but ensure it’s one that your customers are interested in experiencing. Moody dance floor at a sushi bar might be a hit for your older clientele, but a gothic Transylvanian themed steakhouse might not.
Cultivating an atmosphere is a function of the ambiance, the music, and the interior design of your restaurant. This atmosphere should match your restaurant’s brand identity: it might be jarring if an American restaurant sports a dojo theme. This plays into your restaurant’s approachability, or how it feels for a customer to walk in and sit down for a meal.
Some high-end restaurants opt for architecture and design that feels intimidating, like tall marble columns and Victorian accouterments, to contribute to the atmosphere of fine dining, in the same way, some diners will opt for comfy plush seats and bar stools. What matters is that the atmosphere and aesthetic matches the dining experience. Failing to do that can easily turn customers away, and the end of your business.
11. Choosing a Poor location
In many ways, location is one of the most important facets of your restaurant’s survivability. You should think through all the possible customer experiences of your potential location before opening. Ask yourself these questions before getting started:
- Is it easily accessible by car or public transportation?
- Is there parking nearby? Is that parking free, or is safe street parking readily available?
- Is your location friendly to foot traffic, like on a main street or in front of a busy sidewalk?
- Are there other restaurants nearby? Can your restaurant compete?
- Is your restaurant easily visible or accessible?
- Does your restaurant have a wheelchair or handicapped accommodations?
Your answers to those questions will significantly impact your customer experience. A restaurant that is difficult to reach, or is buried behind other competing restaurants, can be easily forgotten or ignored by passersby. Pair a bad location with bad marketing, and your restaurant is on a one-way train to failure town.
12. Providing Bad Food Options
The whole point of opening a restaurant is to serve good food that people are willing to pay for. You’d be surprised, however, how often food quality is overlooked by restaurant owners. Bad, mediocre, or just plain old not good food can easily put off your customer’s and ensure they never return. If other aspects of your restaurant are good, like the location, the price, or the ambiance, they may be able to excuse it. But bad food, in the end, will eat your restaurant from the inside out.
Restaurants, in the end, are highly specialized: they deliver different types of cuisines at different price points, with different quality ingredients, to serve different types of customers. The common denominator between a successful local takeout joint and a Michellin starred tasting menu, is typically good tasting food.
Put some time into recipe development, taste testing, and chef scouting, to ensure you can produce a consistent product for your customers, regardless of your budget or style. If your food sucks, why would anyone come back?
Putting it All Together
Operating a restaurant is no easy task. There are so many aspects that determine your customer’s experience, that just focusing on high-quality food isn’t enough to ensure your success. At the same time, pouring too much energy and money into the ambiance, atmosphere, or even your staff can detract from other areas.
Balance is hard to find, and there are a lot of ways that small mistakes can pile up fast in the restaurant world. The best way to keep your restaurant afloat is to have access to all of the data you need to make informed decisions, whether it’s how much of a certain ingredient you buy or how much you should charge for that artisanal burger.
Marketman’s intuitive inventory management system can help you analyze food costs and menu prices on the fly, allowing you to quickly pivot your spending on ingredients, menu items, and more before they get out of hand. It’s one of many tools you can use to keep tabs on your restaurant’s health and to ensure you’re not one of the thousands of restaurants that are forced to close every year for the mistakes we listed above.