Opening a restaurant is often a dream for many entrepreneurs. However, it should be stated that around 60% of new restaurants fail in their first year and around 80% of new restaurants are closed by their fifth year.
But awareness is the first step in making sure the same downfalls don’t happen to you. Take a look at these 19 common reasons why restaurants fail.
Why do restaurants fail
1. Bad location
Choosing the right location is one of the biggest indicators of success when opening a restaurant. If you open a restaurant with no space for parking or where foot traffic is low, this is often a recipe for disaster because it’ll make it difficult for customers to access your restaurant. That’s why It’s a good idea to open your restaurant in an area where there’s already many businesses around so you can benefit from joint ventures with other business owners as well as benefiting from the added foot traffic.
2. No business plan
A business plan is a key strategic document that sets out important aspects of how you’ll run your restaurant to maximize profit. An inadequate business plan (or none at all) is a common cause of restaurant failure because there’s no strategy to guide the restaurant’s growth and creating a business plan for your own restaurant should be your top priority when first starting out. A suitable business plan should list both the operational and strategic information about your restaurant including your:
- Target market.
- Marketing and promotion strategy.
- Unique selling proposition.
3. Poor customer service
Bad customer service is a detriment to any business, especially restaurants. And in the age of review sites like Yelp, recovering from a bad reputation is harder than ever. Make sure to enforce a workplace culture valued on good customer service from the get-go to ensure you don’t have to worry about a drop in quality.
4. Inadequate restaurant technology
In today’s day & age, trying to run a restaurant without the help of technology is crippling your brand and leaving you at a disadvantage. But before choosing the technology your restaurant will rely on, you’ll need to spend time reviewing what’s out there to determine how to best provide for your needs.
There’s technology solutions for your payroll, point of sale systems, scheduling, as well as many other components of your restaurant. To try out a technology solution to optimize your staffing, save you time, and will keep you compliant with Predictive scheduling laws that are sweeping the nation, take a look at Deputy.
The Workforce Management solution built from the ground up to protect your business & save you time to focus on what’s most important, your business. Click on the link below to start your very own trial of the solution trusted by brands like Nike & Amazon.
Click here for a list of all the software, apps and tools that Deputy integrates with to ensure smoother and more efficient restaurant management.
5. Not the right number of staff members
Labor costs are among the biggest expenses of any business. Having too much staff on hand is a waste of labor costs. Another reason why restaurants fail is due to under-staffing. You’ll provide a bad customer experience where there isn’t enough staff to attend to customers.
In order to create the best schedule every time, you should use software that empowers you to create the perfect staff schedule with one click. Deputy’s Auto Scheduling helps you create a schedule in no time at all and creates optimized schedules based on multiple demand signals for your restaurant like sales, appointments, foot traffic, etc.
6. Failing to respond to reviews
Social media is one of the most common places for customers to vent their frustrations when they’re unhappy with a business. Aside from review sites like Yelp, customers go to channels like Twitter, Instagram, and Facebook to leave comments about why they’re unhappy with your restaurant. You need a strategy to address negative reviews whenever they pop up as well as showing that you’re willing to listen to customers and take their concerns seriously.
7. Ignoring tax issues
There are state and federal taxes that need to be paid by restaurant owners and it’s critical to familiarize yourself with your area’s tax liabilities. If you fail to comply with any tax law, you could be liable to pay huge penalties. Your restaurant could also be threatened with closure or you could even serve jail time.
8. Spending too much money before you open your restaurant
Opening your new restaurant is a pretty exciting time. So it’s understandable that some restaurant owners will go overboard before they even open. They may overspend on launch events and on things like hiring celebrities to make a good first impression. However, restaurant owners need to do their financial forecasting to ensure the money they spent on their launch can be recouped quickly when they open their restaurant.
9. Refusing to specify a niche
Opening a restaurant without a specified niche is a risky move. Being a generalist when it comes to food typically results in a restaurant that stretches itself to thin in regards to menu items.
If you’re struggling to figure out the best niche for your business, read here to get a rundown on the different types of niches.
10. Not taking advantage of takeout or delivery
There are some customers who want restaurant food to enjoy at home. The global food delivery industry is growing and worth around $100 billion. If you’re not taking advantage of this trend, then your restaurant could be missing out on extra revenue that can damage your bottom-line.
11. Inadequate management team
You need to decide which leadership style is best for your restaurant then hire the managers who best fit your idea. However, hiring managers is just the beginning. You have to constantly review their performance around different milestones to ensure they’re the best fit for your restaurant.
Unfortunately, bad managers can have a terrible effect on your restaurant in terms of staff morale. The best way to spot an unfit manager is to be constantly engaged with what they’re doing and to build regular communication channels.
12. Failing to calculate food cost percentages
Learning to price your restaurant menu is a very important skill in terms of preventing your restaurant from failing. You need to know the basics of how to cost your menu per plate.
This includes adding supplements to ensure you capitalize on lower cost dishes. You should be aware of food replacements to halve your price whilst still delivering quality to your customers. It’s recommended that you spend no more than 25 – 35% of your profits on food and beverage costs to ensure you’re restaurant remains profitable.
13. Lack of owner experience
A passion for food isn’t enough to sustain a restaurant. One common reason why restaurants fail is that restaurateurs may not realize how much effort it takes to manage a restaurant. Additionally, they could lack the necessary business skills to run a successful restaurant.
In the beginning, they may do everything themselves but as the business grows, they may not have the skills to focus on big-ticket items that scale the business.
New restaurant owners should seek advice from experts and do plenty of research to ensure they’re ready.
14. No checks and balances
Trying to keep a mental note of all the tasks that need to get done in your head is inefficient, will cause mistakes, and will result in burnout. You should utilize technology to create systems your staff can easily understand.
For example, the tasking feature in Deputy clearly lists all the tasks that staff are responsible for and when it needs to be done. You can also keep an eye on the progress of your tasks and get real-time updates on any device wherever you are.
15. Poor quality food
While this may seem obvious, it’s also a common reason why restaurants fail. If the food is of low quality, your restaurant will fail even with the best customer service or the best systems in place.
Make sure not to skimp out when it comes to high-quality food items and to stay up to date on what people are saying about your food.
16. Bad hiring decisions
Having poor hiring operations in place will diminish the quality of your entire business. Your employees are the heart and soul of your organization and you need to ensure you’re picking the best.
While it may affect your bottom line in the short term, you should offer a higher than average wage in order to give good employees an incentive to stay as well as having a probationary period to weed out anyone that could damage the workplace.
17. Inadequate marketing
Good marketing is needed to distinguish yourself from competitors. Whether this means billboards, social media marketing, or flyers, research which method will be most effective for you to reach your goals and have been most effective with restaurants in your position.
18. Lack of culture
A healthy workplace culture does not only apply to offices. All businesses (including your restaurant) should have a clear culture set in place to ensure efficient workplace operations as well as guaranteeing clear direction in the face of growth. Make sure to regularly reiterate your culture as well as demonstrating your culture firsthand so your employees understand how to carry themselves and the business.
19. Poor accounting systems
It’s understandable that many restaurateurs aren’t experts in accounting practices. However, there’s a few basics you need to understand as a restaurateur. For example, understanding how to work out a cashflow formula will guarantee you’ll be able to spot any issues revolving around income before they grow to be a bigger problem.
One of the biggest financial and accounting factors you need to be aware of is labor cost. You must invest in workforce management and scheduling software that integrates with your payroll to show you how much you spend on labor, your most costly shifts, and where you can save money in terms of scheduling your employees.
As you can see from the common reasons why restaurants fail, having the wrong technology and failing to keep an eye on labor costs are two major problems. Deputy helps with both of these issues by studying your demand signals to help you build smart and accurate shifts for your restaurant each & every time.
Sign-up for a free trial of G2 Crowd’s highest-rated workforce management software to find out why Deputy’s been chosen by more than 90,000 businesses.
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