Sometimes, the idea of owning a restaurant can guide you to launch a new business and can very easily hide real obligations and problems that owning a restaurant entails. It all leads to inexperienced owners closing down their businesses in the first year. Don’t be one of them.
If you know the most common reasons why restaurants fail you will be able to recognize bad signals and pay attention on time, make a right decisions and hopefully not to experience a failure.
It is not easy to decide to engage yourself in hard working job like restaurant business and to take great responsibility in these difficult financial times.
Simply close your eyes and run into something where others assured you that it is impossible, and then after a while you realize that these same “friends” are jealous on you and your abilities.
How to Survive the First year of Business ?
If you run a restaurant business few years you have certainly encountered many problems on your skin, but you’re still there and your restaurant is still open, right? The fact that restaurants fail at an alarmingly high rate, as 90 to 95 percent in the first year, is actually wrong. According to recent studies done by Professor Dr. HG Parsa 59% of hospitality facilities fail in the period of 3 years. In the first year, is the highest level of failure, 26%, 19% in the second and 14% in the third year of business. According to him, the myth that restaurant failure rates from 90% could not be confirmed. “Any model which I used for study, the results of the failure of restaurants have always moved about 55% to 60%. If we compared this research result to other businesses, restaurant industry is quite prosperous business.
Common Reasons of Restaurants Failure
I met people at different levels in the food industry, from owners of expensive exclusive restaurants to owners of cafes on the corner, who teach me about the most common pitfalls and mistakes of beginners in the hospitality industry. So I decided to share my learned lessons and to help to restaurant owners of new restaurants to minimize the most common beginner’s mistakes .The most common reasons why failure rate inrease in the beginning of the business :
- Low start-up capital
- Poor knowledge about competition
- Wrong Location
- Poor restaurant promotion
- Inconstant offer
- The bad partnerships relations
- Poor inventory and staff management
- The lack of original ideas
All of these are valuable lessons and important points to consider. But I want to dive deep into the problem and point out the mistakes that are vital when running a restaurant business.Lack of money – wisely use the initial capitalOne thing is certain .Opening the restaurant is very expensive venture.
Depending on the type of restaurant you want to open you will need at least $30,000. I’ve talked many times with owners who have fallen into this trap. They had to prematurely open a new restaurant to be able to pay off its debt to the bank. When I opened my bar, I took a loan and allmy savings to start a business. I remember that I was counting my monthly credit payments on the opening day. Big mistake ! I could failed very easily but I did not!
The credit rate must be something that is included in the business plan, you must managed everything to survive the first year of restaurant business.
A few tips : Do not go crazy about buying new equipment and furniture, instead think about the benefits of used equipment. Be frugal with open credit and do not take money like you just won the lottery. Use it as a savings and spent only in case of absolute necessity.The restaurant who runs out of working capital before it can start running optimal performance and to make a profit is doomed to failure. When this happens, it s rarely possible to finds a way out of financial problems and to pay credit rates.
I can not emphasize enough how important and necessary is to have enough cash in reserve for the first 12-16 months to make sure that you have enough capital for all the uncertainties they ‘re going to face in the initial period of operation. This is very important because in the first year you can not accurately predict the course of your financial operations.
Pay special attention regarding to financial investments to:
Unrealistically high rent – First-time owners often choose a location that is too expensive for their budget and set themselves up for failure from the start. Make a good business plan.
Insufficient funds for operations - Lack of operational funds cause that concepts that could succeed fail after all. It’s important that you have enough money to keep your restaurant alive until you begin making profit.
Neglecting finances- Keeping control over finances, controlling food portions and drink quality, paying attention to purchase costs and protecting supplies from theft and wastage are bases for running a successful business. Learn how to manage numbers to keep profit.
Market and Competition Ignorance Guarantee Restaurants Failure
In any business, market research and study will increase your chances for success and save you from unpleasant situations you would surely find yourself in. Opening and running a successful restaurant involves more than buying or renting a space, building a place, designing the interior, buying equipment, employing staff and selling food and drinks. When you start your new restaurant business you will not have time for your family at home. This is best illustrated by study about the fact that over 35% of restaurants opened by fist-time owners failed in the first year, while the percentage in franchises is below 10%.
Why are Franchises more Successful than Independent Restaurants?
If you look closely, you will understand that owners of franchises invest a lot more in market research, finding the right location and choosing the right concept. Also, they can rely on their years-long experience and avoid making mistakes they experienced in other establishments in their chain. As a result, franchises arrive with operational and financial plans proven to succeed.
However, you don’t need to own a franchise to avoid most mistakes. You can make a business plan yourself, the one that makes sense and that can be realized. All you need is a correct approach that involves detailed and objective market research and planning.
Location for Your Restaurant
Location, same as a region where your restaurant is of vital importance. Here I again emphasize the importance of market research.When making the analysis of potential sites take into account the following factors:
Who are your potential guests? What are their needs and purchasing possibilities?
What is the environment of the potential location for your restaurant? Location also determines menu item of your restaurant, same as restaurant design and concept. Are there around some business buildings, universities, schools? Follow the competition and how they do their business.
You should think also about accessibility,number of parking places, visibility and traffic around your restaurant.
These are all questions that you need to bear in mind when choosing a location for a restaurant. Of course different types of restaurants require different locations or if you’ve already picked a location your restaurant brand should fit with it. For example if the brand is urban and trendy, a downtown crush with lot of traffic will be the best choice. But if you offer romantic dining maybe it would be better to pick some more quiet location.
There is No Success Without Good Promotion
I’ve been writing a lot about the restaurant promotion but I will point out the fact that in today’s world of digital information and the fast living simply advertising by word of mouth works weaker by every day. Unfortunately people don’t talk too much between each other anymore. Every day we are bombarded with information. Let your bomb have the big crash.
Be sure to create a plan for your restaurant marketing, make a budget for your advertising and get to work which will bring success.. Make some creative ideas for restaurant promotion or pay to some marketing company to do this work for you.
Customize Your Restaurant’s Offer to Your Guests
Of course it would be the best if you could cook what you love to cook and eat to your guests. But no no no. It ‘s not that simple. The restaurant menu should be adapted to the needs of your guests.
Pay special attention to the food prices and align them with the costs of preparation and financial potential of your guests. If your guest rate your food as too expensive I’m sure that they you will never go back to your restaurant to have luch or dinner. Let the price be adjusted to the quality of food and service that you offer.
The Bad Partnership Relations
If you share ownership of the restaurant with a partner then you are familiar with the problems they come across especially if you are with your business partner in closely friendship, kinship or ( OMG) romantic or sexual relationship.
You share financial risks which can be very stressful. Actually I have bad experience and had it twice. I have lost some of my best friends when they becomes my business partners. Partners should provide emotional and working support all the time. Unfortunately, many restaurants fail because of the inability of partners to resolve disputes.
Partners must collaborate to resolve such issues. They need to objectively review the facts and analyze the situation. You should determined „common ground“ and value of the relationship.
For good partnership you must clearly recognize each party’s contributions to the restaurant business. Partners need to be confident that they can reach a successful resolution – just wanting to succeed is not enough. Functional roles should be clarify and distinct from equity ownership. It is increasingly important to separate these two concepts as the business grows.
The best solution is to formalize roles and duties.
Partners need to stand out between interests and negotiation positions. Questions “Why” and “what” can help identify interests
Make a evaluation of the problem and try to find alternative solution. Select the best alternative for your restaurant!
Troubles are arising if contributions, roles, and responsibilities are not clearly defined and recognized.
You Need to Understand Your Customers
Restaurant owners do their best to make nice restaurant with good service but missed to make a good research about their possible customers. Understanding your customers means to getting to know your customers so well that you can anticipate their needs and exceed their expectations.This must be priority in your restaurant business. Identify your guests profiles and put yourself in your guest’s shoes. Find out how to communicate with them. Investigate your data with orders , it can tell you a lot. Look for patterns so you can see what kind of orders your customers commonly make. Improve your business by listening your customers, and give them the possibility to rate your food and customers service. Ask your customers what they think and show them what you have done as a result of their feedback. You may never discover where you are going wrong unless you proactively consult your guests and read their rates.
Lack of Inventory and Staff Control
Profitability analysis and inventory control is an important task of every manager or owner of restaurant and bar, which must be carried out regularly in order to prevent theft and reduce unnecessary costs.
It has been shown that the average monthly bar lost is about 20% of its sales due to theft, free drinks, spilled drinks and other expenses. This means that you lose a $4000-$10000 per month, without even know about it.
Pay special attention when creating ingredients list for inventory items. It is important that you specify correctly amounts that are required to prepare dishes before cleaning, shaping, freezing, etc. in order to have an accurate insight into the requirements of goods and to have proper stock control.
Inconstant Quality of Food or Service
If your guests can rely on good food and good service, it is certainly a reason to return to your restaurant. If the quality is not constant chances of retaining regular guests are small. The competition is too strong to retain them. Make sure that the quality of food and customer service in your restaurant is at high level and more importantly keep it constant. You need to have scheduled restaurant operation to keep everything under control.Good recipes and ways of cooking that have already been accepted among the guests should not be changed. Guests coming back to restaurants where they know what they can expect to get for their money regarding food and customer service.
This does not mean that you do not need to import new foods to your menu. It is very welcome to have some refreshment i your restaurant menu because that shows that you care about guests and that you want to offer something new to their senses.
Customers are always looking for good food for their money. If they think that have not got enough for the price they have paid they will not return to your restaurant again. Guess where they will go: of course at your competitors place.
The Lack of Original Ideas
Even when you serve to people who are not too picky and that will be satisfy with steak and fries, effort that in some way your restaurant is different from others in the environment. It does not have to be strictly your restaurant offer, it can be specific way of restaurants marketing ideas in general, the way you dress your staff, service type, etc.
You need to have a sense of how your restaurant business breathing and sense for business in general, and in accordance with these to make right decisions.
New restaurant owners generally do not have a sense for hospitality business, which make influence on the restaurant business very much. Read, go to seminars, watch how other successful restaurants do their business, educate yourself, learn about the possible marketing ideas for your restaurant and do whatever you need to do to be better restaurant manager.
Now that you have become familiar with the main reasons why restaurants fail, you have an opportunity to do research into your market and concepts and make sure your idea would really work.
But still, if you don’t try, you’ll never know.
Regardless of all the planning, the restaurant can fail, but you are increasing your chances for success if you watch, learn and diligently work in each segment of restaurant business.