A business is most likely to fail in its first year of operation. And in the restaurant industry, that’s especially true — profit margins are notoriously low, staff turnover is often high, and the financial and operational challenges ushered in by the pandemic aren’t going away any time soon.
But you can boost your own rate of success by educating yourself on the common causes of restaurant failure and the most common pitfalls for any restaurant. Once you know what to watch out for and what to avoid, it’ll be all the easier for your restaurant to keep delighting your guests, supporting your staff, and bringing in revenue.
So what factors trigger restaurant failure? And how do you avoid them?
What is the average restaurant failure rate?
The restaurant failure rate is difficult to track nationwide, but the National Restaurant Association estimates a 30% failure rate in the restaurant industry. In other words, one in three restaurants won’t survive their first year.
Though that number sounds a lot more optimistic than some of the higher (and unsubstantiated) failure-rate estimates tossed around (like this one), it’s still alarming and can deter hopeful restaurant owners from taking the leap.
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Why do so many restaurants fail?
Here are the eight most common reasons that cause restaurants to close.
Issue #1 - Sweeping Economic Problems
Restaurants have been among the hardest-hit industries in the pandemic.
Dining restrictions and closures, social distancing, and economic uncertainty are all major obstacles for restaurants. More than 110,000 restaurants in the United States shut their doors in 2020 (either temporarily or permanently), according to the National Restaurant Association.
What’s more, restaurant and foodservice industry sales fell by $240 billion in 2020 from an expected level of $899 billion.
How to avoid: While the challenges from the pandemic are serious and far-reaching, it doesn’t mean that your restaurant is doomed. Far from it. While you can’t avoid sweeping economic problems altogether, how you react when they do happen can be a game-changer.
Many restaurant owners and operators have figured out how to successfully run their businesses during the pandemic and beyond. Some have pivoted business models, adopted new staffing and operation models, or implemented or upgraded new tech solutions that have vastly improved efficiency and,as a result, their margins.
You can hear these stories and access insights of those building a strong restaurant business of the future in Toast’s Restaurant Recovery Playbooks here.
Issue #2 - Undefined Restaurant Concept
An undefined, undifferentiated, ho-hum concept is one of the primary reasons for restaurant failures. In the restaurant industry, imitation is not flattery: Creating a copycat restaurant concept won’t lead to long-term success. (Data shows it’s unlikely to survive its first few months.)
With more restaurants than ever before for guests to choose from, a lack of creativity in your positioning can make or break you.
How to avoid: Get creative and innovative with your overall idea.
Check out this piece on 44 unique restaurant concepts to inspire innovation and to help you think through what truly inspires you to embark on this new journey. And think about who your target customers are and what they’re missing in their restaurant rotation: that’s what you should build.
Issue #3 - Poor Staff Management
Many restaurant managers have fallen into their roles from their love of food and connecting with customers. But it takes a special skill set to be an excellent and effective staff manager. Great managers appreciate, inspire, and motivate; poor managers belittle, intimidate, and effectively demotivate.
Poor staff management invites a host of problems: high staff turnover, difficulty hiring and retaining employees, and a tense or toxic working environment. Management matters because it’s hard to create a successful, long-lasting restaurant without a strong team. An overwhelmed, unsupported staff delivers underwhelming service to guests.
How to avoid: There’s no one perfect way to be a great restaurant manager. But many sure your managers have the training and resources they need to succeed in your restaurant.
Learn more about restaurant management and how to support or nurture a great manager here.
Issue #4 - Lack of Capital
Launching a brand-new restaurant is expensive — and your restaurant won’t reach its full revenue-earning potential for months after you open.
The cost of starting a restaurant is, on average $375,000 -- and that doesn’t include operating expenses once you’re open. Too many restaurateurs overspend beyond their means and then don’t have the sales to make up for their expenses beyond the first few months.
How to avoid: Plan, plan, plan. Calculate how much capital you have to spend and how much you're willing or able to allocate to each area of your business.
Budget smart and try to be precise as possible. While you could end up spending way more or much less than you had planned, starting with a reasonable, well-considered budget will better set you up for success. Learn the details of how to build a restaurant budget here.
Restaurant Business Plan Template
No matter where you’re at in your restaurant ownership journey, a business plan will be your north star. Organize your vision and ensure that nothing is overlooked with this free template.
Issue #5 - Too Much Competition
Competition is high in the restaurant space. And the trendier your concept is, the more competition you’ll have. Setting yourself apart from the competition is key to staying at the top of your customers' minds.
How to avoid: The guest experience is your differentiator here. Let your customers know that you value and appreciate them. And over time, they’ll come to understand that you provide the best overall experience. The more you can demonstrate customer value, and where your competitors are unable to replicate the experience that your food, drink, ambiance, and customer-obsessed attitude provide.
Of course, a great guest experience is rooted in knowing your audience AND the competition. Here’s how to get started:
Define your target customer
Map out your competitive landscape
Differentiate yourself from the competition
Issue #6 - No Industry Experience or Business Skills
Owning a restaurant takes a Swiss Army knife-style of skills -- including food sense, business sense, and industry-specific experience. Too many aspiring entrepreneurs lack awareness of key aspects of restaurant ownership because they lack the deep knowledge gained by first-hand restaurant experience — the kind of experience necessary to succeed in a competitive landscape.
Of course, the lack of experience is true the other way around as well. Some would-be entrepreneurs have decades of restaurant experience but are lacking the business skills they need to be successful in their new concept.
How to avoid: If you don’t have the complete experience yourself, hire people who do. Or even better, find a business partner that fills in the gaps. Some of the most successful entrepreneurs recognize and readily admit their own gaps, and they hire accordingly.
Issue #7 - Not Enough Investment in Marketing
Promoting and marketing your restaurant is a crucial step in ensuring its success. You can have the best food and ambiance in the world, but if no one knows about it, it’s going to be hard to survive.
Simply said, you need to tell your story. Use your website, email, digital tools, and social media to connect with both your regulars and would-be guests.
In 2021 and beyond, guest expectations have changed. What will set you apart is your understanding of the customer journey: how people find you, how you promote your restaurant, how you communicate with customers, and how you deliver the best overall experience with great food and service.
How to avoid: You need a restaurant marketing plan that’s separate from your business plan. Toast’s Marketing Plan is a great place to begin to learn effective ways to use popular restaurant marketing channels, from social media to email marketing and everything in between.
Issue #8 - Failing to Adapt
If 2020 taught us anything, it's that adaptability is key.
The restaurant industry is rapidly changing and guest expectations are changing right along with it. This doesn’t just apply to trends — but also to key changes in the industry.
How to avoid: Keep up with innovations in the restaurant industry. Is your restaurant online? Do you have a website and social media presence? Do you have online ordering and new technology? Do you listen to what your guests are looking for?
Your staff are also an amazing source of information. Talk to your staff members and find out what their friends are loving these days and how they’re choosing to order from restaurants, and listen to what they share.
Do your research – not all new ideas will make sense for your guests – and don't be afraid to take a leap.
You got this.
Success in the restaurant industry isn’t easy, but it is absolutely possible with the right tools and information.
There is no one right way to run a restaurant. Plan ahead, hire the right people, and adapt where necessary, and you’ll be set up for success.