3 Biggest Threats to Your Restaurant's Profitability (and Survival) and How You Can Prepare for Them

By: Agnes Teh Stubbs on September 26, 2018

There are over one million restaurant locations in the U.S. today. But the reality is that for every store opening, there are a few others closing up shop.

Every day, restaurants—big and small—are shutting down, handing over their keys to new management or announcing their intentions to call it a day.

An Ohio State University study on failed restaurants found that 60 percent of restaurants close or change ownership in their first year. Eighty percent shut down within the first five years.

Whether you’re considering starting a restaurant, or opening the doors to your new food venture, it’s important to understand the challenges you’ll face.

Restaurants are facing three major threats that speak to how quickly the industry is changing. A small restaurant’s survival depends on how it responds to these challenges, which we’ll lay out in this report.

Threat #1: Shifting Consumer Preferences and Expectations

Today’s consumers are not the same as they were five years ago. Here are a few trends we’ve noticed:

Consumers are more educated: The average U.S. consumer is becoming increasingly conscious about food choices. According to research by the National Restaurant Association in 2016, more than 7 in 10 adults are trying to eat healthier at restaurants.

Millennials, in particular, are even more motivated to make health-focused dietary choices a priority. This group is redefining what “healthy” means and are in the know about all things nutritional, from what it means to be “natural” and “organic” to what’s “locally sourced” and “sustainable.”

“They want to know where their product comes from,” says restaurateur Will Degel, CEO of Uncle Jack’s Steakhouse. “They want to know who the owner is. They want to know it is not this big company. They’re changing their ways.”

Consumers are “eating out” differently: Today’s consumers are dining out in all sorts of ways.

According to The NPD Group, customers ate at restaurants 37 percent of the time between January to June 2017, while takeout represented a slightly larger piece at 39 percent, followed by drive-thru visits at 21 percent.

Food delivery and takeout is on the rise as busy consumers are either ordering food through apps or over the phone. In the last five years, revenue from food deliveries jumped 20 percent, and the overall number of deliveries increased 10 percent, the research group found.

These same consumers have also brought on the emergence of meal kit providers such as Blue Apron, Hello Fresh and Plated.

HOW YOU CAN ADOPT: Restaurants that fail to adapt to the more educated, demanding and busy consumer whose choices take precedence will be devastated. In order for restaurants to survive, they have to be more versatile. This has to start with knowing what your customers want and meeting those needs. Here’s how:

Offer healthier options: McDonald’s is a prime example of a restaurant that has been heavily impacted by the shift toward healthier options and one that has made the most drastic change in its menu.

In 2014, sales from McDonald’s stayed negative for several quarters as consumers seeking fresher ingredients flocked to its competitors. This led to the fast food giant introducing fresh patties in place of its frozen ones. As a result, they found many customers were willing to pay extra for higher-quality and healthier offerings.

McDonald’s is an example of how menu innovation and the introduction of healthier and fresher food can increase your restaurant’s profitability. Depending on the brand positioning of the restaurant, your small or midsize restaurant could benefit from offering healthier menus that could potentially help drive long-term growth.

Offer delivery and takeout: Takeout is taking over. Many diners want their food delivered instead of dining in, says co-founder Micha Magid of Mighty Quinn’s Barbecue restaurant chain.

“If we had our preference, everyone would come to the restaurant,” says Magid. “You get a much better experience when food doesn’t have to travel for 15 minutes. It’s hotter and better … But if someone wants to stay home and get great barbecue, we want to deliver that.”

Delivery brings a “heightened level” of convenience, says Warren Solochek, NPD’s senior vice president. “Restaurants need delivery in today’s environment in order to gain and maintain share. It has become a consumer expectation.”

Threat #2: Turnover in Restaurant Staff and Management

Staffing is the biggest concern in 2018 for restaurants, research firm TDn2K found. As unemployment rates stay low, turnover for hourly and restaurant management has reached a record high, creating a significant strain for restaurant operators.

“With turnover rates well over 100 percent for most restaurant brands, the expense and disruption of business is an enormous operational cost,” according to its Restaurant Recruiting and Turnover Survey report.

The stressful nature of the restaurant industry, coupled with a tight labor market and a boom in new restaurants, means attracting and retaining qualified staff will become even more challenging.

According to the National Restaurant Association, 37 percent of its members in 2017 say labor recruitment was a top challenge, an increase from 15 percent two years ago.

HOW YOU CAN ADAPT:  With low profit margins putting a constraint on the ability to increase wages, restaurant operators must find new ways of attracting and retaining their hourly staff and management. Here’s how:

Invest in your employees: According to the National Restaurant Association, 9 out of 10 restaurant managers start at entry level. Restaurant managers aren’t born; they’re made.

It requires consistent investment in your people to keep them motivated, engaged and ready to go to work at your restaurant.

There are a number of ways to go about this:

  • Recognize good work: This is a simple process—offer an “Employee of the Month” award for the server who goes above and beyond their responsibilities, or give a hard-working manager a gift card to show your appreciation.

  • Focus on ongoing training: Ensure that on-the-job training is consistent, ongoing and most importantly, built with a long-term vision in mind. Emphasize the idea of progression within the restaurant while presenting your training program.

  • Talk to your employees about their goals: Ask employees what restaurant management skills they’d like to build on and what you can do as an employer to help them develop those skills. From inventory management to human resources, there are a variety of courses and certifications that could set your restaurant manager up for success.

Learn more about employee retention strategies from our article “Your Restaurant’s Turnover Rate Is Costing You Thousands–Here’s What You Can Do About It.”

Invest in technology: The ease and productivity that technology platforms can bring to the operations of your restaurant cannot be underestimated. The amount of time saved translates to greater cost effectiveness over time.

Investing in an inventory management system is a first step. It automates the tedious and manual process of counting and managing inventory. All employees have to do is upload a new product to get the latest count. This removes a lot of stress from what would be an otherwise slow and laborious process.

By putting the right restaurant POS systems in place, restaurant operators are ensuring that employees are equipped with the best tools to do their jobs effectively.

Threat #3: Increasing Restaurant Competition

It’s both the best of times and the worst of times for restaurants in the U.S. In the last decade, spending at restaurants has increased twice as fast as all other retail spending.

The good news is there are more restaurants to choose from than before. The bad news is that there is now more supply than demand.

Competition is now more cutthroat than ever as restaurants battle it out for the hearts (and stomachs) of customers. For consumers, there have never been more dining options. The restaurants that can’t compete are being pushed out of business.

Regardless of your target consumer or restaurant concept, chances are you’ll find yourself in competition with more than a fair share of restaurants that are similar to yours.

HOW YOU CAN ADAPT:  The ability to stand out in this competitive landscape will separate the winners from the losers. Here’s what you can do:

Scope out your competition: Do you know who your competitors are?

They could be any restaurant offering a similar type of cuisine or theme, or targeting a similar market. They could also be any restaurant within close vicinity, whether they’re around the corner, across the road or within a 20-minute drive from your location.

Once you’ve identified your competitors, visit these restaurants and pay attention to the following:

  • What’s their unique selling proposition?

  • How do their food and menu prices compare?

  • Is there anything you can learn from their ambience or service?

  • Are there any creative special promotions that you could also adopt for your marketing strategy?

Another way to find out more about your competition is by reading what customers are saying online. Reviews on Google and Yelp can serve as great indicators of what your competitors are doing well or not so well.

Know your target consumer: Restaurant operators must put themselves in the shoes of their customers to boost loyalty and purchases. But first, you need to know who your customers are.

Start by asking your employees who they think the general types, or personas, of your customers are. Customer personas are used by marketing teams and are generalized representations of who your customers are.

Personas can serve as a guide to identify your current customers and what they’re looking for, as well as who your restaurant is trying to attract.

After you’ve come up with a few personas, you can further back up these profiles with insights gained from customer relationship management software (CRM). Most CRM software has the ability to collect customers’ contact information and order histories, as well as create profiles of diners who have signed up for your loyalty program or online delivery service.

Define your unique selling proposition (USP): Now that you’ve sussed out your competition and know who your customers are, it’s time to define what makes your restaurant different from the rest.

To do this, you have to identify your competitive advantage. Ask yourself why customers would want to come back to your restaurant versus your competition. It could be the variety of food and drinks on your menu, or the price, or perhaps your service and ambience.

Here’s an example of one restaurant’s USP: Diners get to pick from a wide variety of the “freshest and healthiest” ingredients at a Chinese restaurant, after which chefs prepare and cook the meals right in front of diners. The restaurant communicates its USP with the phrase “Freshly Cooked and Tasty Authentic Chinese Cuisine.”

Next Steps: Restaurants Can Turn Threats Into Opportunities

The recommendations we’ve outlined above should provide ideas as to how your restaurant can tackle these threats and even turn them into profitable opportunities. In addition, you can also:

  • Ask your restaurant POS vendor about inventory management and CRM systems that will make your operations more efficient.

  • Browse our restaurant POS software and restaurant management software page. Sort and filter top-rated products based on the budget or size of your restaurant.

  • Speak to our restaurant software advisors at 844-685-8455. They are available to answer questions you might have about restaurant management or other types of restaurant-related software.