Why Restaurants Fail—and How Yours Can Succeed

By: on June 28, 2016

Don’t open a restaurant! It won’t last!

It’s hard work, long hours and little pay!

Nine out of ten fail in their first year!

If you’ve ever opened, or seriously considered opening, a restaurant, you’ve likely heard the above phrases more times than you can count. Fortunately, there’s no merit to these claims (aside from the hard work and long hours, of course).

The notion that nine out of ten restaurants fail in their first year was debunked over a decade ago.

Expert hospitality researcher Dr. H.G. Parsa proved that, though there’s risk with opening a restaurant, it’s no greater than opening any other type of business.

Despite the persistence and inaccuracy of these old notions, restaurants still fail. Why is this? Are there signs that a restaurant might be on the way out or even doomed from the beginning? To answer this, let’s first define the individual “parts” that make up a restaurant.

Certainly a passion and original concept for food and hospitality are at the existential core of any food and drink establishment. But from a business sense, a restaurant consists of:

  • The physical location: The space where the food is prepared and served.
    • A formal business plan: The meat of the restaurant’s identity and livelihood.
      • A point of sale system (POS): The combination of hardware and software that makes the wheels turn. Specifically, restaurant POS systems unite backend operations with front-of-house service.

      Now that we have this restaurant blueprint in mind, we can use it to effectively explore why restaurants fail. Each of the following sections examines how different aspects of these three restaurant components can lead to an overall demise.

      (Click on a link below to jump to that section.)

      Location! Location! Location!
      Restaurants Fail Because of a Lack of a Business Plan
      It’s a Poor Restaurateur That Lacks The Essential Tools

      Location! Location! Location!

      Who’s to say what is the best location for your restaurant? Obviously, your location is limited by availability, price, size etc. But, even if you had unlimited resources to pick the perfect location for your restaurant, would you have any idea what that would look like or where it would be?

      Dr. Parsa has been researching why restaurants fail since 1996. The most recent entry in his catalogue examines the relationship between demographics (location) and restaurant failure rates using Boulder, CO as the test city.

      Boulder has 496 restaurants (at the time of the study) and a population of around 120,000 people across five zip codes. Dr. Parsa’s highly informative and thorough research boils down to these key findings:

      • Of the three zip codes with the highest restaurant failure rates, homeowners make up over two-thirds of the population for two of these said zip codes.
        • The zip code with the highest restaurant success rate (79 percent) also contains the highest percentage of renters (62 percent).

        “These results indicate that a high percentage of renters could be more beneficial to the success of the restaurant industry than previously recognized. Apartment dwellers and transient populations, such as students, were found to be contributing to the success rate of restaurants in Boulder.”

        H.G. Parsa, Ph.D., Barron Hilton Professor of Lodging Management at University of Denver

        Restaurants Fail Because of a Lack of a Business Plan

        The thing about creating a restaurant business plan is that it’s easy to say “we’ll serve Italian-inspired food with locally-sourced ingredients.”

        A note posted on a failed restaurant alluding to various reasons why restaurants fail

        A note posted on a failed restaurant alluding to various reasons why restaurants fail
        Source: BringMeTheNews

        While incorporating ideas such as “locally-sourced” and “Italian-inspired” might make for a great restaurant concept—given the high margins of pastas, pizzas and salads and the popularity of locally-sourced ingredients among millennials—these philosophies alone don’t constitute a complete business plan.

        Restaurant business plans, such as this one provided by FAST Business Plans, contain key strategic and operational details including:

        • Daily operational agendas and employee assignments
        • Location demographics (market size, household area income, competitive landscape)
        • Target market strategy (market trends, market needs)
        • Marketing strategy and positioning in local community
        • Key differentiators of the restaurant, aka, unique selling propositions (USPs)

        Whether or not your business plan is 30-plus-pages like the sample, it’s important to be as detailed and specific as possible. Dr. Parsa’s research illustrates the benefits of organized operational complexities.

        In other words, establishing and continuously building on a living business plan is paramount for encouraging and sustaining growth.

        “Restaurant failures are affected by size and operational complexity. As size and operational complexity increase, so does longevity. It is likely that organizational growth brings about more sales, which brings about the necessity of more staff, more food and beverages, and more systems and controls.”

        H.G. Parsa, Ph.D., Barron Hilton Professor of Lodging Management at University of Denver

        Part of Dr. Parsa’s research divides restaurants into four groups based on size and complexity. From this, he found that restaurants in the group with the least operational complexity closed after only 26 months on average.

        For comparison, the other three groups (each with a greater degree of operational complexity) stayed open more than twice as long on average—64, 85 and 132 months.

        It’s a Poor Restaurateur Who Lacks the Essential Tools

        Creating a business plan, such as the one above, is essential preparation leading up to the opening of your restaurant. It can also be useful to reference it when making impactful decisions about the restaurant.

        However, it’s a static resource. Once you’re up and running, you’ll need some kind of dynamic tool to help you monitor and manage your restaurant.

        This is where a restaurant point of sale (POS) system comes in.

        Operational complexity—which Dr. Parga’s research found to be an advantage—requires equally complex systems to efficiently manage operations.

        Restaurant POS systems offer users everything necessary to monitor back-of-house operations such as inventory management and food costing.

        For the front of the house, many systems on the market now have mobile capabilities (mPOS) that enable servers to use tablets and other devices to enter orders and process payments at the table.

        The operational benefits of mPOS systems have taken the market by storm, as 72 percent of the restaurant POS buyers we advise request mPOS systems.

        Restaurant POS systems typically offer front-of-house and back-of-house features in one integrated solution.

        With tools such as these, restaurant operators can monitor sales reports to see what menu items are selling, which items are generating the most revenue and which customers are purchasing them, both specifically and demographically.

        What to Do With This New Knowledge

        Going beyond this article to dig into Dr. Parsa’s vast catalogue of data on why restaurants fail may seem daunting. But it’s important to learn everything you can to ensure your restaurant is a success. View his four-part examination of restaurant failures below:

        If you’re interested in learning more about these POS tools and how they can help manage your operations, fill out our quick questionnaire. We’ll help you build a shortlist of the best restaurant POS systems based on your individual needs.

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