Top 10 Reasons Why Restaurants Fail Within the First Year of Operations

Reasons Why Restaurants Fail Within the First Year of Operations

To all those who didn’t already know: 60% of all restaurants shut down within the first year of operations, and up to 80% restaurants close their shops in the first five years. No matter how lucrative the restaurant business seems from afar, running a restaurant business is a herculean task indeed. Read more about the common mistakes fits time-restaurateurs make here. We don’t mean to discourage aspiring restaurateurs out there, or to lower the morale of the current ones, but we do believe that prevention is better than cure.  So, here we have listed, in no particular order, the top ten reasons why restaurants fail, and the ways to remedy the problem.

Why Restaurants Fail and Go Out of Business

Read below the most common reasons why restaurants fail and make sure you don’t make the same mistakes in your restaurant.

1. Pilferage and Thefts

Often restaurateurs don’t even realize that their restaurant is being plundered by inside thefts and pilferage. On-counter thefts and inventory thefts take many forms and can bleed the restaurant dry, becoming the top reason why restaurants fail. An average fine-dine restaurant can lose up to five crores in a period of five years due to pilferage and thefts.

How to avoid: Use a sophisticated POS with robust inventory management and anti-theft system to keep a complete check on all business transactions and inventory. Assign special roles and permissions for each job to keep a check on thefts.

Ask how you can control the thefts happening at your restaurant here.

2. Poor location & High Rentals 

The location is considered to be one factor that can either make or break your restaurant. While a bad location can turn fatal for your restaurant, it is important to not to overspend. Often good locations come at a high price, and restaurants are not able to cover their costs.

How to avoid: Choose a location on the basis of your restaurant’s format. The rent of your location must never exceed 10% of your total revenues. Consider these factors before deciding the location of your restaurant.

3. Poor Customer Experience

A poor customer experience can almost certainly guarantee that the customer will not return and is often one of the main reasons why restaurants fail. They may also post bad reviews of your restaurant on social media and restaurant review sites, which can be extremely damaging to the restaurant if not taken care of immediately. Read how to deal with bad customer reviews of your restaurant here.

Poor customer experience can comprise of anything that makes the customer unhappy. From rude and hostile waiters and servers to a delay or mix-up in the orders. A weird smell that hangs in the air or too loud music that doesn’t go with the theme can also deteriorate the customer experience, and add to the reasons why restaurants fail.

Poor Customer Experience one of the reasons why restaurants fail

How to avoid: Make sure that your staff is thoroughly trained. Even if the customer is irrational at times, it is important to keep your calm. Read how to deal with difficult customers here. A well-trained staff not only does treat the customer right, they also function smoothly, thus avoiding any delays.

4. Inexperience

The thing about the restaurant industry having no barriers to entry is a general perception that anyone can open a restaurant. This is far from true. Poor business acumen, no management, and lack of financial planning among first-time restaurateurs are some of the major reasons why restaurants fail.

How to avoid: Research and analyze. Each and every stage of your restaurant venture must be carefully planned at least up to the coming six months. It is also a good idea to hire a restaurant consultant, especially for first-time restaurateurs.

5. Poor Staff Management

Hiring the wrong people is just as bad as being understaffed, if not worse. Untrained staff can do a lot of harm to your restaurant and ultimately becomes one of the major reasons why restaurants fail. Unhappy and disgruntled staff can seriously damage the restaurant’s reputation, and drive the customers away, thus leading to a restaurant business shutdown

How to avoid: Staff training of each and every employee is a must. Conduct regular communication meetings with your staff to maintain transparency among the team. Read this tips to increase the efficiency of your restaurant staff here.

6. Poor Allocation of Resources

Overspending on the lesser important aspects of the restaurant is one of the fatal mistakes you can make as a restaurateur, that can lead to restaurant failure. It is irrational to overspend on the furniture and the ambience if you running short of resources in the inventory department.

How to avoid: Financial planning is important to allocate the resources correctly and plays an important role in the success of the restaurant. Make sure that the basics of your restaurant well taken care of. Create a restaurant business plan, and allocate the money well beforehand, and spend according to it. If you are a first-time restaurateur, be sure to seek professional help.

7. Complex Menu

A large and diverse menu is not just confusing to the customers, it is extremely tedious to maintain, and often the reason behind wastage of the inventory items. It becomes difficult and time-consuming for the chef to prepare vastly different dishes, and may also lead to customer dissatisfaction in case of delays.

Poor menu planning is one of the reasons why restaurants fail

How to avoid: It is always better to go for a short and simple menu and excel in what you serve. It is recommended to design your menu in such a way that you use the same ingredients in several dishes, and which are also available easily. Having a seasonal menu is also a good idea to attract customers, and is also easy on the pockets. Read how to design a menu that tempts customers to spend more.

8. No Involvement of the Owner

It is the sad truth that aspiring restaurateurs often forget: the owner’s involvement is crucial to the restaurant’s success. Investing just your money into the restaurant, and depending completely on the restaurant manager can often turn out to be fatal.

How to avoid: You need to be aware of your restaurant business, down to every detail. All the details, from sales reports to inventory reports, must be evaluated every day.

Mobile reporting and analytics allow restaurateurs to keep a track of their restaurant business from anywhere, anytime. Check it out here.

9. No Reporting and Analytics

A casual attitude towards reporting and analytics can often lead to the doom of your restaurant. Without any track of the daily business, you will not be aware if your restaurant is in profit or is going in loss. Reports also help in identifying the reason for the loss.

How to avoid: No matter what the size or format of your restaurant is, you need to document all the business transactions and maintain reports to avoid restaurant failure. The reports need to be reviewed every day by the owner, to keep a track of the business. Over a period of time, the reports reveal definite trends in the business, and report analysis is extremely important to make informed decisions.

A casual attitude towards reporting and analytics can be a reason why restaurants fail

10. No Marketing

There is a never-ending debate over this issue between the legacy restaurant owners, who have been running a thriving family business for years with minimal marketing, and the new-age restaurant owners who believe in the power of right marketing.  Of course, for established brands, there is little need for advertisement, but with extreme competition, and low attention span of customers, and their loyalty, marketing is an absolute must for restaurants.

How to avoid: Set aside a budget for marketing right from the inception of your restaurant. It is also a good idea to hire a digital marketing agency to run the online marketing campaigns of your restaurant. Find out how to do the offline marketing of your restaurant here.

A lot of planning and strategy, and immense hard work into executing those strategies, go into running a successful restaurant. Keep these tips in mind, and we’re sure your restaurant will see great success! All the best 🙂


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