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% of 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. These figures may make you think, ‘Why Restaurants Fail’ that too ever so often.

Lack of proper information of what the industry entails ultimately leads restaurants to their failure. In this scenario information is the key area you need to focus on. Most restaurateurs do not even know that they are doing something wrong until it is too late. Read more about the common mistakes first 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.

Reasons Why Restaurants Fail

Having discussed the fact that restaurateurs in the industry are making mistakes they might not even be conscious of, there is still an impending question:- ‘Why Do Restaurants Fail?’
Well, there are multiple reasons why restaurants fail. Poor location, high rentals, and your own inexperience can push your restaurant cost up because of which your restaurant can end up failing. Lck of owner’s involvement, internal thefts and poor allocation of resources are reasons which are often overlooked when considering why restaurants fail. Poor staff handling, lack of reporting and poor marketing also top the charts when it comes to reasons for restaurant failure. In short, the top ten reasons why restaurants fail are:-

  • Pilferage and Thefts: Internal thefts and staff embezzlements create gaps which restaurant owners can track only a little too late
  • Poor Location and High Rentals: You may be located too far from your target audience, or your ideal location may be draining your pockets dry. Either way, it means fewer profits, running into losses and ultimately shutting down.
  • Poor Customer Experience: If your customers are not enjoying coming to your restaurant, it is only a matter of time before they stop coming to you altogether. Know how you can deliver stellar customer service.
  • Your Inexperience: Your inexperience can lead to mistakes that can cost you more than a couple of customers.
  • Poor Staff Management: If you are unable to manage your staff, it will lead to bad customer experience, increase in costs and overall dysfunction. Garner the knowledge on how you can handle your staff extremely well.
  • Poor Allocation Of Resources: If you do not give enough attention to how many resources you need to employ in different segments of your restaurant, it will lead to mismanagement and losses.
  • Complex Menu: A long all-encompassing menu may sound like the right thing for your restaurant, but it will only confuse your customers and hinder profits. Know how you can craft that exquisite menu for your restaurant.
  • No Involvement Of The Owner: If you leave all your operations to your staff, your restaurant will not be able to grow and will ultimately shut down.
  • No reporting and Analysis: If you do not study your restaurant performance and have no tool that can tell you what your performance stats look like, you will never know what is working and what is not working which will ultimately cause a shutdown.
  • No Marketing: Marketing your restaurant is as essential as preparing good food or giving a great customer experience. Failure to market your restaurant right will make you lose out on customers. This is a massive blunder that most restaurateurs make and is one of the biggest reasons why most restaurants fail.

Now that you know the most common reasons why restaurants fail let’s dive in further, and understand how they drive restaurants to failure and what you can do to avoid them.

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 five years due to pilferage and thefts. Internal thefts add to food costs of the restaurant, and so the restaurateur is losing the same amount two times over- once when the employee steals it and next when he/she has to cover up for the loss from restaurant’s profits. According to a survey by the National Restaurant Association, theft represents an average of 4% of a restaurant’s food costs.

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 unique 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 poor location can turn fatal for your restaurant, it is important 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. Your location must be close to your target audience. If a location seems nice but has no competition around, don’t get tempted, check why there is no other restaurant similar to yours in such a good location. Take reviews and references from multiple sources and visit the market for your location a couple of times to understand the spending habits of people frequenting the market.

3. Poor Customer Experience

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.

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 is 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 does not only treat the customer right, but they also function smoothly, thus avoiding any delays.

4. Inexperience

The general perception that the restaurant industry has no barriers to entry leads to a belief that anyone can open a restaurant. This is far from true. While there are not any industry barriers, 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. 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. Make sure that you have a business plan in place before you open your restaurant to make sure that you are not missing out on something important and know how to proceed with restaurant management. To know how to write a business plan, click here.

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 employees 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 every employee is a must. Conduct regular communication meetings with your staff to maintain transparency within the team. Make sure that you create a good working environment for your employees. Doing team building exercises is just as important as holding staff training sessions. You can put incentive programmes like ‘Employee Of The Month’ or a ‘Star Rating’ for your staff in place to keep them motivated to work.

6. Poor Allocation of Resources

Overspending on the ‘not-so-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 ambiance if you are running short of resources in the inventory department. Not knowing how much to spend where is the leading reason why restaurants fail.

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 are well taken care of. Create a restaurant business plan, allocate the money 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 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 of 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 track of the business. Over a period, 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 for your restaurant. This restaurant marketing manual would come in handy while devising the marketing strategies for your restaurant business.

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

Also, here is a short video that will take you through the reasons why restaurants shut down.  All the best 🙂

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