It will interest you to know that most restaurants do not close down within their first few years. In fact, restaurants stand a better chance of success compared to other service-provider businesses.
According to the National Restaurant Association, the estimated failure rate in the restaurant industry is about 30%, with around 17% closing down in their first year.
Running a restaurant can be challenging and demanding. But with such a considerable failure rate, how do you ensure your establishment avoids the path to failure?
Let’s dig into these recent restaurant failure rate statistics to break down the reasons behind the closure rates and uncover strategies for success.
Recent restaurant failure rate statistics and factors influencing failure rates
The high failure rate has been attributed to factors such as location, customer service, and operational inefficiencies, like the lack of an online menu ordering system in the restaurant.
Let’s take a closer look.
A study by two economists at UC Berkeley found that 17% of independently owned full-service restaurant startups failed in their first year. A similar study published in Cornell Hospitality Quarterly found that up to 26% of independent restaurants failed in their first year of operation.
Reasons cited for these failure rates centered around management and other internal factors like human resources which in turn affected output.
Another famously cited restaurant failure rate statistics published by the Ohio State University, found that 60% of restaurants do not make it past their first year. And that up to 80% close up within five years of operation.
Though the study was centered around restaurants in Columbus, Ohio, the reasons cited for the failures observed include inexperience, poor customer service, and resistance to new trends.
Key reasons why most restaurants fail
Let’s address the key reasons for restaurant failures based on the stats and common surveys.
Market challenges
A poor or inadequate understanding of the market is one of the most common reasons for restaurant failures.
Setting up a restaurant in a low-demand or low-traffic area can make it impossible to attract enough customers to stay in business consistently.
Sometimes, the location could be a high-traffic area while the wrong customer demographic is targeted. For instance, if you set up a high-end steakhouse in a location where people prefer affordable and quick meals, it’ll be difficult to get consistent patronage.
Financial missteps
Many owners launch their ventures unprepared, as they tend to underestimate the costs involved with setting up their business. The startup costs may end up exceeding the set budget, creating financial strain and cash flow issues.
In addition, it’s common for new restaurants to underprice the items on their menu to attract customers, leading to unsustainable profit margins.
Resistance to trends
The restaurant industry is quite competitive, and resistance to adopting new trends can lead to failure.
Diners expect nothing short of convenience. As a result, a restaurant that fails to provide modern amenities like an online menu ordering system or reliable delivery can lose customers to competitors.
Being in tune with the changing consumer preferences is vital. For instance, the demand for plant-based and vegetarian dishes is on the rise, and not catering to these needs could lead customers to seek such services elsewhere.
Operational Issues
When the service is slow or wait times are not properly managed, diners may leave the restaurant unsatisfied, reducing return traffic.
An inability to manage stock levels is another reason often cited for the industry’s survival rates. Running out of key ingredients or over-ordering leads to missed sales opportunities or wastage.
Management Gaps
Poor leadership can lead to poor service and inefficiency, which in turn affects the business’s performance. Where roles are not clearly defined, and there are management inconsistencies, there will be problems with staff turnover and the work culture, which can be just as damaging.
Effective management strategies to reduce failure risk
Here are some management strategies you can employ to promote success based on the current restaurant failure causes analysis:
Business planning
To set the foundation for success, you should develop a strong business plan before launch. This should define the restaurant’s concept, target audience, and unique selling point.
Developing a strong concept will require market research—studying the market, analyzing competitors, and understanding customer preferences. This will save you from making costly mistakes as your offerings will be tailored to the diners or guests.
Based on your research, you can then create an aligned workflow for food preparation, service, and inventory management. The plan will also serve as a reference for all staff to ensure efforts are geared towards the business’s goals and objectives.
It is important also to include contingency measures in your plan as unexpected challenges can arise. Be sure to plan for supply chain disruptions or economic downturns so that there is a system in place to fall back on and allow for resilience in tough times.
Financial management
Every expense, from rent and utilities to food costs and staff salaries, must be tracked and documented. This will allow for the setting of realistic budgets to avoid overspending and ensure efficient resource allocation.
Maintaining a reserve for the running of the restaurant is also important as cash inflow can fluctuate, which could disrupt operations, especially in lean periods. Also, doing a financial audit regularly can help you identify issues early on and make the needed adjustments.
Adaptation and innovation
Your approach and offerings must remain flexible and adaptable to stand the test of time. Consumer preferences are ever changing, and keying into these trends early often pays off.
This can be the kind of dishes in demand, the way they want to be served, the use of technology to improve the experience, or the level of customer support that is appreciated. It’s all about listening and staying open to new ideas and growth opportunities.
How restaurants are using online menu ordering systems to reduce risk of failure
There’s been a growing adoption of online menu ordering systems to improve diners’ experiences and boost operational efficiency.
Customers can place their orders at their convenience, and this automated order-taking process minimizes errors and speeds up service.
It helps eliminate common issues highlighted in business failure statistics, such as slow service and mixed orders, improving customer satisfaction rate.
Low profitability, another common pitfall leading to the current business closure rate, can be avoided with the data obtained from menu systems.
Details like peak ordering times, customer preferences, and best-selling items can then be harnessed to make data-driven decisions to improve efficiency and profitability.
Learn the numbers: Your key to restaurant success
Understanding the challenges leading to the restaurant failure rate statistics will better equip you to structure your business for success.
Paying attention to key factors like financial management, market adaptability, and operational inefficiency you can significantly reduce failure risks.
Additionally, adopting tools like an online menu ordering system will enable you to make strategic decisions while giving you a competitive edge.
