Why Restaurants have the highest failure rate

Hi

I am new to this forum. I am a 23 year MBA from India into a very good paying job. Of late, I have become interested in starting my own restaurant. I got interested because I found it potentially one of the high success rate industries. One thing I found very important(of couse, there are far too many, but simplistically speaking)is location.

Once I have the ideal location, in my opinion, a restaurant should do well unless you do something terribly wrong. Maybe that is also the reason why so many celebrities out here in India have opened their own restaurant.

However, as I was reading through some threads in this forum, I found experienced people here advising all the time that restaurant is the industry with THE HIGHEST failure rate. I am not able to find out why.

Can people with experience in restaurants give me ideas about why you regard it that way.

Thanks

Adding to my previous question,

I also came across restaurant owners calling their industry competitive; something I am again confused about. In my opinion, restaurants are cool because they only have to fight with the 2-3 restaurants that are in teh same locality as your own(except when you are in a high footfall locality). Even with this competition, I had imagined that the restaurants will keep getting people because nobody wants to keep going to the same restaurant. People shall visit each of these restaurants once in a while..

As a customer, I demand good service. Exceptional food in a bad location (see Jake's Milwaukee or Doe's Eat Place Greenville) will still find me dining there. Indifferent or bad service will not see my return. I also think it helps to specialize and do one item better than anybody else. If you are going to serve Indian or Pakistani, become famous for the best naan or vegetarian or Goan or papadums and people will seek you out. A good dining experience will find folks telling people about it but a bad one will find them telling lots of people.

I most heartily agree with the above post. I have a favorite place my family has been going to for years. I tell everyone about the place. I also tell everone about my negative experiences as well. Yes, done some things and do them well. One peice of advice. If it ain't broke, don't fix it.

quote:

Originally posted by xoox

Hi

I am new to this forum. I am a 23 year MBA from India into a very good paying job. Of late, I have become interested in starting my own restaurant. I got interested because I found it potentially one of the high success rate industries. One thing I found very important(of couse, there are far too many, but simplistically speaking)is location.

Once I have the ideal location, in my opinion, a restaurant should do well unless you do something terribly wrong. Maybe that is also the reason why so many celebrities out here in India have opened their own restaurant.

However, as I was reading through some threads in this forum, I found experienced people here advising all the time that restaurant is the industry with THE HIGHEST failure rate. I am not able to find out why.

Can people with experience in restaurants give me ideas about why you regard it that way.

Thanks

I am surprised at you for asking this question about restaurant failures........... I am not a restaurant owner, but stop and think about the following :
---employees
---thief
---cooks not showing up or sick on the job
---vendors increasing pricing weekly after you just spent $3000 for new menus....
---insurance
---competition
---the right menu, the right prices, the right taste on everything
Hey buddy, I think you are crazy to think about opening a restaurant in this day and age.......
Waiters can kill your business in 1-2 months.
Never forget, if the help was as smart as you, then they would have their own restaurant, and not working for someone else.
Good Luck

quote:

Originally posted by ias61942


Never forget, if the help was as smart as you, then they would have their own restaurant, and not working for someone else.

I beg to differ.. The smart help works for someone! Why not receive a paycheck with set hours vs 18 hour days and all the headaches.

quote:

Originally posted by xoox
Hi However, as I was reading through some threads in this forum, I found experienced people here advising all the time that restaurant is the industry with THE HIGHEST failure rate. I am not able to find out why.

Read this post, it's on another forum but there are many people that post here and on the other forum as well.

www.foodservicei.com/forums/showthread.php?t=10212

Although there are many reasons why new businesses fail, the leading cause of failures within the first year of operations, particularly restaurants, is insufficient cash. New owners often underestimate the amount of capital that the businesss will require. A good lawyer and accountant are essential from the outset to help avoid this pitfall.

May be a cultural difference. Where are you thinking of opening a restaurant. State and Country.

quote:

Originally posted by ias61942

I am surprised at you for asking this question about restaurant failures........... I am not a restaurant owner, but stop and think about the following :
---employees
---thief
---cooks not showing up or sick on the job
---vendors increasing pricing weekly after you just spent $3000 for new menus....
---insurance
---competition
---the right menu, the right prices, the right taste on everything
Hey buddy, I think you are crazy to think about opening a restaurant in this day and age.......
Waiters can kill your business in 1-2 months.
Never forget, if the help was as smart as you, then they would have their own restaurant, and not working for someone else.
Good Luck

I'll throw in incompetent owners and managers. People with no or little restaurant experience that think they can do it.
I like culinary grads who use Daddy's cash to open a place. I can think of a few examples here, including my best friend.
Drugs or alcohol will hurt if either the help or management abuse it.

The only bad location is one where you cannot turn into the parking lot from the main street.

It is not competition that is a problem. I love it, as it makes you try harder to be the best. If you have other restaurants of the caliber of what you are selling, I feel that it actually enhances your location as a destination.
It helps to have good restaurants next to you as it makes it easy to borrow something when you run out of it in the middle of a rush.

As for xoox, do you get BBC TV in India? Watch 'Ramsey's Kitchen Nightmares' to see how many ways that running a restaurant can screw up. I've been in this business for over 30 years and I love it. You can find the episodes on the web too.

mark

Salty said it correct. Cash Flow is so important. Without it you will die. They have no idea as to the actual costs of running the place. Also if you dont use quality ingredients and cut corners you will fail. It must be Clean,Spotless, Food Served Hot, On Time, Bill brought timely, Staff must be Clean and attentive without being fake, Regular menu items must be consistant, Untinsels and Glasses must be spotess. If a customer doesnt like the taste of a particular item they will still return to try something else if the first item was prepared properly. Example: The balckened T-Bone was cooked to medium rare as asked but they did not like the spices. And maybe most of all the Customer must feel comfortable and appreciated. The minute you forget that the Customer signs the paycheck its over. And finally you must love the business. Yourself and Staff. Great help is almost impossible to find and even tougher to keep...Russ

The reasons for failure are as many and diverse as the types of cuisine that can be had.

Everybody wants to find lightning in a bottle as much as a good location...and that's just the beginning.

I think what one of the first hurdles any place faces is establishing a consistency of a quality product, which is effected by about everything mentioned already.
I think it's like that "getting all your ducks in a row" thing...so if you've ever been a duck herder, your way ahead of the game.

If a joint can weather the fine tuning process and start to gain a decent reputation (the all important "word of mouth"...and of course it is...look where we are) it's only over the first hump...gotta maintain that level and keep it interesting to keep 'em comin'.

To repeat what others have said already, cash flow is the biggest culprit of business failures of all types. It doesn't matter that your place is spotless, has great food, has great service, or great prices. If you can't generate enough cash flow to stay afloat you will be out of business.

If you're cash poor going in, chances are you'll never make it long enough to make it successful.

Everyone has made really salient comments. Let me make a few more, if I can.

1. If you own a restaurant, you are on stage so to speak. Serve someone a lousy meal and it gets around fast. Before you know it, you're done. So the pressure is tremendous to do a good job and who are you relying on to do this good job? Yourself? No, if that was the case we would not have so many failures. No, you have to rely on hourly workers and your wait staff (if you have one) to present you in the best light. If they don't care or don't have a vested interest or they're just waiting to get a better gig, you're in trouble.

2. Under capitalization...You better have enough money to hold you through the lean times in the beginning..Few plan this properly. Do not be deceived by intial success in the first few weeks. Everyone wants to try new..It fades fast.

3. Not realizing how many customers you need to support your restaurant. If you think about it, I come into your new place and absolutely love it. I tell others, too. But, how many times can I come back in say a month? I have other places I already love, too. So, I am sharing my love so to speak. You literally need thousands of people to know about your place, come into the place (better figure only 1 time a month to be safe) and tell others about it. You want to get the word out faster? It's called advertising and it's expensive and not nearly as effective as "word of mouth" or a great review.

This is the reason statistics say it takes 5 years to really know if a place will be a success. It takes that long to develop a sufficient customer base to support the restaurant unless it is a high traffic location. If it is, then you have huge rental costs so it's a half dozen one or the other.

4. Not knowing the business. Too many people don't even know their true costs. They do not know how to price out a menu properly. They do not understand portion control, etc. There is a lot more to this business than meets the eye. You have to be a good businessman.

5. Too many operators rely on others for their success. One should never create a menu for a chef you've hired. Unless, you can produce it yourself if he or she leaves! Big mistake made far too often. You have a friend or you meet a great chef and you hook up and decide you'll open a restaurant together. Better tie the chef down some way or you lose when he or she leaves. So, unless it's chef/owner, stick with basic stuff done well and done by anyone who can cook a lick.

I can go on and on, but I think you get the point. Keep it simple and you have a fighting chance. And oh, I totally diagree with the comments that location is a secondary issue to the success of a place. It is far too important, but that's the sad fact. You get what you pay for and location is critical.

Put you place on a great main street, but it is one way or one that requires you having do go down a block or two to make a u-turn to get to it, you're going to have problems. Put your place in a location with limited parking and you're going to have problems unless it's in a big city where everyone walks. Put it in a bad neighborhood where the rent is cheap, be prepared to wait it out for the neighborhood to change.

Is it any wonder that so many new independent operators, with great skills and ideas, still can't make it. It is a rough business. For every success you envy, there are far more failures. If you still insist on trying, why not get a good job in the business, learn everything you can while getting paid, and then take your shot.

Hi all

Really amazing and valuable comments out here. I read through each of them. I guess one reason why my impression about 'restaurant business' is different from what most of you think is probably because of where we stay.

I had a chat meanwhile with one of my friends who has been to US and he told me about the various regulations that the restaurants have to abide by including things like how far the kitchen should be away from the serving room, how the waiters serve, etc. He told me that starting a restaurant is indeed a difficult process governed by the Restaurant association there.

Luckily, as far as I know, we do not have so many stringent laws governing restaurant business. However, cash flow is an important factor as many of you have pointed out. I need to work upon this one..

By the way, I intend to also locate my restaurant close to a graduation college with residential students. I have been studying from one such place and I have observed that students tend to frequent these nearby restaurants quite a lot of times, irrespective of the cuisine getting 'boring'. We had 3 restaurants close to my institute campus and we friends used to frequent each of these so many times. I think it would be a nice plan..

@doggydaddy
yes, we have BBC out here. But I havent watched this particular programme as yet. Will check it out, thanks for the info :)

@All
This has been a real valuable thread. Please put in more thoughts as you get them. Thanks..

quote:

Originally posted by xoox
However, as I was reading through some threads in this forum, I found experienced people here advising all the time that restaurant is the industry with THE HIGHEST failure rate. I am not able to find out why.

Can people with experience in restaurants give me ideas about why you regard it that way.

Restaurants as a whole DO have a high failure rate in America. But you have to break out the information to do a proper analysis as to why. One thing to keep in mind, though, is that as a small business start-up, there are far more restaurants started than most other types of small business. That in itself lends to a statistically higher rate of failure than other business ventures.

Restaurants are not equal. There is far less failure with small Mom and Pop type shops than there is with multi-million dollar, multi investor and partner financed high concept restaurants. So, when you wish to properly analyze the failure rate in restaurants -- or foodservice business in general -- you need to look at the failure rate of the specific type of shop you wish to start.

You need to look at the characteristics of YOUR particular shop, and do a direct comparison with food businesses which share those same characteristics. You may find that the specific type of shop you plan to open actually has a very low risk of failure (everything else being equal) among the entire category of 'restaurants' in general.

Also, you must keep in mind that a food shop IS NOT ONLY competing against other restaurants...... it is competing against ALL food. Any place that provides food -- homes, grocery store delis, gas stations, convenience stores -- are also your competitors. You have to ask yourself just HOW you can drive the consumer to choose you amongst every other food choice.

Xoox,Ive been in the food bizz for the better part of 38 years.My Father started a small Italian restaurant many years ago,I grew up in it.He would have to put his retirement check in it every month to keep it going and pay the bills.He died four years ago this May.I wanted to keep the Family Bussiness going so I bought a small Diner off the Island and opened two years ago,I am closed now and in debt over my head.Why?See what Ias61942 had to say.But the main reason I failed was Simply I RAN OUT OF MONEY!Mind you I busted my butt for two years without a paycheck and then I had to buy food with my own money which I did not have and then the bills came and came.So unless you have an desire to work for nothing with little reward I dont reccomend owning a restaurant.I am now working for another place on the beach on the line and happy to be there.

The industry standard is that you will need to stay in business for at least 3 years before even thinking of making a profit.

Yes, you are all right about UNDER-CAPITALIZED !!! You need enough dough to carry you in shallow times, which could be 2-6 months......
I also don't believe it takes 5-years to make a profit. Yes, it sometimes takes 5-years to see if a certain type of business will make it or not, but if it didn't turn a profit in 2-years or less, then in my opinion, get the hell out and do something else.
I am in Sarasota and Maine in the summer, and 6 weeks ago, here in Sarasota a 5-GUYS HAMBURGER FRANCHISE OPENED. There has been a line out the door since opening. They have earned profit from week one.
Whats the secret ? Many reasons, but most important:
--the owner is in the store
--the quality is very good and must be maintained
--do not--I repeat--do not be overstaffed
--employees must be trained and maintained with being friendly, clean,
neat appearing, hard working, and reliable.
--don't change a recipe unless it begins to fail
--don't overcharge.... Undercharge if anything to get started.
--sell a product in demand which seems to be food.
I could go on and on, but I am sure you get the drift......
Don't open a pizza shop unless you have the best in town, at a fair price.
Hope I helped, great success to all, Irwin

Here is a good article about why new restaurants fail - http://www.hvs.com/Jump/?aid=3153

quote:

Originally posted by xoox
Hi The ideal location, in my opinion, a restaurant should do well unless you do something terribly wrong. Thanks

Kathryn Rem: A la carte - Corky's Ribs and BBQ closes
Published Sunday, March 16, 2008

CORKY’S RIBS AND BBQ, 3458 Freedom Drive, closed last weekend because of financial problems that owner Barry Hickman attributed to the March 2006 tornadoes that mowed down much of the Parkway Pointe strip mall.

“Our guest count feeds off the guest counts of the neighboring hotels, and when they closed for eight months (for repairs), we lost that business. We gave it some time after they reopened, but we never recovered.” Corky’s opened in July 2001.

Kind of a repeat, but have enough cash to live for a year or two and enough to be able to pay all the bills, personal and business. If you do everything perfectly and have a good location, still count on at least a year to start breaking even.

I opened my hot dog joint in an indoor arcade with probably thousands of people coming in every day. When I first saw the crowds, I was sure I'd be doing $1,000 per day right from the start. Bad assumption. People are creatures of habit and take a long time to try out a new joint. There's a Quizno's 2 doors away that has lines of 15 or more people lined up for lunch. I figured that after we opened, those line-dwellers would try us out so as to not wait so long for their food. Nope, they still waited at Quizno's because that's where they were used to going.

We just finished our first year last month, and like overnight, our weekly gross has more than doubled. People are finally venturing in after us being there a year.

Looks like you shall be a success story pretty soon kensandyeggo. Congrats!

I would like to ask one thing however. Didn't you try out some kind of market penetration strategy. Like for example, if you find that a chunk of the visitors to the arcade were from the nearby university,then you could be offering an exclusive 5% discount for the uni students. The word spreads like fire right!?

Almost all of the arcade's customers come from Wachovia Bank headquarters across the street, from Duke Energy Co. and Bank of America a couple blocks away.

We found that if you do too many coupons or specials, you get a lot of "mooches" that only come in for the "specials" and don't order anything else. We knew where the customers come from and a "Wachovia" discount isn't really necessary. We found that dcent food (Vienna) and killing them with friendliness and courtesy have paid off. Many people have told us that they come to us because of the friendly atmosphere. Oh, cleanliness pays off alos. Our health scores for our 4 inspections so far have been 102, 102, 101 and a 101 earned yesterday. People really notice your health score.

I forgot to add. I was actually asking about your initial days when the Wachovia bank guys would be rather visiting Quizno than your shop. A discount plus a smaller queue at your place would mean people would have started taking to your restaurant even quicker and you could have doubled your gross even faster..

Poor or too optimisitic planning
Undercapitalized
Inferior food and service

Despite all that, a few more would survive if they stopped paying crazy these crazy leases.

Hear in Orlando, you'll see these high rent locations flip every 6-12 month, because the rent is simply way to high, usually 5-10% of the owners most optimistic projections.

We passed out hundreds and hundreds of coupons. Same advice: have enough cash to last a year or two.

Do all these reasons apply to chain restaurants? All the national chain restaurants in my area are always packed on weekends. 45-60 min wait no matter what place it is.

I'm talking about names like
Red Lobster
Texas Roadhouse
Austin's
TGIF
Olive Garden
Outback Steakhouse
Applebees
etc

I can only think of 2 that close(chi chi's and Lonestar), but I forget why they closed.