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Why Do Restaurants Fail? Avoid These Common Mistakes

It’s not easy to succeed in the restaurant business. Why do restaurants fail? According to a study by Ohio State University, 60% of restaurants close in their first year and 80% within five years.

The first thing you need to start a restaurant is the perfect location and lots of capital. Staying in business requires leadership skills and experienced staff members who can cook delicious food.

Restaurants fail for several reasons, but most are preventable. We spoke with restaurant owners and experts to determine the leading causes of failure and how restaurants can overcome them.

Prevention is always better than a cure. There are ways to prevent these issues from happening in the first place, so put some work into it.



Lack of Vision

According to Cornell University, leadership is the critical factor in whether or not a restaurant will be successful. The study found that restaurants close because they lack vision and direction.

A restaurant’s mission statement and vision should center every decision. It can guide branding, inspire customer service efforts, and create a staff culture.

How to succeed:

To make sound business decisions, you need to define your restaurant’s mission statement. This can be done by asking yourself why you want to open a restaurant.

If you are trying to open a taco restaurant because of the money, stop right there and get an investment banking job.

If you want to open a taco restaurant and share the food, culture, and feeling of home that you grew up in Mexico City, proceed.

Your mission statement will inspire your menu, your restaurant’s values, even your interior design. A restaurant is only successful if the owner has a clear vision and mission for their business.


Not Enough Industry Experience

New restaurateurs often make the mistake of assuming that because they are great cooks, they will be excellent restaurant owners.

The cooking skills that make you a great chef are not the same as those needed to succeed in restaurant ownership. It would help if you had years of experience working with numbers before opening your place.

When running a restaurant, it’s not just about serving delicious food. It would be best to make sure that the prices on your menu items cover costs such as labor and overhead expenses.

It is vital to have diverse skills on your team when you own and operate a restaurant. If one person does not possess all the necessary skill sets, succeeding will be challenging.


Not Enough Operating Capital

The survey from RestaurantOwner.com found that the median cost of opening a restaurant is $375,500.

Starting a restaurant is expensive. Many owners have opened beautiful spaces with gorgeous bathrooms and brand new appliances but then find themselves in the position of not having enough sales to keep up.

One of the mistakes new restaurant owners make is to focus on making their establishment perfect in appearance without thinking about what happens after it opens. Not every restaurant will be an immediate hit, and entrepreneurs need enough operational capital so that they can keep the lights on and doors open until customers come.

How to succeed:

Opening a restaurant is not cheap. From rent, renovations, and kitchen equipment to labor, marketing, and food expenditures, opening up a shop can be expensive.

If you open a restaurant, your location will determine how many customers come in and how much revenue is made per service. It also determines the number of staff needed to run the business and utilities like heating.



Poor Location

Why do restaurants fail? One of the leading causes is a poor location. Aside from foot traffic, the place can impact how much it costs to operate.

When you consider the cost of commercial space, permits, and inspections, location is crucial in determining your restaurant’s future profitability.

How to succeed: 

Tom Scarda, CEO of The Franchise Academy, says that restaurateurs should always research a location before opening up shop. It’s the most important decision they can make because it will affect their business for years to come. Assess a site based on:

  • Clientele
  • Foot traffic
  • Competitors
  • Accessibility
  • Ambiance

When you choose a location for your restaurant, make sure that it is accessible and attractive to the people who are likely to visit. If there’s not enough foot traffic in this area of town, then no one will come.

Next, you need to crunch some numbers and determine how many customers the space can comfortably seat. You also want to calculate your cost per service to know what amount of revenue is needed for it to cover all expenses.


Not Staying on Top of Business Numbers

A restaurant may be successful, but it is essential to know what statistics mean and how they affect the business. If a restaurateur doesn’t understand profit margins or payroll reports, they might spend more than necessary, hurting their profits.

How to succeed: 

You should review your point-of-sale system’s reports regularly. These can help you decide how to better reach your goals instead of guessing and then finding out the data later.

If numbers are not your thing, hire someone with expertise to help you out. A passion for cooking and baking is excellent, but it won’t get the job done without intelligent business decisions.


Ineffective Menu Pricing and Planning 

One-third of a restaurant’s revenue is allocated for the cost of goods sold (COGS), one-third goes towards labor expenses, and the rest goes to overhead costs such as rent and utility bills.

Once these are paid, whatever is left is the profit.

Did you know that the average restaurant only makes between 2% to 6% profit? Click To Tweet

Food costs and menu pricing are significant for a restaurant’s success.

How to succeed: 

A restaurant needs to cover all of its expenses and still make money to be profitable. To do that, it will need to crunch some numbers.

We have published articles to help you find the best salespeople:

  • Calculate your ideal food cost percentage.
  • Audit your menu item prices.
  • Reprice your menu items to ensure you’re making a profit on each sale.

Reducing food waste also helps your bottom line. Using the same ingredients in multiple dishes will help reduce losses and save money.


Failing to Adapt

You may have inherited a restaurant that has been in the family for two generations, but it is struggling to attract new customers. Restaurants are doomed if they don’t adapt to changes, and their business is based on trends.

How to succeed: 

If you’re looking to update your restaurant, here are some ways to do it:

  • Get online or get left behind.
  • Update your menu.
  • Embrace technology.

To keep your restaurant relevant, you must stay open-minded and flexible in the face of change.


Being Too Trendy

When trends like froyo, cupcakes, and matcha become popular, restaurants often hop on the bandwagon by opening up their own. When a movement becomes over saturated in an area with plenty of competition, your restaurant must find ways to stand out from all other competitors.

How to succeed: 

Do your research and make sure you aren’t getting into a business that has already been saturated with other similar concepts.

If you want to be a trendsetter, do not just rely on marketing and advertising. You need the best people for your team to succeed.


High Staff Turnover Rates

The high turnover rate in restaurants is not surprising, given that three out of five restaurateurs cite hiring as one of the main struggles.

It’s hard to find and keep experienced restaurant staff. They are often paid less than they deserve, see their jobs as temporary rather than long-term careers, and there is never a shortage of other restaurants looking for workers.

How to succeed:

Ensuring that your employees feel like they have a future at the restaurant is crucial to keeping them around. Offer competitive wages and opportunities for professional development to ensure you’ve found the right team.


Inconsistent Food and Service

A restaurant’s reputation must be strong. If people trust the reviews of others, they will know whether or not to try your restaurant.

Consistently excellent service and food are the keys to positive reviews. There is no shortcut to creating a successful restaurant, but employees can be invested in their work culture by fostering an environment where they feel valued for what they do.

How to succeed: 

To get more people to book online, try responding to negative reviews. ReviewTrackers found that 44.6% of consumers are more likely to visit a business after seeing an active response.

The wrong way to respond is by getting angry or defensive. The right way is to be humble and offers an apology.

Next, you want to promote your positive reviews because they act as social proof that people love the food and service at your restaurant. This will help first-time visitors feel confident in their decision to come.

Use your online reviews to show that you are an excellent company to get more business. You can do this by contacting permission from the reviewer before using their quote on your website or social media page.


Not Enough Repeat Customers

Restaurants need to focus on repeat business and new customers, but they should be sure that their food is good enough for people to come back. Positive reviews help with this.
While it is essential to have a consistent menu and excellent service, offering incentives for repeat customers and a loyalty program can help get people to come back.
According to global management consulting firm Bain & Company, as little as a 5% increase in repeat business can lead to an upsurge of 75%.
Restaurants can incentivize repeat visits by offering loyalty programs. Restaurateurs can personalize offers for these customers, such as birthday specials sent via email.
There are many ways to encourage repeat customers. One way is by creating a loyalty program that rewards returning visitors with discounts and exclusive offers.


Mixing Family and Business

The family-owned businesses in the United States account for 64% of GDP. But when a family gets too involved, restaurants can fall apart.

According to a study, successful restaurant owners were single or divorced and had a family life outside of work. This allowed them to balance their personal lives with running a business.

How to succeed: 

Hire help! 

It can be difficult for families to hand over control and trust other people with the business for families who own restaurants. However, this is necessary for success because your restaurant will not last if you don’t delegate responsibility.

With the right staff in place, you can work on projects to grow your restaurant. If someone else is taking care of day-to-day operations at home, they can come back refreshed and perform better on their job.



What Percentage of Restaurants Fail?

One study from Cornell’s School of Hospitality found that 30% of all restaurants go out of business within the first year. And 7 out of 10 close after three to five years of operations.

Compared to corporate-owned chains, independently owned restaurants have a much higher restaurant failure rate. Click To Tweet

It’s tough to make it in the restaurant business, but these statistics show that once a restaurant is open for more than five years and has some traction with customers, they are likely to stay around for at least ten more.

So try to get past the first five years. The next few years should go by faster than ever before, and if you survive this time, then any other problems in your business will seem like a walk in the park.


How Long Do Restaurants last?

Some restaurants close in a year, while others last for generations. The average lifespan of a restaurant is 8 to 10 years.


So Why Do Restaurants Fail?

Restaurants are hard to make it in. There is a lot of competition, high staff turnover rates, and low-profit margins, which leads most restaurants to fail within the first year they open.

As a restaurateur, you have the opportunity to learn from others’ mistakes. Avoid these common restaurant pitfalls that will cause your business to fail.