Opening and running a successful restaurant requires a great deal of capital (see: the cost to open a bar) and comes with a lot of risks, even for the top 25 Michelin Star restaurants. This is part of an even larger hospitality industry trend.
But that doesn't mean you should just give up!
By learning the pitfalls of those that came before you, and creating a strong restaurant business plan, you can make the right decisions to help your business grow.
To help, we've put together a guide on restaurant failure and the ways you can avoid it yourself and stay on the path to restaurant or bar profitability.
What Percentage of Restaurants Fail? Restaurant Success Rate
Approximately 60% of restaurants fail within the first year of operation and 80% fail within the first five years.
These numbers may seem off-putting, but the remaining 20% of restaurants go on to find long-term growth and success.
Why Do Restaurants Fail?
There are many reasons that a restaurant may fail, but here are the 6 most common reasons:
1. Bad location. There are many things to take into account when choosing a location. You will need ample, accessible parking, your restaurant needs to be easy to find, and your location needs to serve an active population. If your restaurant doesn't meet the needs of your target market, you'll find it difficult to increase restaurant sales and stay open.
2. Inexperience. Opening a restaurant or bar without experience or guidance is a huge mistake. Learning from the ground up is the only way to learn the ins and outs of the entirety of a restaurant. If you don't know how to open a bar, you need to learn quickly. Before opening a restaurant, an owner needs a good understanding of all that goes into the operation, to the best of his ability. You can start by reading some of the best wine books, best bartending books, our guide to becoming a sommelier, and our guide to successful bar management. Looking into bar equipment layout tips is helpful, too.
3. Inflated costs. It takes a lot of money to keep a restaurant running. There's food cost, liquor cost, labor cost, overhead costs, prime cost, and more. These costs add up quickly, and many owners can become overwhelmed trying to find ways to reduce costs in a restaurant.
4. Improper pricing. If you don’t know how to price liquor for your bar, you won't last long. Performing menu engineering using psychological pricing can limit this issue and help your kitchen and bartenders focus on the best items. You’ll also need to know how to choose the right wine bottle price, beer pricing for bars, and set a price for wine by the glass.
5. Lack of marketing. Many owners fail to market enough or market appropriately. A common misconception is that restaurant marketing is expensive. However, many marketing initiatives can be done through low budget or no budget options. Running bar promotions, restaurant SEO, trying new happy hour ideas, or
6. Disorganization. Without an onsite manager, small restaurants can’t pay attention to the customers they feed, popular items ordered, most profitable dishes, or any inventory loss. One way to mitigate these issues is by using a perpetual inventory system like BinWise Pro. Inventory is tracked in real-time, so you know what's on hand. There are also many integrated reports that show everything from each dish's profit margin to that month's cost of goods sold. You should also create a standard bar opening and closing checklist, bar sop guide, restaurant cleaning checklist, and a set of standardized recipes.
4 Signs of a Failing Restaurant
If you're worried that your restaurant may be failing, here are 4 signs to keep an eye out for:
1. Increased turnover rate. One of the unfortunate aspects of the restaurant industry is a high turnover rate in employment. Try establishing a very solid management structure that your employees can follow even in your absence. Make sure they understand their responsibilities as well as everyone else’s roles. Make a comprehensive list of bar manager duties, bartender duties, and a bartender duties checklist, so there's no confusion.
2. Absentee leadership. An owner typically puts in the work to create a concept, hire a staff, design a space, implement systems and allocate money. Especially in the first year of operation, it is crucial for an owner to be at the restaurant. Some owners think that when the doors open, the restaurant can run on autopilot. That thinking can lead to unhappy staff, falling profits, and eventually closure. BinWise Pro can automate many aspects of inventory management (like par level) and cost calculations, and it’s even cloud-based. That means managers can check their performance from anywhere at any time. Don’t worry, there's plenty left for the leadership to do.
3. Worsening food quality. This seems like a no-brainer, but it is an ever-present problem in failed restaurants. As an owner, you need to taste your food regularly. This is the surest way to keep up with the quality. Additionally, when doing your food costing, make sure you are not sacrificing quality for price. Your staff won't know how to upsell food and drinks that aren't satisfying to your customers. You can look to some of the best wine lists for inspiration.
4. Menu issues. A good menu requires considering how many items are too much versus offering too little. It’s best to have a smaller number of dishes, but making them really well. Typically, longer menus take longer to order from, require more ingredients, thus making you have to buy more ingredients. You can also get with the times and invest in a QR code menu through SproutQR to instill confidence in customers in the cleanliness of your business.
How to Sell a Failing Restaurant
Selling a failing restaurant is difficult, but not impossible. The best way to do this is by contacting a restaurant broker. These businesses specialize in connecting restaurant owners with prospective buyers and know the ins and outs of restaurant sales.
After reviewing your restaurant balance sheet and other financial information, the broker will pick one of two options. Your restaurant may be sold to a chain or prospective restaurateur. Or, the more likely scenario is that you will sell off assets separately. This includes equipment, supplies, and the building if you own it.
20 Biggest Failed Restaurant Chains
Restaurant failure isn't just the providence of small business owners, many large franchises have also been forced to close.
Here are the 20 biggest failed restaurant chains:
- Planet Hollywood. This themed restaurant chain backed by a number of big-name celebrities saw massive growth during the 1990s. Due to poor performance, only seven locations remain today.
- Chi-Chi's. Once the premier name in the Mexican food genre, poor management and an outbreak of Hepatitis A led to bankruptcy in 2004.
- Official All Star Café. A former subsidiary of Planet Hollywood with major backing from professional athletes, Official All-Star Café fell when its parent company filed for bankruptcy.
- Burger Chef. An original competitor to the likes of McDonald's, Burger Chef finally ceased restaurant operations in 1996 due to overaggressive expansion.
- Sambo's. This chain grew to more than 1,000 locations in 1979 but was bankrupt less than two years later. The poorly chosen name of the restaurant led to protests and eventual closure.
- Kenny Rogers Roasters. In 1991, this fried chicken chain was founded by a former KFC CEO and famous country musician Kenny Rogers. Intense competition led to the closure of all American locations by 2008.
- Howard Johnson's. Once the largest restaurant chain in the U.S., Howard Johnson's changed ownership a number of times. Each sale lowered the number of locations and dwindled down to a single restaurant in 2016.
- Bennigan's. This formerly popular mid-range casual restaurant failed due to poor leadership. Menus, concept, and quality never changed to keep up with the times.
- Bob's Big Boy. This Southern California chain had more than 240 locations in 1989. Today, only five remain. Changes in ownership are the likely cause.
- Charlie Brown's Steakhouse. This regional chain out of New Jersey spread too quickly in the 80s and 90s. Today only one location remains.
- Henry's Hamburgers. Riding on the coattails of McDonald's, there were more than 200 Henry's locations in the 1960s. Failure to keep up with times and a meat sourcing scandal resulted in only one remaining location.
- Lum's. This Florida-based hot dog chain grew to more than 400 locations thanks to its unique concept. After being acquired by KFC, the chain eventually closed in 2009.
- Ponderosa Steakhouse and Bonanza Steakhouse. In the mid-1980s, hundreds of these steakhouses could be found across the country. Many changes in ownership led to this number being only 30 today.
- White Tower. A cheap attempt to ride the popularity of White Castle, White Tower grew to a major franchise over 30 years. A lawsuit and failure to change with the times lead to its demise.
- Red Barn. Housed in distinctive red barns, this chain grew to more than 400 locations in the 60s and 70s. Stiff competition from larger chains like McDonald's and Burger King pushed them out of business.
- Steak and Ale. This casual steakhouse chain once had more than 280 locations in the 80s. Changes in ownership led to eventual bankruptcy in 2008.
- ESPN Zone. More of a sports bar than a restaurant, ESPN Zone missed the mark as a restaurant. By 2010, parent company Disney had enough.
- Boston Sea Party. This wonderfully named seafood restaurant emerged around major convention centers in the 1970s. By 2000, they couldn't afford to remain open.
- Pup 'N' Taco. An oddly-named restaurant that sold tacos and hot dogs, Pup 'N' Taco was eventually beaten by Taco Bell. Today, three locations remain.
- Wimpy Grills. Named after the Popeye character that loves hamburgers, this chain once had more than 1,500 locations worldwide. The death of the founder and subsequent change in ownership led to the closure of all U.S. locations.
Frequently Asked Questions About Why Do Restaurants Fail
What Percentage of Restaurants are Successful?
The National Restaurant Association estimates a 20% success rate for all restaurants. About 60% of restaurants fail in their first year of operation, and 80% fail within 5 years of opening.
What Problems Do Restaurants Have?
Here are 5 common restaurant problems:
1- Inventory shrinkage and waste.
2- High labor costs.
3- High employee turnover rate.
4- Poor customer service.
5- Heavy competition in the local market.
What Do Restaurant Owners Struggle with?
Increasing business, retaining customers, staffing, managing and restocking inventory, and technology are the main issues restaurant owners struggle with.
Failure Is a State of Mind
Running a restaurant isn't easy, but avoiding failure is made a lot easier by putting in the effort. Put in the time to understand the inner workings of your business and the needs of your customers. You'll be more capable of reacting quickly and correctly to any issues that arise.
For more information on running a successful restaurant, check out some restaurant management books or read about how to perform a SWOT analysis for a restaurant and use a restaurant financial audit checklist.
If profit margins, inventory management, or sales tracking are a problem for your business, BinWise Pro is the solution. It eliminates pesky manual entry and paperwork saving up to 85% of your time.
Time you can spend growing your sales and mastering your business.