There’s an oft-cited statistic on restaurant failure that’s been floating around the industry for several years – namely, that 90 percent of restaurants fail in their first year of operation. This statistic has been boldly claimed on television by celebrity chefs and is often touted as common knowledge. But think about this for a second – 9 out of 10 restaurants fail in their first year? Restaurants are risky ventures, but with those numbers, you’d have to be insane to want to get into the food business.
A 2005 Cornell study by H.G. Parsa and colleagues debunked this statistic as a myth. Simulations in the study determined that at a 90 percent failure rate within one year of opening, the restaurant business would be shrinking, not growing, as several other studies (including a recent LRS-sponsored report) have concluded.
Despite this good news, restaurants are a risky venture. Here, we have some of the most common reasons restaurants end up shutting their doors:
Location means more than just the building where the restaurant sets up, but this is important. Your restaurant should be easily accessible and visible to both road and foot traffic. Other factors go into location as well. The number and the density of competitors in the surrounding area can affect a new restaurant’s potential for business. The busier the area, the more potential customers you may have, but the stiffer the competition as well. Consider also the culture of the neighborhood. Does the cuisine you serve have a market there?
- According to Parsa’s 2005 study, restaurant failure rates are higher in areas with higher concentrations of restaurants.
Poor customer service
First impressions are important. As new restaurant owners iron out the kinks, customer service missteps can cost them repeat business. A bad customer experience will slow the growth of your customer base, so delivering a positive customer experience and continuously improving is crucial. Aspects of customer service include speed, attentiveness of staff, and a clean, welcoming environment.
- Dissatisfied customers spread the word: 13 percent of unhappy customers tell more than 20 people about their experience.
- Technology can assist with speedy customer service, data collection, and reservations. Restaurants need to adapt with the times. One example? The Table Tracker, which helps food runners locate the order and the customer’s table to deliver food quickly.
Poor food quality
This point should be painfully obvious to any restaurateur, but we’ve all eaten at a restaurant where the food is awful. How does this happen? There are a number of possibilities: management ignorance or apathy, lack of quality control, and a reliance on standard operating procedure (the assembly-line style) without the constant striving for improvement. These are all potential reasons. If your food isn’t satisfying, there isn’t much reason for anyone to visit your business.
- Poor quality control is a common factor in restaurant failure.
Poor marketing management
In Parsa’s 2005 study, there were several interviews conducted with both successful restaurant owners and failed restaurant owners. There was a common theme found in many of the interviews. Marketing. The majority of the successful owners named marketing knowledge as one of the top reasons for the success of their business, while failed owners blamed the superior marketing of their competitors as a top reason for failure.
- According torestaurants.com, effective marketing and advertising is crucial to building a good reputation for a restaurant.
Starting a new business, especially one in an industry as competitive as food service, is an incredibly risky venture. But with quality food and customer service, a good location, and effective management, the odds for success will be much higher.
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Jason Barge is a marketing manager at LRS and an expert in communications for the hospitality industry.