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October 26, 2018 7 Reasons New Restaurants Fail (How to Succeed Instead)

restaurant failure

Starting a restaurant? A healthy fear of restaurant failure isn’t a bad thing. But no need to panic. The latest research found that only 17% of new restaurants fail in the first year. Instead of focusing on how to survive, learn to thrive. Let this list of 7 reasons for restaurant failure – and how to avoid them – be your guide.

1) The Fail: Poor Planning

You know the saying. Fail to plan, plan to fail. To prepare for success and reduce the risk of restaurant failure, start with a business plan for opening a new restaurant. As you write your plan, pay close attention to these 3 critical variables.

  • Wrong Location: The #1 Reason for Restaurant Failure

Experts agree, the most common reason for restaurant failure is choosing a bad location. To find the perfect place, look for spots with plentiful foot and vehicle traffic. What’s nearby? A college campus or office building with potential customers? Dig deep. What business was there before? Were they victims of restaurant failure?

  • Customer-Focused Concept and Name

Reality is your friend. You may dream of opening a fancy French restaurant. But if you’re in a blue-collar community, that concept is ripe for restaurant failure. Use these steps to select a successful concept:

  1. First, do a demographic analysis. Who lives in a 10-mile radius of your restaurant? Middle class families or trendy young professionals? More seniors or singles? Are there seasonal customers?
  2. Build your restaurant concept around the customers identified in the first step. For example, a bistro with global flavors (and a large bar area for socializing) would be ideal if catering to a younger crowd with adventurous palates. Your concept should also be unique and different from other restaurants in town.
  3. Select a name that describes your concept. Do your homework to ensure the name isn’t trademarked or could be confused with a competitor.
  • Carefully Choose Core Technology

Another key to avoiding restaurant failure is starting with the right technology. You have an advantage over established restaurants. While they’re busy figuring out how to transition from an old POS system, you can start fresh with a more affordable, cloud-based POS. Today’s POS systems do more than process payments. They’re business management hubs. From staff schedules to inventory, loyalty programs to gift cards, options like Toast POS do it all – all in one place. You can even put the latest tech in the hands of your guests with customer-facing POS systems like tablet menus. Tablet Menus let guests order and securely pay on handheld tablets.

2) The Fail: 1-Star Food

Your intentions are good. The recipes are fantastic. But what ends up on a guest’s plate is a generous portion of restaurant failure. How does that happen? And how can you fix it?

  • Practice Menu Self-Restraint

Unless you’re aiming to be the next Cheesecake Factory, don’t overdo it on menu options. It’s a recipe for restaurant failure. When opening a restaurant, focus on doing a few dishes really well. Plus, research suggests that limiting menu options boosts sales: fine dining restaurants should offer 7-10 menu items per category. Casual concepts should stick to 6 per category.

  • Test Kitchen

In a Business Insider interview, Chef Robert Irvine of Restaurant Impossible recommends a simple approach to preventing restaurant failure due to bad food: “I insist on regular tastings before service to make sure that the quality of the product is top notch!” Before opening – or even if you’re already in business – host a weekly test kitchen session for friends who aren’t afraid to be brutally honest.

3) The Fail: Only Focusing on Food

Even with the best food in town, you’re still at risk for restaurant failure if you overlook everything else related to the guest experience. Of course, a good restaurant atmosphere and strong customer service is essential. But great restaurants focus on fun.

Providing in-venue entertainment adds value to every guest’s experience (and brings them back for more). As a new restaurant, offering entertainment can help you build crowds…fast. After all, everyone wants to go to the “it” spot with a lively social scene.

Most importantly, entertainment increases the chance of a guest returning. Building a base of repeat customers is the ultimate way to resist restaurant failure. Want proof that it pays to put fun on the menu? A Facebook Loyalty Study asked 14,000 adults to describe brands and businesses they love most. The number one word used was “quality.” Number two? “Fun.”

Simply hiring a band won’t save you from restaurant failure. Plan interactive entertainment like popular “paint and sip” events or open mic nights. Better yet, weave fun into every guest visit with tablet menus that double as a digital arcade with games for all ages. Guests can also compete in nationally scheduled trivia 7 days a week, 15 hours a day. You can even use tablet menus to host your own live trivia events.

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4) The Fail: No or Low Profits

Sorry to play Captain Obvious here, but the inability to turn a profit is a sign of potential restaurant failure. If your profit and loss (P&L) reports are more “L” than “P,” look to these areas for improvement.

  • Get a Grip on Inventory

Restaurant failure can happen when you spend more than you make. Along with labor, your food costs are your biggest expense. Smart restaurants watch their inventory like a hawk with a little help from inventory management systems like BevSpot.

At least weekly, they record vendor purchases – and then track every sprig of parsley served and every ounce of alcohol poured to come up with a metric known as cost of goods sold (COGS). The calculation is simple: (beginning inventory + purchased inventory) – final inventory.

By knowing your COGs, you can avoid costly mistakes (which lead to restaurant failure) like over-ordering and wasting unused or spoiled items.

  • Price for Profit

Another way to prevent restaurant failure? Price menu items for profit using the food cost formula. This ensures that you’re adding in a profit margin with every sale. Most experts recommend aiming for a 30-35% food cost percentage. To calculate your food cost percenage, prime cost, and more, use this free restaurant metrics calculator. Knowing your numbers is one of the best ways to ensure that restaurant failure is not in your future!

  • Smart Staffing

New restaurants tend to overstaff in an effort to cater to first-time guests. But that can back fire and trigger restaurant failure as labor costs spiral out of control. Jonathan Deutsch, PhD of Restaurant Express suggests that your labor costs stay within 25%-35% percent of total sales. To keep labor costs in check, but still provide top-notch service, tablet menus can help. Since patrons can send orders directly to the kitchen, waitstaff are freed up to cover more tables. It’s a win-win and way to build immunity against restaurant failure.

5) The Fail: Where are the Customers? (Spoiler Alert: Your Marketing is Missing the Mark)

During the first month you’re open, restaurant failure will seem impossible. You’ll likely be the talk of the town and enjoy free press coverage from your grand opening. But the honeymoon phase ends – and so does the initial customer rush. What can you do?

  • Just Say No

As soon as you open, expect to be bombarded by radio, TV and newspaper reps selling you advertising. If you say yes to every offer, say hello to restaurant failure. Learn to say no unless it fits into your marketing strategy (which you outlined when you wrote your business plan, right?).

  • The New Influencers

Get an edge on the competition by turning to the hottest trend in restaurant marketing: social influencers. You pay people with a large following on their own blog, Facebook page, or Instagram feed to talk up your new restaurant. Use www.BuzzSumo.com to find influencers near you. To ward off restaurant failure in the future, don’t just use influencer marketing when you open – keep it going year after year.

  • Target Practice

Savvy restaurants use targeted marketing to keep costs low and ensure high response rates. You should only pay for advertising that reaches the target demographic you outlined in the first section. The latest digital marketing tools like Facebook Ads and Google Ads empower you to target ads to your chosen demographic: by age, location, interests, and more.

A final note on marketing. It’s true that to make money, you have to spend it. But restaurant failure is often the result of mismanaged advertising budgets. Stick to your budget, invest in targeted marketing, and you’ll be good to go.

6) The Fail: One and Done Customers

New restaurants are often so focused on getting guests in the door that they overlook strategies to bring them back! Your goal: create an army of repeat customers to ward off any hint of restaurant failure. According to the Harvard Business Journal, increasing guest retention rates by just 5% can boost profits by up to 95%. On top of launching repeat events (like live trivia on tablet menus), you can bring ‘em back again and again with these tips:

  • Launch a Loyalty Program

No, not the plastic or paper-punch card. Use one of the 10 most popular restaurant loyalty programs that run on apps, or even something as simple as the guest’s phone number or email address.

  • Play Capture the Email

On opening night, your servers should be on a mission to provide great service – and collect emails from customers. To prevent restaurant failure, keep customers engaged and intrigued by sending regular emails promoting your menu, events, and special offers.

7) The Ultimate Fail: “I’m Not at Risk for Restaurant Failure”

When it comes to possible restaurant failure, ignorance is not bliss. Stay woke and watch your numbers. As soon as you open your doors, you should be ready to calculate those restaurant metrics mentioned earlier. Each week, run the numbers again to ensure you’re not at risk of restaurant failure.

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