Top 10 Reasons Why Restaurants Fail Within The First Year Of Operations

According to a report, 60% of restaurants shut down within the first year of operations, and up to 80% of restaurants close their operations in the first five years. No matter how lucrative the restaurant business seems from afar, running a restaurant business is an arduous task. These figures may make you think, ‘Why Restaurants Fail’ that too ever so often. Lack of proper information about what the industry entails ultimately leads restaurants to their failure. In this scenario, information is the key area you need to focus on. Most restaurateurs do not even know that they are doing something wrong until it is too late.

The main reason that the mortality rate of restaurants is so high today is that the owners are not looking at the numbers. Why are customers not coming? Why are sales down? All the answers lie in the dashboard of your POS system

Pravesh Pandey
Chief Instigator & Belief Officer
BYG Brewski

We don’t mean to discourage aspiring restaurateurs out there, or to lower the morale of the current ones, but we do believe that prevention is better than cure. So, here we have listed, in no particular order, the top ten reasons why restaurants fail, and the ways to remedy the problem.

Top Reasons Why Restaurants Fail

Having discussed the fact that restaurateurs in the industry are making mistakes they might not even be conscious of, there is still an impending question:- ‘What are the top reasons why Restaurants Fail?’

Well, there are multiple reasons why restaurants fail. Poor location, high rentals, and your inexperience can push your restaurant cost up because of which your restaurant can end up failing. Lack of owner’s involvement, internal thefts, and poor allocation of resources are reasons which are often overlooked when considering why restaurants fail. Poor staff handling, lack of reporting, and poor marketing also top the charts when it comes to reasons for restaurant failure. In short, the top reasons why restaurants fail are:-

• Pilferage and Thefts: Internal thefts and staff embezzlement create gaps in which restaurant owners can track only a little too late.
• Poor Location and High Rentals: You may be located too far from your target audience, or your ideal location may be draining your pockets dry. Either way, it means fewer profits, running into losses, and ultimately shutting down.
• Poor Customer Experience: If your customers are not enjoying coming to your restaurant, it is only a matter of time before they stop coming to you altogether. Know how you can deliver stellar customer service.
• Your Inexperience: Your inexperience can lead to mistakes that can cost you more than a couple of customers.
• Poor Staff Management: If you are unable to manage your staff, it will lead to a bad customer experience, an increase in costs, and overall dysfunction. Poor staff management also leads to out-of-control labor costs, which is one of the biggest expenses in the restaurant business. Here’s how you can handle your staff exceptionally well.
• Poor Allocation Of Resources: If you do not give enough attention to how many resources you need to employ in different segments of your restaurant, it will lead to mismanagement and losses.
• Complex Menu: A long all-encompassing menu may sound like the right thing for your restaurant, but it will only confuse your customers and hinder profits. Know how you can craft that exquisite menu for your restaurant.
• No Involvement Of The Owner: If you leave all your operations to your staff, your restaurant will not be able to grow and will ultimately shut down.
• No reporting and Analysis: If you do not study your restaurant performance and have no tool that can tell you what your performance stats look like, you will never know what is working and what is not working, which will ultimately cause a shutdown.
• No Marketing: Marketing your restaurant is as essential as preparing good food or giving a great customer experience. Failure to market your restaurant right will make you lose out on customers. This is a massive blunder that most restaurateurs make and is one of the biggest reasons why most restaurants fail.

Now that you know the most common reasons why restaurants fail, let’s dive in further, and understand how they drive restaurants to failure and what you can do to avoid them.

1. Pilferage And Thefts

First on the list of the top reasons why restaurants fail is due to pilferage and thefts. Often restaurateurs don’t even realize that inside thefts and pilferage are plundering their restaurant. On-counter thefts and inventory thefts take many forms and can bleed the restaurant dry, becoming the top reason why restaurants fail.

An average fine-dine restaurant can lose up to five crores in five years due to pilferage and thefts. Internal thefts add to food costs of the restaurant, and so the restaurateur is suffering the same amount two times over once when the employee steals it and next when he/she has to cover up for the loss from the restaurant’s profits. According to a survey by the National Restaurant Association, theft represents an average of 4% of a restaurant’s food costs.

How To Avoid

Use a sophisticated POS with robust inventory management and an anti-theft system to keep a complete check on all business transactions and inventory. Assign unique roles and permissions for each job to keep a check on thefts.

Ask how you can control the thefts happening at your restaurant here.

2. Poor Location & High Rentals 

The location is considered to be a prime factor that can either make or break your restaurant. While a poor location can turn fatal for your restaurant, by not generating enough customer footfall, it is crucial not to overspend. Often good locations come at a high price, and restaurants are not able to cover their costs.

How To Avoid

Choose a location based on your restaurant’s format. The rent of your location must never exceed 10% of your total revenues. This is one primary reason why restaurants fail. Your location must be close to your target audience. If a location seems nice but has no competition around, don’t get tempted, check why there is no other restaurant similar to yours in such a good location. Take reviews and references from multiple sources and visit the market for your location a couple of times to understand the spending habits of people frequenting the market.

3. Poor Customer Experience

Poor customer experience can almost certainly guarantee that the customer will not return and is often one of the main reasons why restaurants fail. They may also post bad reviews of your restaurant on social media and restaurant review sites, which can be extremely damaging to the restaurant if not taken care of immediately.

Poor customer experience can comprise of anything that makes the customer unhappy. From rude and hostile waiters and servers to a delay or mix-up in the orders. A weird smell that hangs in the air or too loud music that doesn’t go with the theme can also deteriorate the customer experience, and add to the reasons why restaurants fail.

How To Avoid

Make sure that your staff is thoroughly trained. Even if the customer is irrational at times, it is vital to keep your calm. Read how to deal with difficult customers here. A well-trained staff does not only treat the customer right, but they also function smoothly, thus avoiding any delays.

It is also critical to analyze the reason behind customer dissatisfaction. For example, if you’re gathering reviews that are continually saying that the service is terrible, it took a long time for the food to be served, etc., figure out the reason behind this delay.

You can analyze the time taken to accept, prepare, and serve each item in the menu with the help of the Kitchen Display System and POS reports.

Employing Tablet Ordering so that the servers can accept orders directly through the Tablets or Mobile ensures that the order is placed automatically, and instant KOT generation reduces the service time significantly and also helps optimize the Table Turnover.

4. Inexperience

The general perception that the restaurant industry has no barriers to entry leads to a belief that anyone can open a restaurant. This is far from reality. While there are not any industry barriers, poor business acumen, no management, and lack of financial planning among first-time restaurateurs are some of the primary reasons why restaurants fail.

How To Avoid

Research and analyze! Every stage of your restaurant venture must be carefully planned at least up to the coming six months. It is also a good idea to hire a restaurant consultant, especially for first-time restaurateurs.

Make sure that you have a business plan in place before you open your restaurant to ensure that you are not missing out on something important and know how to proceed with restaurant management.

5. Poor Staff Management

Hiring the wrong people is just as bad as being understaffed, if not worse. Untrained staff can do a lot of harm to your restaurant and ultimately becomes one of the primary reasons why restaurants fail. Unhappy and disgruntled employees can seriously damage the restaurant’s reputation, and drive the customers away, thus leading to a restaurant business shutdown

How To Avoid

Staff training of every employee is a must. Conduct regular communication meetings with your staff to maintain transparency within the team. Make sure that you create a pleasant working environment for your employees. Doing team-building exercises is just as important as holding staff training sessions.

Setting goals and targets for your employees is also critical for fostering a great work culture. Key Performance Indicators not only help you measure their staff performance, but they also make the employees feel that their role is making a difference to the restaurant’s business. This makes them focused and increases efficiency.

For instance, you can measure the performance of your staff through the ‘Sales by Server’ report from the POS. Similarly, you can assign targets for your Chef to ensure that the Food Cost doesn’t go beyond 30%. You can fetch such reports from the POS itself and develop an internal performance management system.

Basis their performance, introduce incentive programs like ‘Employee Of The Month’ or a ‘Star Rating’ for your staff in place to keep them motivated to work.

6. Poor Allocation of Resources

Overspending on the ‘not-so-important’ aspects of the restaurant is one of the fatal mistakes you can make as a restaurateur, which can lead to restaurant failure. It is irrational to overspend on the furniture and the ambiance if you are running short of resources in the inventory department. Similarly, you might be spending a lot on certain raw materials that are not being sold at all, leading to wastage. Not knowing how much to spend where is the leading reason why restaurants fail.

How To Avoid

Financial planning is essential to allocate the resources correctly and plays a critical role in the success of the restaurant. Make sure that the basics of your restaurant are well taken care of. Create a restaurant business plan, allocate the money beforehand, and spend according to it.

Refer to your POS reports for understanding the areas that are bleeding money and eliminate them. For instance, the dessert section of your kitchen might not be contributing to sales. It is better to remove that section, save up on the workforce and operational costs.

7. Complex Menu

A large and diverse menu is not just confusing to the customers; it is exceptionally tedious to maintain, and often the reason behind wastage of the inventory items. Undue wastage leads to high food costs, which in turn, leads to losses. It also becomes difficult and time-consuming for the Chef to prepare vastly different dishes, and may also lead to customer dissatisfaction in case of delays.

How To Avoid

It is always better to go for a short and simple menu and excel in what you serve. It is recommended to design your menu in such a way that you use the same ingredients in several dishes, and which are also available easily. Having a seasonal menu is also an excellent idea to attract customers, and is also easy on the pockets.

It is critical to analyze your restaurant menu performance consistently. You should remove the items that have high food costs and are not resulting in sales. Refer to your Menu Performance Reports to analyze which menu items are not contributing to sales, and remove them from the menu. This would help you have a lean menu that sells more of what customers prefer.

8. No Involvement of the Owner

It is the sad truth that aspiring restaurateurs often forget: the owner’s involvement is crucial to the restaurant’s success. Investing just your money into the restaurant, and depending entirely on the restaurant manager can often turn out to be fatal.

How To Avoid

You need to be aware of your restaurant business, down to every detail. All the details, from sales reports to inventory reports, must be evaluated every day. Mobile reporting and analytics allow restaurateurs to keep track of their restaurant business from anywhere, anytime. Check it out here.

9. No Reporting and Analytics

A casual attitude towards reporting and analytics can often lead to the doom of your restaurant. Without any track of the daily business, you will not be aware of your restaurant is in profit or is going in loss. Reports also help in identifying the reason for the loss.

How To Avoid

No matter what the size or format of your restaurant is, you need to document all the business transactions and maintain reports to avoid restaurant failure. The reports need to be reviewed every day by the owner to keep track of the business. Over a period, the reports reveal definite trends in the industry, and report analysis is critical to make informed decisions. How you can achieve that is through your restaurant POS. An ideal restaurant management software also provides you all the details that you need to know.

10. No Marketing

There is a never-ending debate over this issue between the legacy restaurant owners, who have been running a thriving family business for years with minimal marketing, and the new-age restaurant owners who believe in the power of right marketing. Of course, for established brands, there is little need for advertisement. Still, with extreme competition and low attention span of customers and their loyalty, marketing is an absolute must for restaurants. Your restaurant management software could help you build new marketing strategies around your customer data.

How To Avoid

Set aside a budget for marketing right from the inception of your restaurant. It is also a good idea to hire a digital marketing agency or have an in-house marketing team to run marketing campaigns for your restaurant.

The marketing activities should be planned on the strengths of your restaurant. You need to analyze the consumption patterns of customers and come up with engaging campaigns. If Nachos are the most selling items at your restaurant, you can create Combo offers or come up with a Nacho festival with variations of Nachos on the menu.

Similarly, you can run highly personalized Loyalty Programs and SMS marketing campaigns for generating repeat visits. However, remember to measure each marketing activity. For instance, if you’re hosting an event and have a special menu planned for the day, track the increase in footfall, the increase in Average Per Customer, and a total increase in sales.

A lot of planning and strategy and extensive hard work go into executing those strategies for running a successful restaurant. Thankfully, a smart POS system helps you make data-driven decisions that are sure to boost the business and avoid an early shutdown!