Unfortunately, restaurants fail.
And in my opinion, it happens much more frequently than it should. Between selecting the wrong location, staffing issues, and overspending on items that simply don’t provide a healthy or justifiable ROI, owner-operators can put themselves behind the eight ball — and well before opening day.
I’ve hit on this topic before and listed six reasons why restaurants fail, many of which are actually completely preventable, especially when time and care is taken with planning and accumulation of pertinent knowledge and expertise.
Here are three more reasons why restaurants can fail.
1. Insufficient cash reserves.
Establishing sufficient cash reserves prior to even breaking ground on the venture is critical. Whether you are renting a space or building from the ground up, opening a new concept or joining a franchise, plan on everything costing more than your original estimates.
A RestaurantOwner.com member survey found that the median total startup cost, excluding land purchase, came to $275,000. And on average, restauranteurs said it took 18 months before they become profitable. Although there are ways to minimize costs, like this $13,000 startup for instance, you need to be realistic about the financial road on which you’re embarking. So as a conservative estimate, you should have enough financial capital available — either in the form of cash or credit — to cash flow all costs for two years.
Many restauranteurs may have enough to fund the startup costs and perhaps six months to a year’s worth of expenses, so when profitability stretches past those dates, it can quickly become a dire situation.
2. No unique selling proposition.
In virtually any town or city, there can be handful or even a dozen similar restaurants. There may be five pizza joints, three hamburger fast food options, and two Mexican-themed restaurants in one town alone.
Many local or regional markets can generally support multiple restaurants in the same genre, but only when each restaurant has defined and clearly communicated their unique selling proposition.
You need something that sets you apart and establishes you from any competitors — and it doesn’t have to be a huge monumental difference or even something tangible necessarily. But you do have to be able to properly execute the idea.
Sure, maybe you’re opening the first vegan restaurant in the area. That’s a pretty big differentiator. But maybe your uniqueness is that your produce is locally sourced or you donate five percent of Wednesday night’s sales once per month to a local nonprofit. Or it could be that your service is leaps and bounds above your competitors and that’s the angle you use to establish your market share.
Whatever you do, make sure it’s unique, satisfies an unmet consumer need or want, and is sustainable for the long run.
3. Lack of industry experience.
At the core of the American dream, the notion that anyone can do or become anything has reigned supreme. While I wholeheartedly agree with the sentiment, there is more to the story when it comes to opening a restaurant.
All too often, maybe following a layoff or coming into an inheritance, people take the leap and decide to become restauranteurs — finally realizing a lifelong dream. But if they lack the managerial and leadership qualities necessary for restaurant success and do not possess any industry experience or knowledge, plus they don’t bring in others who have a proven track record in food service, then the inexperience can quickly shine through.
So while moving into a new role or venture is possible, you need to have at least some sort of baseline knowledge in the industry you’ve chosen…and an absolute love for the industry doesn’t hurt either. When opening a restaurant, you can’t go in blindly and immediately expect success. There is a significant learning curve and failing to acknowledge and remedy this can be a fatal flaw.
More Industry Insider Insights
Because restaurant success and failure continues to be such a hot topic, I’ve recently posed this question on LinkedIn: “When you launch your restaurant concept, you plan to be in it for the long haul. You really can’t go into it any other way. But with such a large number of restaurants failing, this is an issue that needs to be tackled head-on. Why do you think so many restaurants fail?”
The answers this question received are eye-opening and insightful. Head on over and check them out and leave a response of your own. I read them all and would love to hear your opinion too.
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