It is not easy in deciding to engage yourself in the grind of running a restaurant business and to take on such great responsibility on a daily basis. Most people see owning a restaurant through rose tinted glasses and usually only see the operations from the surface or from an outside approach; tasting nice food, designing interiors and enjoying a drink with the patrons. This is not quite true, although it can become part of it. It’s more likely that you will sweat some blood and tears before it gets to this stage.
So how many restaurants actually fail – The FACTS and the MYTH
Some time back, the NBC television network in the US broadcasted a program titled Restaurant: A Reality Show. Among other occurrences on this show, an advertisement by American Express claimed, “90 percent of restaurants failed during the first year of operation.”
To verify the possibility of 90 percent first-year failure, Cornell University conducted several spreadsheet simulations. The simulations were based on assumptions that roughly parallel the study conducted: fifteen hundred restaurants in the market; new-business failures during the first year, 90 percent (the American Express figure); average industry turnover of 10 percent per year (similar to Cornell university study’s 1999 finding); number of new restaurants opening per year, 15 percent; and average market growth rate, 3 to 4 percent per year (a US national average as reported by the National Restaurant Association of USA). In the second series of simulations, Cornell University replaced the 90 percent first-year failure rate with a 30 percent rate, drawn from our study.
Comparing those two calculations over a twenty-year period, it was concluded that if 90 percent of restaurants actually failed during their first year of operation, we would see fewer restaurants at the end of each year, a finding that is contrary to the observed reality in the restaurant industry. In addition, when 90 percent failure was inserted in the equation, simulations indicated that, in twenty years, the market would shrink from 1,500 units to 254 units, or a loss of 84 percent of the existing restaurants. Taking that simulation to its inevitable conclusion, no restaurants would remain in about ninety-four years.
These results are practically impossible under normal conditions and run contrary to the National Restaurant Association’s observed 3 to 4 percent growth rate (www.restaurant. org).
On the other hand, the 30 percent failure rate resulted in the market’s growing by 219 percent, to 3,287 units, a more realistic number. Cornell University conclude that the reported 90 percent restaurant failure rate is a myth. These results are strongly supported by the outcomes of economic data simulations and by many academic research studies showing that restaurant failure during the first year of operations is about 30.0 percent.
Indeed, when American Express was asked for its data, it stated in writing that it could not provide data supporting the 90 percent failure assertion it made.
Needless to say; the percentages of failure are still high. When you plan to invest your life savings or borrow against your family home, you want to bring the chances of failure down as low as possible.
HOW to avoid the failures
My company, Savvy IQ (Savvyiq.com) has consulted for many restaurants over the past years; many looking to gain the edge from the competition, some looking for a turnaround strategy to improve the performance and others just want the quick results of driving more footfall and revenue. But what has become more commonly asked for by clients and is now a large part of our business is the planning, strategy and concept development for new businesses.
People have come to the realisation that appointing a group of hospitality industry experts from day one is money better spent, than trying to re-float a sinking ship.
If you’re planning on opening a restaurant, you would have read many online articles, such as ‘Top 10 reasons why restaurants fail’, ‘Top 5 reasons why restaurants fail’, ‘Top 20 reasons why restaurants fail’, ‘Top 1 million reasons why restaurants fail’, blah blah blah and I could equally make a list of items to give you the reasons as to why restaurants fail. But I believe that there is only 1 reason as to why restaurants fail: NO BUSINESS PLAN.
No business plan
When considering any venture, a solid business plan must be implemented. This business plan is your document; a document for you and only you at this stage. It does not need to be in any format, except for the one that you can understand and focus on.
The business plan should illustrate your vision. What sort of cuisine will you have? where would you like to open your outlet? how much should your average check be? what style of service are you offering? where are you sourcing your products? what are your hours of operation? what IT system will you use? how will you advertise? And the list goes on The business plan will outline all the points that you find on the internet as to why restaurants fail.
From these questions above and many more which you should consider, you then begin to detail the elements in your business plan.
From your vision on food, you will then begin to create a mood board on the style of cuisine, look and feel of the food. You then should begin to build a detailed menu with recipe cards, food costs and sale prices. Once this is complete, you now have your core product that you will conduct a general competitor analysis as to how you are positioned in the market against the competition. The menu price will also define the style of service, décor and ambience. I could go on and on about this subject, but before considering anything else, you must define the core; your menu.
Once the menu is complete, the décor style defined and the expected size of the outlet, you will then need to develop a property and location strategy. Location is very important, if not the second most important to the menu. Find a location which you have something to offer or where there is a high footfall, however high traffic flow usually comes at a price.
While your restaurant should be in an accessible and parking-friendly or transport location, you should also be attuned to the needs of the neighbourhood. Do not choose a location where there’s already several similar cuisines to your concept nearby, unless you are offerings something very unique. And by unique I don’t mean just your grandmas authentic Napolitana sauce, which the whole family loves. It takes more than that to go up against seasoned experts. Obviously, you will consider your neighbourhood based on your concept offering. So, if you’re promoting yourself as a family-friendly restaurant, don’t expect to succeed in a location where more singles than families live.
Therefore, to consider your location strategy, map the areas that you plan to open your outlet and include this detail in your business plan. Once you understand the rents in the areas you are considering, you will need to ask yourself, what is the maximum rent you can afford to pay? From your assumptions on price point and daily covers you will be able to calculate your expected rent, assuming a maximum of 10% of your turnover. This information is very valuable to ensure a profitable outlet.
Next item to consider is hiring the right people. In your business plan, you should develop a detailed recruitment plan that matches the concept and cuisine. What level of chef and manager is required? What is your budget for the salaries of these key people? Develop a staffing schedule based on your opening hours to give you a realistic wage cost. From this you will then have more inputs to place into the detailed budget.
The ‘Human Resource’ section of the business plan should also outline detailed service techniques that make your concept unique. Second to the food, customers will value the service over design, crockery, music or any other feature in your restaurant. Your training plans and staff plan is very important.
The business plan is your main document. So, if you have an idea to open a restaurant and before you read more on the web as to why business fail, begin developing your business plan.
I wrote an article back in 2014 and posted it in 2015 entitled ‘A Restaurants Business Plan’. See the link below for the details that you should include
Below are some additional articles that I have written than could assist any new restaurant opening. Please feel free to read the following by clicking on the links.
How to start a restaurant
Creating Your Restaurant Concept
A Restaurants Business Plan
Top 10 Restaurant Startup Errors
Small Business Success – Easy Tips That Will Help You Succeed
Dangers of Procrastination When Building Your Business
Paul was born in Sydney, Australia and was exposed to the hospitality industry from a young age. He began his career in the family business, working in all aspects of the restaurant industry. He later took a post in a boutique hotel in Sydney to continue his studies in management.
Paul’s passion in F&B moved him from hotels to free-standing restaurants as he worked his way up to management positions at a very young age. With an eagerness to succeed, he opened his first café in the Sydney Suburb of Brookvale. He soon expanded into the second café in North Sydney.
Paul sold his cafes later in order to focus in the restaurant industry. Purchasing Milsons restaurant in Kirribilli, Sydney, at the young age of 27, Paul became one of the young restaurateurs of Sydney. This ‘One Hat’ fine dining restaurant continued its success with Paul at the helm. Later purchasing the sister restaurant, Jaspers of Hunters Hill, another ‘One Hat’ restaurant, Paul began to grow his company to create a mini restaurant empire. Successfully opening Essence restaurant in King Street Wharf Sydney, Paul continued to grow his restaurant company to 12 restaurants throughout Sydney.
Creating a strong following and a recipe for success, Paul founded Savvy IQ, advising fellow restaurateurs and hoteliers on his expertise and formula to success. His work expanded internationally, and later became Director Asia Pacific for Hilton Worldwide managing almost 300 F&B outlets in 17 countries. He then moved to Moscow as Director for Stepan Mikhalkov as Director for Verchisky, Vanil and a number of other restaurants and cafes within the group.
With an international focus, Paul has been appointed as CEO with restaurant groups in Saudi Arabia, Kuwait, Bahrain, and London. Now Paul continues his consulting company, Savvy IQ and developments concepts in London and internationally, with 4 restaurants concepts opening in 2017/18.