Top Reasons Why New Restaurants Don't Succeed

Opening a successful restaurant is no easy feat. With fierce competition, changing consumer preferences, and operational challenges, it's no wonder that many new restaurants struggle to stay afloat. In fact, the failure rate in the restaurant industry is considered to be high. We'll examine the facts behind this belief, explain why many new restaurants don't succeed, and provide tips to help you avoid the pitfalls.

What Is the Restaurant Failure Rate?

When it comes to the average restaurant failure rate in the US, you'll see percentages that range from 20% to 60% of new restaurants failing within the first year. Why is there such a wide range of reported statistics? The answer is that it's difficult to accurately track restaurant failure. Many of the stats that you see reported are estimates, or they are based on studies from several years ago.

Instead, let's look at the success rate for accommodation and foodservice businesses, as reported by the U.S. Bureau of Labor Statistics. Every March, the BLS reports on the age and survival of new businesses in each industry sector.

These are the reported survival rates of new accommodation and foodservice businesses for the last few years:

• Businesses opened in March 2020 - 85.5% survival rate in the first year, 80.1% survival in the second year, 72.1% survival in the third year
• Businesses opened in March 2021 - 86.6% survival rate in the first year, 76.2% survival in the second year
• Businesses opened in March 2022 - 85.8% survival rate in the first year

Based on the bureau's data going back to 1994, we calculate the failure rate in the first year for new restaurant and accommodation businesses has fluctuated between a high of 21% (2008) and a low of 9.7% (2016). Failure rate does continue to grow after the first year of doing business, but we'll help you understand the risks so you can set your restaurant up for success.

Why Do Restaurants Fail?

Just like any new business, restaurants face multiple challenges that range from poor planning to inadequate management. We'll go over some of the top reasons why restaurants fail so you can avoid the same mistakes and increase your chances of thriving in a competitive industry.

1. Lack of Market Research and Understanding

Lack of market research is a major contributor to the failure of many restaurants. Without a thorough understanding of the target market, its preferences, and its needs, it becomes difficult for a restaurant to attract and retain customers. If you don't know what the target audience wants, it can result in a mismatch between your chosen restaurant concept and customer expectations. For example, a restaurant may invest heavily in gourmet dishes in a neighborhood where residents prefer quick and affordable options. By conducting a location analysis, you can identify the preferences, tastes, and trends of your target market, allowing you to tailor your menu offerings accordingly.

To avoid the pitfalls of inadequate market research, here are some steps you can take:

• Conduct surveys and focus groups: Gather feedback from potential customers to understand their preferences, expectations, and dining habits. This can help you shape your menu, pricing, and overall concept to better align with your target market.
• Analyze demographic data: Understand the demographics of the area where you plan to open your restaurant. This includes factors such as age, income levels, and cultural preferences. This information can guide your menu, marketing strategies, and even the interior design of your restaurant.
• Monitor industry trends: Stay up to date with the latest industry trends, including emerging cuisines, popular ingredients, and dining preferences. This will help you stay ahead of the competition and cater to evolving customer demands.
• Conduct competitive analysis: Identify your direct and indirect competitors and analyze their strengths and weaknesses. This will help you differentiate your restaurant and develop unique selling points that set you apart from the competition.

2. No Industry Experience

Lack of industry experience is one of the top reasons why many new restaurants fail. Without a deep understanding of the complexities and challenges of the foodservice industry, restaurant owners and operators may find themselves unprepared to navigate the competitive landscape and effectively manage their business. Many aspiring restaurateurs think they can get around this by hiring a general manager or executive chef to run their business. Beware of hopefuls who may not be as experienced or successful as they claim to be. Turning over control of your everyday operations to the wrong person can be a recipe for disaster, especially if your restaurant knowledge is limited.

Get ahead of the game by learning as much as you can about the restaurant industry before opening a restaurant. Understanding the ins and outs of the industry can help you make informed decisions. Here are a few ways you can gain valuable knowledge before taking the plunge:

• Work in the industry: One of the best ways to gain firsthand knowledge of the restaurant industry is by working in it. Consider taking on a job in a restaurant, whether it's as a server, line cook, or even a manager. This experience will give you a behind-the-scenes look at how restaurants operate and help you understand the day-to-day challenges and responsibilities.
• Attend culinary school or take cooking classes: If you're planning to open a restaurant that focuses on a specific cuisine or culinary style, attending culinary school or taking cooking classes can be incredibly beneficial. Not only will you learn essential cooking techniques and skills, but you'll also gain a deeper understanding of the culinary world, including ingredient sourcing, menu planning, and food safety guidelines.
• Network with industry professionals: Building a network of industry professionals can provide you with valuable insights and advice. Attend industry events, join professional associations, and connect with experienced restaurateurs. Engaging with others in the industry will not only provide you with valuable knowledge but also potentially open doors to partnerships and mentorship opportunities.
• Read industry publications and resources: Keeping up with the latest trends and developments in the restaurant industry is crucial for success. Subscribe to industry publications, such as restaurant trade magazines, and follow reputable online resources. These sources often provide valuable insights, case studies, and expert opinions that can help you stay informed and make informed decisions.

3. Ineffective Marketing Strategies

Another factor that contributes to restaurant failures is ineffective marketing. In today's digital age, a strong online presence is essential for attracting customers. Many restaurants overlook the importance of having a well-designed website, engaging social media accounts, and online review management. Here are some key facts to consider when it comes to avoiding ineffective marketing strategies for your new restaurant:

• Utilize digital marketing: Utilize platforms such as social media, search engine optimization (SEO), and email marketing to reach a wider audience. Engage with your customers through compelling content, promotions, and regular updates to keep them interested and coming back for more.
• Invest in professional photography: High-quality visuals play a significant role in attracting customers to your restaurant. Invest in professional food photography to showcase your dishes in the most appealing way possible. These images can be used across various marketing channels, including your website, social media profiles, and online advertisements.
• Offer incentives and loyalty programs: Incentives and loyalty programs are effective ways to encourage repeat business and build customer loyalty. Consider offering discounts, freebies, or special promotions to entice customers to choose your restaurant over competitors. Implement a loyalty program that rewards frequent customers with exclusive perks to keep them coming back.
• Monitor and analyze your marketing efforts: It's crucial to track the ROI of marketing campaigns to understand what works and what doesn't. Utilize analytics tools to measure key metrics such as website traffic, social media engagement, and conversion rates. This data will provide valuable insights into the effectiveness of your marketing strategies, allowing you to make informed decisions and refine your approach.

4. High Employee Turnover

Employee turnover rate is a major contributing factor to the failure of many restaurants. Not only does a high turnover rate disrupt the overall flow of operations, but it also results in increased costs for hiring and training new employees. Replacing an employee in the restaurant industry can cost you thousands of dollars. This includes expenses related to advertising job openings, conducting interviews, training new hires, and lost productivity during the transition period. With a high turnover rate, these costs can quickly add up and eat into the restaurant's profits.

To avoid high employee turnover and set your new restaurant up for success, consider implementing the following strategies:

• Competitive compensation and benefits: Offer competitive wages and benefits packages to attract and retain talented employees. Conduct market research to ensure that your compensation is in line with industry standards. Consider offering incentives such as performance bonuses or employee discounts to motivate your staff and encourage them to stay long-term.
• Employee training and development: Invest in comprehensive training programs to equip your employees with the necessary skills and knowledge to excel in their roles. Provide ongoing development opportunities to help them grow professionally and feel valued within the organization. This can not only improve employee satisfaction but also increase their loyalty to the restaurant.
• Positive work culture: Foster a positive work environment where employees feel respected, supported, and valued. Encourage open communication, recognize and reward employee achievements, and create opportunities for teamwork and collaboration. A positive work culture can significantly reduce turnover by promoting employee engagement and job satisfaction.
• Employee feedback and recognition: Regularly seek feedback from your employees to understand their concerns, suggestions, and overall satisfaction. Actively address any issues and implement changes based on their feedback. Recognize and appreciate your employees' hard work and contributions, as this can go a long way in boosting morale and reducing turnover.

5. Subpar Food and Service

In today's highly competitive market, customers have countless dining options to choose from. If a restaurant consistently serves mediocre or poorly prepared dishes, customers are likely to be disappointed and may not return. Even if your menu is top-notch, bad service will also drive customers away. The way customers are treated and served can greatly influence their overall dining experience. Slow or inattentive service, rude staff, and mistakes in orders can leave a lasting negative impression on customers. Word of mouth travels fast, and negative reviews can spread quickly, leading to a decline in customer traffic and ultimately, the demise of the business.

Here are our tips for providing high-quality food and excellent service in your new restaurant:

• Menu development: Crafting a well-designed menu is crucial to the success of your restaurant. Consider the preferences and dietary restrictions of your target audience, and offer a variety of options that cater to different tastes. Regularly update your menu to keep it fresh and exciting, and be sure to highlight any signature dishes or unique offerings that set your restaurant apart from the competition.
• Consistency: Consistency is key when it comes to food and service. Customers expect the same level of quality and taste every time they visit your establishment. Train your kitchen staff to follow standardized recipes and cooking techniques to ensure consistent results. You should also establish service standards and train your front-of-house staff to provide attentive and friendly service consistently.
• Efficient kitchen operations: A well-organized and efficient kitchen is essential for delivering food quickly and maintaining quality. Optimize your kitchen layout to minimize wasted movement and time. Invest in quality kitchen equipment that can help streamline operations, such as high-performance ovens, commercial-grade refrigeration, and efficient food preparation tools. Implementing systems for inventory management and food waste reduction can also contribute to a smoother operation.
• Invest in staff training: Properly trained staff members are crucial to providing excellent service. Train your employees to be knowledgeable about the menu, including ingredients, preparation methods, and potential allergens. Teach them effective communication and problem-solving skills to handle customer concerns or complaints professionally. Regularly conduct training sessions to keep your staff updated on new menu items, service techniques, and industry trends.
• Feedback and continuous improvement: Actively seek feedback from your customers to gauge their satisfaction and identify areas for improvement. Encourage them to leave reviews on platforms like Yelp or Google, and consider implementing a feedback system within your restaurant. Analyze the feedback received and use it to make necessary adjustments to your menu, service, or overall operations. Continuous improvement is essential for staying competitive in the restaurant industry.

How to Make Your New Restaurant Successful

Check out our video for some highlights that will help your new restaurant succeed:

We've covered just a few of the top reasons why new restaurants might fail after opening. You can improve your success rate by creating a well-thought-out business plan that includes financial projections, marketing strategies, and operational procedures. Investing in high-quality equipment and training your staff to deliver exceptional customer service is also essential. Finally, staying up to date with industry trends and continuously improving your menu and offerings can help keep your restaurant competitive in a saturated market. By following our tips, you can set yourself up for success and increase your chances of running a thriving restaurant.