Top 5 Reasons Why Restaurants Fail
Updated: Jun 21
Are you planning to start your own restaurant business anytime soon?
What are the things that you consider to be successful in this industry?
As a business, it is very critical that you must not only survive the first year, but you must thrive in this extremely competitive industry.
The restaurant business is outrageous. Statistics show that small businesses, in general, have only a 30% chance to make it through until three years, 70% don't survive and end up closing.
How much money do you need when you start a small restaurant? There's a lot of capital involved, you need to pay so much upfront to start-up and losing is horrendous.
It is heart-breaking to see a restaurant that closes because it is not just all about the money, more than that is the enormous amount of stress, blood and sweat it took for the owners to open until the day they had to close their doors.
How are you going to make the first year of your restaurant business successful?
Here are the 5 things that you must consider for you to avoid mistakes:
1. Fixed cost savings
Fixed cost savings are expenses that you have no control over, they are fixed no matter what, they don't change whether your sales are good or bad. The rent, in particular, is the biggest cost in a business.
Depending on your location and what kind of restaurant you own, rent can be very high that it can make or break your business.
It should be approximately 7-9% of your sales to be considered healthy.
You must have 6-12 months of fixed costs in savings before opening your restaurant to ensure that you won’t have to close your doors early on. These costs include rent, insurance, basic bills, etc.
Even if sales are not the best in the beginning, at least you’ll have peace of mind financially and won’t have to worry about closing soon.
2. Partnering with your food supplier
Remember that the food cost is variable and you can have a little bit of control over it. It is important in this business that in the first year, you make some good deals with your food suppliers.
It will be great if you can have a prime vendor relationship with your food supplier and use that as leverage to get better opportunities.
Ideally, every month or every quarter, negotiate different items and see what you can get. Worst-case scenario, you may not get anything so always ask for possibilities.
You need to be constantly negotiating because if you are expecting that your food supplier is going to come to you and suggests for you to reduce your food cost, it is never going to happen.
They wouldn't do that, you need to fight for yourself. It's always a good idea to negotiate your top 10 most used items in your restaurant because if you can get a little bit of a deal of each of those, it is going to have a big impact since you use a lot of them.
3. Strategic marketing
Strategic and smart marketing is very vital in your first year in the restaurant business.
In that initial year, you don't have as much money to go around. You may not be hitting break-even that is why it is critical to allot money on marketing.
You must not view marketing as an expense, but rather, consider it as an investment in your business.
Every dollar that you put in marketing, you need to get double or triple that back in acquiring customers, and that's non-negotiable!
There will be sales reps walking in or calling you to offer their services the moment you open your restaurant. Companies like Yelp, TripAdvisor, Google Places, etc., make their money through advertising and your local newspaper might also ask you to place an ad with them.
You need to be very strategic and smart to discern what is going to work for you and not.
Most of these companies have contracts and payments involved so you need to have intelligent decisions.
We spent thousands of dollars in our first year making wrong choices, you need to study your ROI (Return of Investment) thoroughly because it is critical for you to thrive in that first year of business.
4. Variable costs - labor and food costs
We have more control in these areas. One thing that makes the restaurant industry hard is the overhead rate.
It varies depending on how many staff you have, while food costs are based on the percentage of sales. So if you have a lot of sales, you have to purchase and make more food.
Hence, we have more control over labor and sales. If sales are not very good, we can send some staff home or we can reduce the food we order. You need to be obsessed with these two numbers, but overall, they are variable so it will be easier for you to manage them compared to your rent which is a fixed cost.
Moreover, it is necessary to have a good POS system that gives you the capability to remotely check your labor from your phone. In our company, we always strive to be between 20-25% plus all the taxes we have to pay.
You need to be on top of your labor in your first year, monitor it every hour or even every half an hour to make sure that you are not losing money.
5. Being fancy
In your first year of business, you don't have as much money, so don't be fancy.
For instance, in our first year, we had flooring that was almost falling apart, chairs that needed repairs and a decor that did not meet our standards.
However, we had to "let go” of these things because we needed to prioritize other things that are more important since we don't have enough money to spend on all that we wanted.
We learned to be frugal by spending only on what is necessary. Many restaurants try to do it all in the beginning by consuming a huge amount of money in getting fancy with their decor, and then sadly, they don’t survive and become eventually broke.
In your first year, do not overspend and extravagant, allocate your funds to more important things like strategic marketing which can help you generate more money.
Save as much as you can to make sure that you don't go out of business in your first to three years and you will thrive in this industry.
You need to start strong and be consistent all throughout. Failing is not an option, and there should be nowhere else to go but up!
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