It is common knowledge that the restaurant industry is one of the toughest to enter when you are operating a business. The profit margins are extremely thin, usually around 3%–5%, and it is very easy to be in the red without proper management and focus on your restaurant. Following the COVID-19 pandemic, an estimated 70,000 restaurants closed, according to The Washington Post. Now more than ever, restaurants need awareness and proper management to stay in business. Below are the top reasons restaurants fail, and how you can avoid them.
1. Poor Location & Visibility
Your physical location—where your restaurant can be found and accessed—is key to understanding how customers will bring you business and visit your establishment. You may even know from personal experience of great restaurants that had to be pointed out to you, only for you to say, “I never even realized this was here!” Your restaurant not being in a prime location can lead to low foot traffic, slower business, and eventual restaurant failure.
A good restaurant location should be first accessible—for example, prime spots in a city are on more well-traveled streets, off or near public transportation systems, or in areas that are popular for the local community to visit. If you are in a larger, more cramped space, such as in Manhattan, a street-facing business that customers can see and stumble across is key.
Your restaurant exterior is just as important—if not more important—as your interior. It entices potential customers to come inside and enjoy your business offerings. Without that visibility and chance for people to happen upon your business, it will be very hard to succeed. Furthermore, if your location and how you market your business do not represent the type of food or experience a customer can expect, then there will be no reason for new customers to enter.
How to Avoid It
When it comes to picking the best location, look for a spot that offers a lot of foot traffic. Being visible to many different customers will help drum up business. It is also great to look for neighborhoods or communities that allow for many businesses to thrive. For example, being located near an area with other local businesses can lead to a lot of foot traffic, referrals, and a general sense that your restaurant belongs.
If you can offer parking or parking assistance, that is another huge bonus for customers. And if you cannot, be sure to know where customers can park to access your restaurant.
In regards to visibility, make sure your restaurant name and logo are clear and easy to spot. You do not want to make it a scavenger hunt for customers to find you within a cramped or crowded area. Next, make sure your business branding and signage reflect the voice of your business and what you have to offer. How customers perceive your business is extremely important, especially if it is their first time dining in. Finally, ensure that your business can be found on apps such as Google Maps and the iPhone Maps app and that your Google Business location is up-to-date.
Does your location work? See our guide to choosing a restaurant location for tips for long-term success.
2. Inexperienced/Uninvolved Management
It can be very rewarding yet challenging to start a food business. It takes a lot of time, effort, and focus in order to get it right. Not having the correct skills in managing a restaurant can hinder it from being profitable and lead to eventual failure. This does not mean that only people with a ton of restaurant experience should be managing, but it does mean that you should have someone who has run or managed a successful restaurant before be involved in the business.
An inexperienced manager may have trouble with multitasking and may not have knowledge of what to look out for in finances and making business decisions. It is also hard to manage employee, vendor and supplier, and customer relationships if you have not done it before. Whether among staff, a mentor, or a consultant, having someone available to guide new managers and operators is vital to your restaurant’s success.
Restaurant management and ownership is a team sport. There are many owners who like the idea of owning a restaurant yet often shirk away from responsibilities and on-site presence to support their chef, front-of-house supervisors, and other management staff. If you are an owner or operator, you need to be involved. You should be able to quote the food cost, liquor cost, and labor cost average at any given time. You should be aware of the staff you employ and what they are like. You should know the customers. Without an experienced leader in some guiding role day-to-day, things can start to fall apart.
How to Avoid It
One of the best ways to address inexperience is to ensure that proper training and high-level research are done on the different tasks and challenges one may face while managing a restaurant. For starters, if you can, you should be asking other business operators how they track their financials and ensure profit. Ask for their systems of inventory counting, bookkeeping, invoice management, billing, payroll, and whatever else they are willing to share with you. Some of the best resources are other operators doing the work.
Beyond that, there are plenty of online resources (such as Fit Small Business) with the necessary information you need to ensure you are ready to manage a restaurant. For example, our article on how to calculate food cost is a comprehensive breakdown for those who have never done this task before.
Being present and invested in your business is the best way to avoid things falling apart. While this may seem simple, it is too often the case that some owners and operators get bogged down in everything but the health of their business and how their restaurant is serving customers and performing. It makes a world of difference when you are involved. You catch things with perspectives that others who work day-to-day may not have. You show that you care for the common good of the business, the staff you employ, and the guests you serve.
A blend of real-time management, reaching out to other business owners and managers, and spending time researching gaps in your knowledge is vital in ensuring you have the correct amount of experience to manage a restaurant.
Do you and your managers know how to manage? See our article on the basics of restaurant management as a refresher course.
3. Improper Cost Management
As we mentioned above, one of the greatest challenges of managing a restaurant, or any business for that matter, is managing costs. In the restaurant space, this takes a lot of bandwidth; relentless focus and effort are needed to stay ahead of the cost of your ingredients.
Anyone in the restaurant industry who sees a restaurant failing will first look at how you are managing costs and the systems in place to ensure they are lower. Labor and food costs are major costs you have direct control of day in and out. Restaurant operators struggle with costs because so much goes into ensuring that product is not wasted and that labor hours are used properly. Both of these costs dictate the amount of money you bring home after sales are made, and both are affected heavily by how you manage them.
Food is time-sensitive and spoils quickly. Food cost is extremely hard to manage if you are not running a tight ship and keeping track of how your ingredients are being used. And the labor market in the restaurant industry is very competitive. Ensuring both of these costs are in line is how you stay profitable. If you cannot keep your operating costs low, you will not make a profit and will likely fail.
How to Avoid It
To avoid improper cost management, it is very important to have systems in place that ensure you are able to manage and correctly assess the cost of goods and the cost of doing business in a given time period. Being sure to understand your cost management is the only way to succeed from a financial standpoint in this industry.
For food and other ingredient cost, staff proficiency, correct ordering, and proper storage methods are key. Doing inventory counts, training staff properly, and keeping up with competitive prices for your suppliers are essential to keeping food cost low.
For labor costs, ensuring you are fully staffed and not wasting worker energy on poorly thought-out tasks promotes a fulfilling work environment that helps you make a profit. You should have enough staff for the demands of the business without over-scheduling and know which members to pair with each other for maximum efficiency.
To manage your costs, you first have to know them. See our guide to restaurant metrics for all the math you need to know.
4. Complex Menu/Unfocused Concept
If your menu or your concept is confusing and unfocused, it can leave your business in some dangerous waters. A complex menu is hard to digest for customers and leaves them not really knowing what to order or what to expect. An unfocused concept leaves the diner feeling lost on what the reason for the restaurant’s existence is, and even more confused on why they should return again.
A complex menu can also lead to a lot of lost money in the form of food waste. If you have one hundred menu items on the menu, then you need all of the ingredients for all the specific dishes on your menu that you offer. The likelihood of every single dish being ordered is slim. You then need to take into account the prep work and labor hours it takes to prep for each item. With complex, over-bloated, and unfocused menus, food and labor waste is very common because it is very hard for customers to ever order all you have to offer.
Think of the restaurants you like—what makes them special and why you return to them again and again. I am sure a big part of this is because of the identity of their food and the products they sell. You do not have to have gimmicky menu items or extremely unique offerings to stand out. Some of the best restaurants have limited menus and just execute them really well. If there is no clarity on the food and experience you are offering, then you cannot expect your diners to understand what it is exactly they are coming to your restaurant for. So focus on what you do well and what speaks to your concept, and ensure your customers can order quality food that makes sense for the business you are operating.
How to Avoid It
If you have never built out a restaurant menu before, hiring a consultant or using other menu examples is a great way to understand what you should be selling to your guests. Additionally, understanding the number of menu items that you should have based on your concept and leading industry restaurants keeps your menu focused. If we take a look at Chipotle, for example, they offer a very concise set of menu items. This allows customers to narrow down their choices to what they want while ensuring they get the same kind of experience every time they visit.
Another great example can be a coffee shop that offers varied drinks and a limited food menu. There is one in my neighborhood that offers six breakfast items along with its robust coffee and drink offerings. They recognize that some may want breakfast foods, but they also recognize that most customers will be coming to focus on the coffee and other beverage options. So tailoring your menu to your business type and what customers will be expecting is a great way to avoid cluttered menu options while giving a concise and focused experience to your guests.
Read our guide to menu development planning & design for more expert tips when building out your menu.
5. Poor Food & Product Quality
Sixty-eight percent of diners rank quality as their top priority in a restaurant. So many operators and chefs get lost in the fact that, at the end of the day, it is about serving delicious, good food. It may seem a relatively simple goal, but a lot of work and thoughtfulness goes into achieving this goal. Many restaurants fail because they offer subpar products, which in turn leads to lower business volume and eventual closure. Delicious food is the name of the game and is the one thing all restaurants and food businesses need to offer without exception. If your food is not good and your customers are leaving dissatisfied, then it is likely that you will not succeed.
Poor food stems from a number of reasons. The first one is where you are sourcing your ingredients from. If you are cooking with subpar ingredients, the product you put out will be subpar, no matter what you do to it. The next major issue you will face is poor staff training. If you do not train your staff to cook products to the level you expect every time, the end dishes or drinks will not resonate with customers. Lastly, if the recipes you are using do not work or the dishes you are building do not make sense, then food quality will go downhill very fast.
How to Avoid It
Understanding the quality of your vendors is something that needs to happen all of the time. When you are receiving orders, be sure to check quality and send back ingredients and other food items that do not meet your standards. When you are in service, if a dish is not up to the standard you have set, you do not serve it to the guest, no matter how busy it is. And for your menu items, they should be researched and tasted by a wide group of people so that you know that they work.
Seventy percent of customers shared that they would return to a restaurant with a poor service experience if the food was good. The name of the game is setting standards of quality for your ingredients, staff, and menu items and sticking by them, even when under stress and when it is not convenient.
Do your suppliers work for you? See our guide to restaurant suppliers for some fresh ideas.
6. Lack of Marketing
The greatest shame is when you offer great food and a great dining experience and no one knows about it. Lack of marketing and getting your business out there is another unfortunate way to run a restaurant out of business. With social media making it easier than ever to reach customers, a lack of marketing can be a death sentence for most businesses. Sure, you can point to one or two restaurants in your neighborhood that do no marketing and get a lot of traffic. But these are rare, and most restaurants do need marketing or they will not fill up.
Running a restaurant is a balance of not only creating a great dining experience but also ensuring you have the customers in seats ready to pay for that experience. If you have empty seats, this is not only a drain on the time it took you to prep for the seats and the labor on staff to serve them, but it is also the lost cost of the business you could have had if customers had shown up. Without any marketing plan or any effort to showcase your business to new customers, this can be a major reason why a restaurant can fail.
How to Avoid It
There are many useful ways to market your business in 2023. One of those ways is to engage with social media. Share specials, events, and signature menu items online. Interact with posts and comments from customers or would-be customers and share what it is you are serving in the restaurant. You can hire professionals for a more refined approach and a dedicated marketing plan as well.
For example, 33% of Gen Z will base their decisions on ads showing off restaurants and their services. Word-of-mouth is also huge, so be a presence in your community to ensure that people know about you and your service. Lastly, highlight your strengths in marketing the unique voice your business has in order to drum up interest and bring people into seats.
7. Poor Customer Experience
Not listening to customer feedback and being unwilling to take criticism and feedback is a surefire way to fail at running a restaurant. Customer feedback is integral to how you do business. You need customers to like your food and service to keep coming back and spending their money. If you have staff that are not properly trained to serve your guest’s needs, and you do not take seriously any issues that may arise, then you will fail. Also, if a customer’s needs are not met, they will most likely not come back to your establishment.
A poor customer experience can stem from many reasons. Receiving the wrong food, improperly cooked food, missing requests on certain orders, and even serving foods with allergens that cannot be consumed are all ways that a customer’s order can negatively impact their experience. Poor service, lack of attention to detail, and poor treatment of a customer by staff can lead to a negative service experience as well. Finally, if your branding and menu do not match the voice of your brand, customers can leave feeling unsatisfied and in search of more.
How to Avoid It
To avoid poor customer experiences, you first need to train your customer-facing staff on how to handle customer concerns and how to best represent your brand. Your staff should be able to not only react to customer needs but they should also be able to anticipate any issues and figure out exactly how to show up for your specific clientele. Back of the house staff should ensure food is cooked correctly and maintain a high level of care to meet customer satisfaction.
For situations when customers may have bad experiences, your follow-up is everything. Too many operators let customers go away without putting in effort to fix the poor situation. Seventy-nine percent of customers who have an issue resolved will plan on returning to that restaurant. Of course, there is a difference between customers who are unsatisfied and disrespectful and rude people who just want to hurt others. But for those genuine times of bad experiences, touching base with the customer and putting your best foot forward goes such a long way. It is often the case that a recovered poor customer experience leads to a regularly returning guest, all because you showed you cared. This is vital in keeping customers and ensuring they return to dine with you.
Learn the basics of providing exceptional customer experiences in our guide to retail customer service.
8. Improper Pricing
Improperly pricing out a menu is another huge mistake when it comes to restaurant leadership. If you are not making money on your product, you will not be in business long. And if you are overcharging customers, it will be very hard to get them to come back. Especially after the pandemic and difficult financial situation many are in, properly pricing food is vital to ensuring the success of your business. Your prices should be enough to make a profit but also need to be in line with the perceived value of the experience you are offering. If either is off, you will struggle to get customers to keep coming back to your establishment.
How to Avoid It
Menu engineering is one of the best skills you can have as a food business operator. The best way to accurately price out a profitable menu is to go through each item and understand the cost it takes to make it, where you can optimize pricing, and how it fits into the broader menu selection. When you understand the costs of each item, you then can play around with pricing in order to get customers to purchase certain dishes. You can also work backward on the recipe creation side to lower costs and make more profit. Pricing is huge, and if you have never done it work with a consultant if you can afford it to get it right.
9. Unfavorable Leases
Most restaurants lease their location, and those commercial leases have several clauses that can influence your ultimate profitability. There are two main ways that a restaurant lease can clause a closure; the first is lease terms that require you to increase costs and the second is a refusal to renew your lease. Some restaurant leases will require that your business is open for specific hours, like lunch and dinner service seven days a week. If you can’t fill your dining room for one of those day parts, your costs would skyrocket.
Some leases also require that you pay a percentage of your sales—usually 3% to 10%—as part of your rent. If you don’t specify what “sales” means, you could be giving your landlord 10% of your top-line sales, before any of your expenses (like delivery commissions) are taken out. This can quickly deflate your profit margin. When your lease is up (usually after five to 10 years), your landlord can use their knowledge of your past sales to raise the rent to a painful threshold. Or they might refuse to renew your lease altogether, leading you to close.
How to Avoid This
The best way to avoid an unfavorable lease is to hire an attorney—preferably one with restaurant lease experience—to negotiate your lease. You’ll likely spend a few thousand dollars on fees, but the right attorney will save you 10 times that in the long run by helping you avoid onerous lease terms. Especially if your landlord requests a percentage of your sales as rent, you want someone to negotiate every aspect of that section of the contract. Another option is to not be afraid to walk away from a bad lease. The location might be great, and you might have fallen in love with the kitchen, but if the lease terms make you shiver, get out and find a better lease elsewhere.
10. Uncontrollable Circumstances
The last reason a restaurant may close is unforeseen circumstances out of the business owner’s control. The COVID-19 pandemic is a prime example of this, as thousands of businesses shuttered due to lockdowns and the spread of the virus. Other factors include severe weather damage, structural accidents, and economic downturns such as recessions.
The restaurant industry is hard, not only because of the already thin margins but because it is affected heavily by a lot of outside factors. Building a business that is foundationally strong and able to deliver stellar experiences to guests on a consistent basis is the best way to account for the “what-ifs” and the extreme scenarios any business in the food industry can face.
The restaurant industry is very tough, and credit should be given to all who venture into it. The margins are thin, the product expires quickly, and customers are brutally honest when it comes to food. The National Restaurant Association recognized the failure rate of restaurants to be 30% within the first year. This percentage rises as the years go on. With that said, use these 10 top reasons restaurants close to identify any gaps you may have in your operation. Make a plan to fill them and be diligent with your business. Restaurant closures are common, and there are many reasons for them. Being aware of what they are can keep your restaurant open and thriving.