Why Do Restaurants Fail — And How Do You Beat the Odds?

Jessica Elliott

Jessica couples her 24 years of restaurant and hospitality industry experience with meticulous research to deliver insight into technology, operations, and marketing topics. Her optimized copy helps companies engage their audience while strengthening their communication with clients, employees, and management.

Over the past year, some seemingly popular restaurants declared bankruptcy or closed their doors. So what are the reasons restaurants fail? The answer is never simple and rarely due to one cause. Restaurants close for a myriad of reasons, from money issues to marketing problems. 

Unfortunately, restaurant owners are too busy trying to keep afloat. They don’t notice the problems in time to create a new strategy. Before your company starts failing, it’s vital to shake things up and stop bleeding cash. 

Avoid the pitfalls of restaurant ownership by learning the common reasons for failure. Then, use tactics that improve performance and future-proof your business. 

Small family restaurant owners discussing finance calculating bills and expenses of new small business - Stressed man and woman going through paperwork together in coffee shop

5 reasons why restaurants fail

With a low-profit margin, restaurants are a risky venture. FSR Magazine says, “Bankruptcies aren’t anything new in the industry, but they’ve been proliferating at a rapid pace, compared to more sporadic declarations 10 years ago.” 

Yet, when business is good, then restaurant ownership is exciting and satisfying. You can’t prevent every closure. Instead, build resilience into your systems and culture. 

Why do restaurants fail? 

  1. Not enough capital
  2. Marketing and branding mistakes
  3. Disconnected customer experience
  4. Restaurant location issues
  5. Poor business decisions

1. Not enough capital

Here’s the thing, it’s not getting cheaper to own a restaurant. Food and wages continue to rise, taking an even bigger chunk out of your budget. Profit margins are slim as “67% of a restaurant’s costs go directly to wages and purchase expenses.”

Having a reserve fund for a year of expenses and emergency cash is essential. Unclear financial projections may provide a sense of false security. For owners struggling to pay bills, one emergency like a broken fryer or ice machine can push them over the edge. 

2. Marketing and branding mistakes 

Failure to perform market, customer, and competitive research start your business off poorly. It’s hard to find the time once you’re balancing daily restaurant ownership and management. The lack of data creates a snowball effect. 

Not enough preparation leads to poor location decisions or branding and messaging errors. If you make your brand confusing or hard to access, then it’s tougher to gain visibility among customers. Each touchpoint must be equally impressive and guide your audience towards your goal. 

3. Disconnected customer experience

Repeat customers are your lifeblood. Consistent branding helps secure them. But, if your crew struggles to do their jobs or food quality drops, then your guests suffer. Reasons for poor customer experience include: 

  • An insufficient training program
  • A lack of capital leading to cutbacks
  • Failure to track social media and review sites
  • Problems with delivery or carry out services

It costs more to get new guests. Plus, it’s not cheap to fix mistakes.  Once you’re in a cycle of reacting to errors instead of preventing them, then it’s tough to turn your business around. 

4. Restaurant location issues

Story after story shows the importance of location. There aren’t many perfect locations that get everything right, including price. Ultimately restaurant location affects your bills and expenses. It sets a limit on your potential revenue. Problems with location include: 

Lack of traffic or parking. From congested roadways to unsafe walking paths, traffic flow impacts your sales. Business owners who don’t know their ideal customers may choose locations that work against their restaurant. 

Competition. A competitive analysis provides data about your direct and indirect competition. Many restaurant owners find a great building but suffer when a well-funded franchise moves into the place next door. 

Problems with building layout. The interior of a building may cost you more money on improvements. But, its design and size also impact your utility bills and staffing needs. Furthermore, the capacity limits your revenue. 

5. Poor business decisions

You have access to a lot of data. Small details like price fluctuations and return on investment (ROI) affect your choices. Unfortunately, when asked the question, “why do restaurants fail,” experts point to a lack of experience and poor decisions. 

Taking early action makes a difference in success rates. While a robust business plan won’t ensure profitability, it will provide the steps needed to get there.

Reasons why restaurants are successful

In many ways, restaurant ownership is a learning experience. You read all the reasons why restaurants fail, then discover a new problem once your doors open. However, with enough funds and a willingness to act fast, restaurant owners can and do succeed in this tough industry. 

Great food isn’t enough to stay in business. Instead, success comes from making fact-based decisions and ongoing improvements. Develop a plan before starting up your restaurant and get ready to act fast to save it. 

Successful restaurants convey a clear brand proposition

Outstanding restaurants sell more than a food product. Owners and their crew deliver an experience. Their promise guarantees a benefit that diners desperately want. Thorough research helps you develop a restaurant brand that stands out

The best brands hone in on this promise and use it to direct their marketing goals. Your brand also affects your culture, staff, and customers. 

Restaurant owners develop agile systems 

There’s no doubt that restaurant owners who create repeatable processes improve their success rates. That’s because routines provide consistency of food and service. A set system for handling different scenarios enhances customer experience. 

But, it’s not only about developing an initial employee manual or training guide. You must test out your process and change it when it’s not working. Successful restaurateurs create plans for:

  • Staff onboarding and training programs
  • Guest retention plans, like loyalty rewards 
  • Customer service guide for handling phone, email, and social media
  • Responding to negative reviews
  • Portioning ingredients
  • Employee retention and engagement

Restaurateurs invest in real-time analytics

Investing in restaurant management software with real-time updates is critical to success. The more you learn how to read your data and identify gaps or issues, the more likely you are to succeed. 

You spend a considerable chunk of money on supplies and wages. Tracking this information helps you pinpoint problems. Then, you take steps to protect your profits. Real-time analytics help you plan menu prices, schedule shifts and stay informed. Successful restaurant owners use data from: 

  • Inventory reports
  • Payroll reports
  • Cost of goods sold (COGS)
  • Profit and loss statements
  • Marketing and advertising ROI

Successful restaurants start with adequate preparation 

Some restaurant owners work in a restaurant for dozens of years. Others have a degree or certificate in business management, accounting, or entrepreneurship. While they can give you a leg up, you don’t have to run out and sign up for a business course or go to culinary school. There are tons of free online courses available for every area of business. Consider brushing up on:

  • Business management
  • Digital and print marketing
  • Financial management
  • General operations and processes

The more you know, then the better off you’ll be. Hone your business skills and industry knowledge before opening your doors. If you’re unable to invest time, then outsource vital aspects. Consider hiring a certified public accountant or a PR person

Strong restaurant crews support growth

Lastly, great restaurants succeed because they build a safe culture. One that promotes excellence and inclusivity. From top-notch leaders to happy crew members, enthusiasm is contagious. Your guests notice a culture that places people first.

Sure, not everything will always run smoothly. But, how you and your team respond to problems makes a difference. Give diners more reasons to trust your brand by with a culture that:

  • Addresses issues right away
  • Encourages feedback 
  • Supports personal development

If you notice a weak spot, then offer extra help. Building a better team relationship results in memorable customer experiences. 

Why do restaurants fail: Learn the answer and stay in business

Many restaurant owners share a passion for the industry. Unique concepts and impressive experiences thrill guests and keep your seats full. But, with the joys of cooking also comes a need for business and marketing experience. Strike the right balance of passion and knowledge for a successful restaurant.

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