Why Do So Many Restaurants Fail? 10 Blunders to Avoid

Reading Time: 9 minutes

Do you know what’s the bitter fact about the restaurant industry?

Most restaurant businesses never make it to the profitability zone.

No, it’s not me simply saying it.

According to a report, around 60 percent of new restaurants fail within the first year. And nearly 80 percent shut before their fifth anniversary.

Why is that the case? Why the restaurant industry is so prone to failure? Is it safe to venture into this industry?

I know you must be having several such questions in your mind. But don’t fret. Along with the top reasons why restaurants fail, you’ll have other answers as well by the end of this blog.

Top Reasons Why Restaurants Fail

There are various reasons why restaurant businesses fail. And they vary from business to business. However, the ones listed below are certainly the prime reasons behind a restaurant’s downfall. If you can dodge these, then you’re already halfway through running a successful restaurant. 

1. Capital crunch

A restaurant business is capital intensive.

It might sound a tad harsh but if you don’t have the money in the bank, running a restaurant is going to become a challenge.

What usually happens is that compared to experienced restaurant owners with financial history, first-time restaurateurs have limited access to sources of capital. Maybe they have borrowed capital from their family or maybe they have utilized their life-long savings.

Most of the time they go wrong with financial planning. They don’t know how much money is coming in and going out of their business and overspending on certain aspects.

And there comes a time when these restaurants run out of money and are left with no choice but to shut down the business.

Simply put, for a restaurant to succeed, it is imperative to understand money. And that can only happen when you have a strong budget, financial plan, and an open mind in place.

2. Poor location

If you ever think “What is the most common mistake that restaurants make?”, then it is choosing the wrong location. 

Location plays a crucial role in a restaurant business’s success. It can make or break a restaurant.

However, many (mostly first-time) restaurateurs overlook this aspect. They think a restaurant can work wonders in any location. Just a quirky look, a drooling menu and the money keeps flowing.

Well, let me burst that bubble for you.

THIS IS NOT TRUE.

If you’re overlooking the local population where your eatery is going to get established; or if there’s no parking space, the restaurant can lack in targeting customers despite having great food.

Furthermore, you also have to determine if you have competition in a certain location and what are your chances of outworking them.

The right street visibility, in the right location, and targeting the right consumers, is the key to running a successful restaurant brand.

3. Fail to adapt to the changing trends

One of the most common reasons restaurants fail is because they don’t keep an eye out for the latest trends.

You just can’t open a restaurant and expect people to keep flocking. You have to make your restaurant appealing to them by staying abreast with the latest trends.

For example, if I was a restaurateur, I would definitely set up a fancy Reel Booth. Let people dine, make reels, and share their content once they upload on Instagram. Or, maybe I would host comedy night or open mic on Saturdays.

Now, this sounds like a plan to me.

Furthermore, when I am saying trends, it is not just in terms of the industry. You have to keep a keen eye on the changing consumer preferences and re-mold your restaurant business accordingly.

For instance, you notice that customers nowadays are more into making digital payments rather than cash. And it is certainly a good call to incorporate this into your restaurant.

4. Complex menu

I know. I know.

Every (aspiring) restaurateur wants to curate a fancy menu for his/her restaurant. 

And it’s nothing new that whether it’s printed, online, or on a board above a counter, a menu is a restaurant’s prominent selling tool.

But, there’s always a BUT.

What should a great restaurant menu look like? 

One that has a lot of dishes for consumers to pick from? NO!

According to George Armitage Miller, an American psychologist, humans have a short-term memory and can generally hold only seven pieces of information, plus or minus two.

This means that the menu of your restaurant has to be simple and contain fewer dishes than you might think.

Step into your customers’ shoes for a moment and imagine sitting at a restaurant with a mammoth menu, becoming anxious while making a decision, and pleading with the waiter for another minute to decide.

Now, let’s come back to your restaurant owner version and imagine looking at your customers taking so much time to order their food. And now you’re feeling anxious because the table turns are getting slower.

These kinds of scenarios reduce your chances of retaining customers and making great sales.

5. Broken marketing

Marketing not only makes your business visible but also attracts those who were once a part of the nay-sayers.

I am not saying that restaurants don’t use marketing to their advantage. Rather, what I am saying is that they lack the strategy.

Now, the strategy completely depends on the type of restaurant and the type of consumers it caters to. For some, digital marketing works wonders, while some witness better results through offline marketing.

Based on your analysis, you have to determine what suits the best for your business.

Want to learn about some interesting insights on restaurant marketing? If so, here’s an article. 

6. Complexity in staffing

Bitter Fact: Restaurant businesses are famous for having high employee turnover rates.

A happy and skilled staff can take your restaurant business to the next level.

But if you don’t have the right set of people at your restaurant or if they aren’t happy working with you, then it can be one of the reasons why your restaurant can fail.

Now, when I say staffing, this isn’t just about hiring people, there’s more to it.

• Upskill your staff with all the latest technology.
• Provide them with benefits that make their life easy.
• Appreciate them for their good work.
• Treat them as your colleague and not as someone working for you.
• Train them well to deal with every kind of situation.

Simply put, take care of your restaurant staff and they will take care of your business.

7. Lack of business and operations skills

The high failure rate of restaurants or inability to grow after a certain point is primarily due to a restaurateur’s lack of business skills.

To operate a profitable restaurant business, you must know things that are beyond your daily operations.

Being a restaurateur is not just about investing a load of money, establishing a restaurant, and just letting it run. You have to get your hands dirty, wear multiple hats, and have your skin in the game.

For example, you must have the knowledge of proper seating arrangements. You cannot simply place tables and chairs.

To utilize the restaurant space as effectively as possible, do some basic math and see how many seats approximately you would want at your restaurant. And plan your seating arrangement accordingly.

You can also opt for a flexible floor plan to have enough available space for all your interior elements and not turn any guests away.  

8. Overlooking the latest technologies

Restaurant technology has come a long way. From a simple cash register to managing end-to-end operations of a restaurant, technology has grown leaps and bounds.

Today, every other restaurant owner is turning to incorporate the best technology to improve their bottom line. And this is making the industry much more competitive.  

So, if your restaurant fails to take advantage of technology then you are certainly going to lag.

Now, there are various areas where technology plays a crucial role, and one of the imperative areas is restaurant operations.

A restaurant management system or a POS system automates and streamlines a restaurant’s entire operations. Regardless of the type and size of your F&B business, a restaurant POS system can organize everything and help you boost your revenue.

Not just that. This technology can also be integrated with additional modules to allow restaurants to meet diners’ expectations with a top-notch digital experience and easy-to-use interfaces. It gives guests more control over the ordering and payment process.

9. Poor quality of food

“Where is the chef? He even messed up a plain ham and cheese toast. You should name your restaurant “Joke”. But the water was good.”

I know this is funny, but you’re running a restaurant and not a comedy club. So, focusing on the quality of the food is probably the wisest thing to do.

People spend a lot of money and time dining outside of their homes. And they expect great food. And as a restaurateur, it is your sole duty to ensure that.

If I am visiting your restaurant for the first time and ordering Chicken Maharaja, then there are chances that I have tasted this dish before and loved it. And now I am expecting the same quality (close enough, if not top) from your restaurant too.

Simply put, if the food is mediocre, words about it are going to spread faster than you can imagine.

Not to mention, food contamination is another factor and it can occur at any point in the food supply chain. Therefore, take proper preventive measures to eliminate the chances of a widespread foodborne illness outbreak.

10. No knowledge of consumer psychology

This is most probably one of my favorite points as it involves the underrated aspect — psychology.

The reason we are discussing consumer psychology is that you have to understand what would drive your customer to spend their money at your restaurant. And if you can’t do that then it could turn out to be another reason for restaurant failure. 

There are various elements to it and is a vast topic to cover in one aspect. However, here are a little something to help you understand the fundamentals.

Have you ever thought about your restaurant’s lighting? What role do they play instead of making the place brighter? If not then you’ll find this interesting.

Low, warm lighting, for example, provides a calming and relaxed mood. Meaning, this type of lighting often encourages customers to stay longer, increasing the chances of them buying dessert or an additional bottle of wine.

If it is a fast-food establishment or any eatery with a high turnover, then brighter lights are preferred as it helps stimulate the customers to eat quickly and free up the space.

11. No cost control

For a restaurant business to flourish, it also needs to turn to cost control.

If you aren’t aware, cost-cutting or cost control is the process of reducing the unnecessary expenses that your business incurs to save utmost and increase profit.

Sounds like something you need to practice? If so, you’re right.

One of the best examples of this is food wastage. A high-end restaurant wastes about 75,000 pounds of food annually. And that’s a massive number.

Now, we won’t touch the other angles of food wastage. That’s a topic for some other day.

But in terms of money, that much food wastage is a waste of money.

So, if you want to help your restaurant sustain and increase its profitability, you can incorporate various control tactics like the First in First Out Method (FIFO). This is a technique where the raw materials/ingredients that were purchased first are used first.

We have a dedicated blog on cost control for restaurants. You can check it out to learn more. 

How Your Restaurant Can Succeed?

I am sure you must have waited for this section to come as I said I would address certain questions. Most of them have been covered in the section above, now it’s time to address the elephant in the room – how to avoid restaurant failure?

To give you a proper picture of how to succeed in a restaurant business, here are some of the prominent pointers that you might want to consider:

• Before anything else, spend time understanding the current market scenarios. And don’t forget to include case studies of some of the most successful and failed restaurant businesses. This helps you get a clear picture of what to do and what not to.
• Next up, seek help whenever you need it. There are seasoned professionals in every aspect. For instance, you have a restaurant theme idea in mind but you are not sure how to go about it. Why not consult a restaurant business consultant? Get your idea validated, learn the fundamentals, and if required (and if you’re capable) invest in working with a strategist.
• Read all the above restaurant blunders and avoid them at any cost. Like I said above, these are some of the frequently occurring restaurant blunders, and you don’t want them to take your business down.
• Learn and understand restaurant revenue management strategies. From airlines to hotels, every industry and business is turning to revenue management, and there’s no reason why restaurants shouldn’t.
• Last but not the least, humanize your restaurant. When I say humanize, what I mean is be empathetic towards your customers and your staff. Take every extra mile required to fulfill their needs and wants.