The biggest mistakes restaurants make, and why they have a high failure rate

The restaurant business is tough. Everyone in it knows it. Everyone looking to get in it ignores it.

The cold fact of the matter is that opening up a restaurant may be one of the worst investments you could make with your money. That's a horrible, sobering statement coming from someone like me who's in the business of helping restaurants succeed, but it's the truth. Most restaurant fail. Oh, the failure rate isn't the "90%" you may have heard from friends and family, but according to Cornell University, and the National Restaurant Association, 60% of restaurants fail within the first three years of operation. After five years, the number might be as high as 75%.

Uggghh!

Why the hell would anyone want to get into this business with a failure rate like that? Risk and reward my friend, risk and reward.

As with other high risk investments, opening the right kind of restaurant in the right kind of market can pay off very well financially. Some of the better chains can see average net profits approaching, and even exceeding 30% of sales. That's a great return! While the risk of opening a restaurant is huge, the reward can also be huge. If you happen upon the right concept, and manage it well, you could see your investment paid off in 3 years or less, and have lots of residual cash flow to boot.

Certainly there has to be some sort of magic formula you can follow to make sure your restaurant gets these incredible returns, isn't there?

Unfortunately..... no. There is no magic formula. Experienced operators have businesses go belly up every day, and just as often, novices open up with no clue of what they're doing, and make a killing. While experience does give you a better chance of succeeding in the high risk world of restaurant ownership, I'm going to give you some points of consideration even more important than experience.

These are the top reasons why restaurants fail.

1) No unique selling point

Your customers need a reason to come to you instead of your competition. While I know you'd love to think that your food is so good that people will line up out the door to eat it, you're mistaken, just as millions of mistaken restaurant owners before you who are now out of business.

Good/great food and/or service is NOT a unique selling point. "Isn't that the reason people go to great restaurants?", you ask? No, it's not. Now, I don't want to understate the importance of great food and service, but it isn't the reason someone is going to try your restaurant. Having great food and/or service is not a UNIQUE selling point. While you may honestly believe that your food is better than your competition's, I guarantee you your competition thinks the same thing, and they are telling everyone they know. This means that your profession that your food is better sounds just like the message of every one of your competition. THAT is not unique. If you don't believe me, just step back and listen to all the other restaurants out there. They make a lot of the same claims, don't they?

If you want to offer something truly unique, you need to move past food and service. Yes, you need to have great food and service, but by having great food and service, you are only meeting the minimum expectations of your customers. You are not giving them a reason to eat with you that your competition isn't claiming as well. What you need is something original to sell. Something other than the best food or the best service. Your need a UNIQUE selling point.

Sonic offers "nostalgia" with their 50's style drive-in and car hops.

Burger King offers "accomodation". "Have it your way!" they tell you.

Applebees markets themselves as "Your favorite neighbor". They put up local memorabilia when possible, and build in smaller towns. They use stained glass fixtures and tacky decor you might find at that old couple's house next door.

Hooters sells "sex" with cute waitresses in tight tops and shorts.

A truly unique selling point isn't the best food or service. It's an emotion you offer to people, whether it be nostalgia, accomodation, sex or something else. People remember emotions long after they remember food and service. If you make a real, emotional connection with your customers, they will remember how you made them feel for decades to come, long after they forget what they ate and who waited on them. Food and service can support a unique selling point, they just can't be a unique selling point.

2) Too large of a menu

This is a VERY common killer of independent restaurants. As an independent operator, you'll get pressure from customers to have certain items on your menu. You'll also have pressure to keep certain items when you make a menu change. You'll get requests. You'll get complaints when you change things.

You have to realize that this is all part of the process. YOU CAN NOT PLEASE EVERYONE. Don't even try.

Large menus create several problems within an operation:
  • Large menus lack focus. When you try and offer EVERYTHING your customers like, you aren't giving them more choices and more reasons to come back, you are confusing them. They don't know what your specialties are, what you supposedly do well, what they should order, and how to describe you to their friends. If your message is focused and easy to convey, more of your customers will convey your message.
  • Large menus take longer to order from. The more choices you have on your menu, the longer it takes each table to peruse that menu, and the longer it takes for them to order. For every minute they are NOT ordering, you are NOT making money for the seat they are occupying. Take this statement to heart if you want to be successful in the restaurant business: You will only ever be as successful as your peak period of service. 80% of revenue, and 100% of profit is made during peak periods. Anything that limits your ability to serve customers and collect money during your peak periods is limiting your potential for profit.
  • Large menus require more inventory items. The more items on your menu, the more ingredients you need to buy to make those items, and the more items you'll have on your shelf. Every item on your shelf represents a possibility for loss. It can be stolen, it can be mishandled, mis-prepped or stored incorrectly and spoiled. The less inventory items you have, the less waste you'll have. The less waste you have, the more profit you'll have.
  • Large menus require more equipment and personnel to produce. The more items you have on your menu, the less opportunity your staff has to cook multiple orders at once. Less multiple orders means more burners, grill space, fryer grease, and hands are required to produce the same number of dishes. All these additional tools cost you money.
  • Large menus mean longer ticket times. When you have too many different dishes cooking at once, and less multiple orders in the same pans, it means more time to produce whatever is being ordered. Beyond the fact that Americans are no longer willing to wait 45 minutes to have their dinner prepared for them, you should be thinking about how long ticket times limit your ability to process people through your dining room. The longer it takes to serve each table, the less tables you can turn during peak periods.
It is inherent in people to assume that somehow offering people more will make you appealling to more people. It's just not true. When you try to be all things to all people, you end up being very little to very few. People need to know what you're about. Keep your menu focused.

3) All talent and no brains

So you can cook. Your food is fantastic, and everyone you cook for confirms it. You're ready to open a restaurant then, aren't you?

NO!

Not to burst your bubble, but a lot of people are excellent cooks. Many of them have original ideas and fantastic food that no one has ever offered in a restaurant before. That doesn't make them, or you, a good candidate to open a restaurant.

Owning a restaurant isn't about cooking. It's not about having good food. While those things are components of a good restaurant, they are not the reason for it's success.

Once you have the perfect menu for your market, knowledgable staff to serve your market, a trained line to reproduce your food, and plenty of booze to ply your guests with, you're 1/3 of the way there. "WHAT?", you say? "That's it! I've got all the pieces in place! I'm ready to go!". No, you're 1/3 of the way there.

What most new restaurant owners don't realize is that having good food and service is only 1/3 of the battle. The other 2/3rds include marketing their restaurant and managing their restaurant. We'll talk about marketing after this, but managing is a very important piece to the puzzle that most new restaurant owners overlook. Beyond making good food and selling it to people, you need to know how to collect data and analyze your business to make sure you have the necessary information to run a profitable business.

You need to know:
  • How many people I'm feeding each day/shift/hour
  • What items they're buying, and how many of each
  • What gross profit those items are contributing
  • What those items should have cost me to sell
  • What my actual cost of selling those items is
  • What my labor is compared to my budget
  • How many labor dollars I spend per sales dollar
  • How many labor hours I spend per sales dollar
  • What I purchase each day, and how to categorize each purchase for analysis
  • What my sales are compared to what they should have been
  • What my profit and loss is for EACH WEEK
That's a lot of things to worry about, and that's only the tip of the ice berg. There are many other managerial concerns. This is why I'm telling you that your great ideas for a menu, and incredible talent for cooking will only get you 1/3 of the way to operating a successful restaurant.

4) Poor pricing strategy

Strategy? Yes, strategy. You need to have a method for pricing your menu. You can't just look at what everyone else is charging, and charge the same. The financial picture of your business is different than every other business out there, and you need to have a pricing strategy that takes your unique financial situation into account.

When considering pricing strategy, I first need to tell you what is being done out there now, in restaurants all over the country, even the world, because the point of this article is to tell you what mistakes everyone else is making.

The predominant method to pricing menus in the food service industry is to use a budgeted cost percentage to formulate prices that will yield that budgeted percentage when the sale of all your different items is taken into account. This method assumes that if you sell X dollars of food, and Y percentage of those dollars go to pay for the food, then you will get Z profit.

The major problem with this pricing method is that most operating expenses within a restaurant do not fluctuate as a percentage of sales. The rent of a restaurant is not always 5% of sales. If sales are down, the percentage goes up, if sales are up, the percentage goes down. Simply achieving a target food cost percentage does not guarantee that a restaurant will make the profit they priced for.

The common sense alternative to pricing by a target percentage is pricing according to the markup you need to cover the expense of doing business, leaving you with a profit you find acceptable. This method is called pricing by gross profit dollars. The basic principle of this method states that you can assume, through calculation, how much every person that walks through your door will cost you to serve, and that with this number you can price your menu to yield an average gross profit greater than the cost necessary to serve every person who walks through your door, in addition to your needed profit. Adjusting these prices according to market price points yields a gross profit that will cover your operating costs, your product costs, and the profit that you decide you need to make for this venture to be worth your time.

Pricing by gross profit is the only method of pricing that takes into account every cost of operating a business, including profit.

5) No marketing skill

This may be the biggest restaurant killer of them all. I've talked to hundreds of restaurant owners in my day. I have yet to meet ONE that didn't underestimate the importance of marketing. As I stated earlier, marketing is 1/3 of the reason you succeed or fail. I may even have to give marketing the extra 1% of the 100% possible when splitting reasons for success into 1/3rds, and say that it is even more important than good food and service, or management skill.

If I have a catch phrase about marketing, it's this:
"No matter how great your food is, if no one knows, it won't sell."
The worst fallacy I see new restaurant owners buy into, is that they can market their new restaurant through "word of mouth".

Yes, word of mouth marketing is fantastic. New customers are more likely to act on the recommendation of a past customer than they are an ad by you. That much is true.

The problem with assuming word of mouth marketing is going to make throngs of people do the Tennessee Waltz through your door is that when you're new, NO ONE KNOWS ABOUT YOU! You CAN'T depend on word of mouth marketing until you're established!

For this reason, a marketing program driven by "word of mouth" marketing for a startup restaurant is a recipe for failure. You need a better plan.

While I won't go into great detail as to what that plan should include in this post (you can certainly pay me to tell you though), I will tell you that the absolute best marketing tactic you can employ in any retail business or restaurant, is to gather contact information from EVERY person that comes through your door, and market to them. Marketing to existing customers represents an exponentially greater opportunity for increased sales than spending dollars trying to reach new customers. These existing customers are a better source for new customers than any marketing method out there targetting people who haven't been in your restaurant and aren't already familiar with your product.

6) Bad negotiation skills

Most new restaurant owners don't know what they SHOULD be paying for the services necessary to successfully operate a restaurant. That's a problem.

Every vendor out there, whether they be a food distribution company, point of sale software provider, chemical company, paper goods, linen, liquor, beer or wine distributor, or a credit card processor, has clients who get great deals, and clients who get taken advantage of.

Normally, the difference between a vendor giving you a good purchase rate, and taking advantage of you, is your knowledge of the goods your buying, and what other people are paying for them.

Two things are a given in negotiating a purchase contract:
  1. If you don't know what other people are paying for the same goods you're buying, you're not getting the best price
  2. If you aren't making your purveyors COMPETE for your business, you aren't getting the best price
While there are other negotiation tactics to consider when trying to get premium pricing from a vendor, these two are the most important to remember.

Know this. There is a sucker in every negotiation. If you don't know who that sucker is, it's you.

I realize there are other important factors to operating a successful restaurant. These are the six that immediately come to mind while writing this article. I see these six problems in most restaurants and food service ventures I see fail. Keep these six in mind, and maybe, just maybe, you won't become one of the majority of restaurant owners that fail.

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Tags: biggest, consultant, consulting, emotion, fail, failure, gross, make, marketing, mistakes, More…pricing, profit, rate, restaurant, restaurants, successful, why

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Comment by Judy "the foodie" Asman on April 2, 2008 at 9:44pm
Thanks for sharing this thoughtful post, Brandon.

One thing I will say is, if there is a large menu--a la Cheesecake Factory--make sure to promote that as your unique selling point. This has no doubt become one of it's "shticks," even going so far to use local sponsors for ad placements. As tacky as some may find this to be, the truth is you can armchair travel the world with its diverse menu and Cheesecake fans love it!
Comment by Vivian on April 2, 2008 at 8:09am
Although I agree with Brandon's point in general about not having too many menu items, I think TGIF's in particular is an exception. Their broad base of items allows big groups of people to go there and TGIF will be able to "please" everyone in the group if you know what I mean. A large portion of their premises is bar area and we all know the return on liquor. They also have some of the more highly trained staff in the business who are very good at upselling. And I assume with their franchise system , food ordering/costs, etc. are kept tightly in line with good perceived value... otherwise I agree with everything that Brandon said. If I had a nickel for every time I meet someone who says, "I'm a great cook and I give great dinner parties. I should open a restaurant" ahem, as if. I've had a restaurant and I am a pretty damn good cook plus a decent business person to boot, doesn't mean I'm running off to open my own joint any time soon.
Comment by Robyn on April 2, 2008 at 5:28am
Brandon,
Exceptionally great piece of writing. I think you touched on so many good points, let all owners listen up! I think one of the strongest truths you said was about marketing....owners need to market their places to continue a steady stream of customers through that door. It so sad when I hear a restaurateur say that their marketing campaigns worked for one month, but as soon as they stopped it...the customers stopped coming in. I think that is the case in point!
Another strong point you touched was strategic pricing. This is one method I try to consult with my clients as well.
Most concepts open up under capitalized, and play a game of financial catch up. This is also a leading cause of failure. It is so important that operators of restaurants go in to their new venture with multiple sources of working capital.
I look forward to reading more from you!

Non-Operator
Comment by Brandon O'Dell on April 1, 2008 at 10:44pm
....location, location, location.

I recently ate at the Top of the World restaurant on the 106th floor of the Stratosphere in Vegas. Got a very good ribeye (marketed as prime, but CAB in reality), undercooked scallops in a marginal curry cream sauce, a side of potatoes, a great cheese platter, and a 375ml bottle of wine all for the low, low price of $150.

The meal wasn't any better, probably not as good, as I could have gotten for half the price in Wichita. The service was pretty good. The view though? 106 stories of rotating glory with a cushy booth seat staring us directly out at the Vegas evening lights from above. It was one of a kind. Though I don't feel we received a good value on the food, the view was one of a kind, and even I had to admit it justified paying $70 for a $30 dish.
Comment by Steve Paterson on April 1, 2008 at 6:55pm
I was just reading a member profile and I saw this in his list of
Favorite Restaurants, Liquors, Wine and Beers

"Any restaurant with a gorgeous view"

So right he is! This is something that can overcome tremendous faliures in other areas.

There's a pier near where I live on the Gulf Coast that has a restaurant/bar on it. Perfect sunsets, night after night.

Packed. Lines down the pier to get in.

The food and service are so bad, Wikipedia even had a page devoted to it, but took it down due to slander issues.

Not only do the servers have attitude ("Do you have any idea how lucky you are to even be here?"), but the management backs up the arrogance.

...as the realtors say....
Comment by Steve Paterson on April 1, 2008 at 5:10pm
Good point Brandon.

I always grimmace when I see a dinner only restaurant open on the breakfast side of the street.

Non-Operator
Comment by Brandon O'Dell on April 1, 2008 at 5:03pm
A bad location is another big reason for a lot of failures, but like many of the other things I pointed out, it's possible to work around.

The problem with locations new owners is that people romanticize themselves into believing a location is better than it is. They ignore the fact they have 50 seats, but only 10 parking spaces, or that there's only access to them from one direction off the street. They don't check if their restaurant and/or sign is visible from the street, or don't make sure they even has a sign that screams "HERE WE ARE!".

I lump "location" into marketing, but it is very important on it's own. It's possible for a restaurant to thrive with a bad location, buy why would you want to try?
Comment by diane on April 1, 2008 at 3:51pm
Brandon, fantastic post! This is the kind of thoughtful contribution we should all aspire to.

One thing you didn't mention is bad location. My own personal restaurant failure involved a sexy but far too expensive location with no parking or visibility from the nearby Highway in a highly seasonal resort market... (but ooooh, it was right next to the gondola). Our second location was far more successful in a standard Class A retail space with more reasonable rent, plenty of parking and a visible location between Safeway and Starbucks. Unfortunately the first unit was such a cash drain, we had to sell them both.

Non-Operator
Comment by Brandon O'Dell on April 1, 2008 at 9:58am
Thanks for the feedback guys. It's appreciated.

To large menus, I would say that it's possible to have a successful concept despite making some mistakes.

There are definately concepts that successfully offer menus on steroids. There are also concepts that have no appreciable marketing strategy, concepts with bad logos, poor primary color choices, sub-par food, and overall lacking service, that are all successful.

McDonalds, for example, serves paper thin, frozen hamburgers. I wouldn't suggest to anyone to do that, but they do it with a lot of success.

Large menus, like other conceptual mistakes, can be overcome. In the case of a TGIF or Denny's, tight operational systems trump the menu issues. Most restaurants don't have the resources and/or knowledge to design menus that effectively cross utilize products, strictly monitor waste and prep, and circumvent long ordering and preparation times. These companies get around their big menu problems, but in my opinion, they're leaving money on the table.

To Andy:
I'm excited to hear Applebees is cutting their menu. No doubt, other chains will follow. Though I hang a lot of s*** on Applebees for the things they do in the interest of speed and consistency, I also hold them up as a company who indpendent operators have a lot to learn from. Aside from that consistency, and the ability to process a lot of full service dining customers, I think Applebees willingness to constantly change is one of the reasons they remain at the top of the food chain.
Comment by Doug Golden on April 1, 2008 at 9:13am
Brandon - this is one of the most straightforward and accurate (IMO) posts I have seen on FohBoh to date concerning restaurant failure.

Most would have thrown in "being undercapitalized" in the top 5, I think that is a skewed and over used excuse. Let's face it... many people are just bad with money no matter how talented and passionate they are. It's not that they are undercapitalized.... they just throw money at the wrong priorities.

A marketing strategy should be well thought out and planned for a start-up. Funds should then be earmarked first and foremost for said plan. If you do not have adequate capital to do so... put off opening until you do.

Again...great post!

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