As a career restaurant consultant and operator, this question has always been intriguing to me. Restaurants have been infamously branded with a highest 1st year business failure. I have seen unrealistic internet reports of up to 90% failure rates the first year. A study reported in Forbes Magazine by two economist who tracked start-up business failures over a 15-year period, found the failure rate of restaurants was only 17% the first year, which is even lower than the national average of 19% for other small businesses. In actuality, 59% do fail by year three. The majority of these are independent restaurants. Every restaurant is different in size, location, and concept so it often difficult to compare apples to apples when discussing failure reasons. From my experience with independent restaurant start-ups, the common reasons for 1st year failures are under capitalization, not being able to sustain staffing levels for smaller concepts, failing to put into place systems to manage consistency, and not developing a second in command.
The environment where you can more easily compare results is with a franchise restaurant chains which typically achieve a national success rate of 95% over the same 3-year period. This is attributed to well established and proven operating systems in addition to the high bar franchisors set for their franchise partners to meet during the approval process. It is important that they set up their prospects up for success. The brand’s success is dependent on expansion which lead to more royalty collection usually around 6% of net sales. Franchisors also require larger amounts of capital for construction, stock, and operating contingencies, they assist with better location selections, and generally require the applicant have extensive restaurant operations experience.
Contrary to popular belief, new franchisees do not “own” the franchise restaurant. What they are buying is the rights to use their operating systems, logos, and brand images with the agreement they will following the franchise covenants. This requires consistency to brand standards. Yet, even with all these excellent brand systems and an equal concept, why do some franchisees flourish and others flounder?
Usually it boils down to poor management. The following are the four key areas that I have seen time and time again as I visited dozens of franchise restaurants over decades of my consulting career:
Failure to properly taking care of their external customers. Most businesses focus heavily on providing good customer service to their paying guests as they know satisfying them is essential to grow their business. Obviously, some are better at this than others. I have witnessed many a short-sighted manager be reluctant to “comp” the $10.00 meal of a disappointed guest when in reality it only costs restaurants 22-35 cents per dollar for the food cost or roughly $3.00 on a $10.00 meal. It costs 70% more in marketing expenses to attract a totally new guest than to maintain a current guest. Risking the repeat business of a guest over $3.00 is a ridiculous sales growth strategy. The most successful restaurateurs focus on a routine of supervisors frequently engaging the guests at the table and inquiring about the guest experience when issues can be corrected before they become big scenes or the customers chose a competitor. They are also very in-tune to all types of guest feedback and take quick action to improve opportunity areas.
Failure to properly take care of internal customers. There is an old adage that says if you take care of the employees they in turn will take care of the guests. When I set out to revitalize a struggling restaurant, the first thing I focus on is relieving as many stressors as I can for the staff. Every issue I can tick off is a degree less pressure and builds trust. These fixes could be as small as ordering enough soup spoons so they could minimize trips to the dish room during the rush to making sure they have enough uniforms so they did not have to struggle to meet the grooming standard or insuring they received their breaks on time. During staff listening sessions, the two most common complaints that cause animosity between team members and/or supervisors are usually the management not insuring the previous shift does their side work or not correcting poor performance of other staff members, particularly when it comes to reporting to work on time or calling off sick. If not dealt with swiftly, this inconsistency can develop into restaurant-wide complaints of favoritism or discrimination.
Failure to use key performance indicators to evaluate their performance. It is surprising how many restaurateurs do not track their results, even the basics of food cost and labor cost. And even if they do, the owner and the GM may not communicate the results and solutions to the rest of the management team or employee level. The restaurant business is a business of pennies. The average restaurant makes a profit of only 4 cents for every dollar of revenue. It is very important for operators to know where they stand on a daily, weekly, and monthly basis so they can take quick action when they see a problem.
Failure to hold people accountable. Once a problem is identified, some teams do not respond quickly to correct the problem. This is due to several reasons: Fear of confrontation, they are not sure how to correct the problem, or procrastination. This is particularly common if there is a high management or employee turnover rate. I have heard employees say that they have seen managers come and go and therefore they will continue with the status quo because they know the new procedure will not be consistently implemented. On the flip-side, managers who have constant turnover on their shifts often will over-look issues and poor behaviors because they fear people will quit if confronted in essence making themselves powerless. It is essential that leadership reach out for support if they are having chronic problems.
Hands Off Ownership: When businesses are new, it is not uncommon to see the owner there for long periods of the day, even 7 days a week. They are so focused on making their “new baby” successful. Their hard work and dedication often pays off and if they proactively develop their second-in-command this creates the opportunity to expand to more locations. Unfortunately, as the number of locations increase so does the amount of distractions. Some owners become much more enamored with the excitement of opening new restaurants than the operations of restaurants. If they are not careful, soon they lose touch with the brand standards, the daily issues their team’s face and operational consistency begins to drop. Usually, the first area to go is sanitation, then consistency in service and food quality.
There you have it! The most common reasons that established restaurants whether independent or franchise fail in the long run. All can be prevented if operators take care of internal and external customers, take the time to regularly review their benchmarks,, and keep involved and focused on the day-to day operations.