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 t