White Paper: Why do Restaurants Fail?

Introduction and Factoids

Opening and growing a business is tough work, especially a restaurant. While factors like location, capitalization, and management’s attention to detail all play an important part, there are other elements that can make or break success. But first, here are some factoids to clarify potential misconceptions and emphasize the importance of repeat customers:

  • According to recent studies conducted by Dr. H.G. Parsa, 59 percent of hospitality businesses fail within the first three years. 26 percent of failures occur in the first year, 19 percent in the second year, and 14 percent in the third year of business. 1
  • A recent study found that 70 percent of restaurant customers never make a return visit, and many restaurants do nothing to retain those customers or encourage them to return. 2
  • Zach Goldstein, CEO of Thankx Inc, which published the above-mentioned study says, “Modern customers are promiscuous. With countless competing options, they don’t mind spreading the love. Most brands write them off by focusing on customer acquisition, but customer retention is seven times more cost-effective—they’re already familiar with you.” 2
  • Retaining customers is vital to the success of a restaurant. Why? The reasons are in the revenue. Repeat restaurant customers account for at least 1/3 of a restaurant’s revenue—astounding, as these customers may only account for about 15 percent of its customer base. What’s more, a recent Harvard study found that if a restaurant increases repeat visits by 5 percent, it can have the potential to increase profits from 25 percent to 125 percent. 2

Restaurants don’t have much time to get it right—a key to success is quickly acquiring and retaining repeat customers. Let’s look at the factors that are imperative for restaurants to succeed.

 

Key Factors of Why Restaurants Fail

There are several reasons restaurants fail—all arise from key areas or pillars that are crucial to a restaurant’s success. These factors include inventory and staff control, attention to accounting practices, management of food costs, incentives, customer service, and lack of systems and system integrations.

 

Lack of Inventory and Staff Control

“Profitability analysis and inventory control is an important task of every manager or owner of a restaurant or bar and must be carried out regularly in order to prevent theft and reduce unnecessary costs.” 1

“It has been shown that monthly, the average bar loses about 20 percent of its sales due to theft, free drinks, spilled drinks, and other expenses. This means that you lose between $4,000 to $10,000 per month without even knowing about it.” 1

 

Customer Service

“If you have untrained staff and/or bad customer service, customers won’t return to your restaurant. That negative reputation will build, and in the world of modern technology, unhappy customers will use websites like Yelp.com to warn others away. People are important to your business.” 1

Manage and Control Your Workforce

Your staff is your first line of the customer experience and last touch for kitchen inventory. Simplify labor management, build staff schedules, and organize your team with our Workforce solution. Track employee time to better understand who’s managing your restaurant, and ultimately save costs. Interested? Go to our Workforce page.

 

Miscalculated Food Cost Percentages

“Knowing how to properly price your restaurant menu is the first step toward making a profit. Do you know how to cost out menus on a per-plate basis? Most owners do not. For example, adding caviar to a menu item as a supplement can be a good idea to capitalize on a low-cost dish. Replacing parmigiana with grana padano will cut your risotto bill by thirds. Many tricks can help keep food costs down with taste remaining the same. The golden rule of 30 percent food cost will help you keep menu items in line.” 3

“Pay special attention when creating ingredient lists for inventory items. It is important that you correctly specify amounts that are required to prepare dishes before cleaning, shaping, freezing, etc. to have an accurate insight into the requirements of goods and to have proper stock control.” 1

Simplify Your Food & Beverage Inventory

Track your inventory and control your costs with our intuitive cloud-based food management solution. Quickly forecast sales, manage vendors, and make smarter purchasing decisions.

  • Cut down on waste and over-production
  • Easily generate purchase orders
  • Efficiently plan menus and recipes

 Want some help? Visit our Food and Beverage Management page. 

 

Lack of Attention to Accounting Practices

“Since they work on such tight margins, restaurants must keep a close eye on their cash flow. Making sure you have enough cash to cover big expenses, like food orders and payroll, can often make the difference between recovery and closure. Double-checking your books is a good idea and getting a CPA to do the polishing will ensure everything is in its correct place. If your accounts run into the red, start looking for ways to save money.” 3

Knowledge is Power

Save time and money when you make data-driven decisions based on synchronized POS data. With POS Hub, a cloud-based and above store POS reporting system, all of your POS data will be consolidated into a single view. When you have the right data, you can better manage expenses like food and labor costs. Learn more on our POS Hub page

 

No Incentive

 “Have you given customers a reason to return? Do you reward your loyal customers? Once you’ve earned customer loyalty, it must be nurtured to be maintained. It’s important to show your loyal customers that you really appreciate them. It’s your job to convince them of their importance. Do you have a loyalty program? If not, you’ve given them no incentive to return to your restaurant. You have endless options for rewarding loyalty from rewards programs to special offers and exclusive perks. Incentives also have the potential of generating positive advertising for your business, so incentives are a win-win.” 2

  

Undercapitalization

“Not having the requisite funding for the first 6-12 months of a restaurant’s operations is a sure- fire way to ensure failure. Most restaurants will go through an initial phase with higher than normal costs and losses while everything gets put into place. Unexpected costs will always arise, so you must plan for it. Initially, you must expect that actual costs will be significantly higher than budgeted and allocated costs. Always have a cushion so that unexpected costs will not bankrupt the restaurant. A restaurant that runs out of working capital before it can start running at optimal efficiency and make a profit will eventually shut down. Once that happens, there is no way to make that money back.” 4

Lending with Restaurants in Mind

All small businesses need capital at some point. If you’re planning to expand your restaurant, and need a little extra working capital, we get it. Grow your business with fair pricing, fast funding, and reasonable repayment planning. Check out Beyond Lending.

 

It’s a Poor Restaurant Who Lacks Essential Tools

“Creating a business plan is essential preparation leading up to the opening of your restaurant. It can also be useful to reference it when making impactful decisions about the restaurant. However, a business plan is only a static resource. Once you’re up and running you’ll need dynamic tools to help you monitor and manage your restaurant.” 5

Tools for Impactful Decisions

The right restaurant operations software can simplify your daily processes. When you leverage tools to track employee scheduling, food costs, and labor forecasting, you can save time and money from the minute your guests arrive to when they pay their bill. Learn more about Beyond’s Restaurant Solutions

 

This is Where a Restaurant Point-of-Sale (POS) System Comes In

“Operational complexity, which Dr. Parsa’s research found to be an advantage, requires equally complex systems to efficiently manage operations. Restaurant POS systems offer users everything necessary to monitor back-of-house operations such as inventory management and food costing. For the front of the house, many systems on the market now have mobile capabilities (mPOS) that enable servers to use tablets and other devices to enter orders and process payments at the table. The operational benefits of mPOS systems have taken the market by storm, as 72 percent of the restaurant POS buyers we advise request mPOS systems.

Restaurant POS systems typically offer front-of-house and back-of-house features in one integrated solution.

With tools such as these, restaurant operators can monitor sales reports to see what menu items are selling and which items are generating the most revenue. Purchases can be sorted by individual customer or may be broken down by demographics.”5

More Intuitive Restaurant Point-of-Sale.

Tailor your POS to your daily processes and long-term business goals with our adaptable product suite. We offer a scalable line of point-of-sale solutions, with a range of features and functions—all customizable to your specific needs. Whether you run a corner boutique, neighborhood pub, or multi-location restaurant, we’ll help you find the best POS for your business. Find out more about our POS solutions

 

The Beyond Mission

Beyond is a financial technology and transactions company that strives to simplify operations and reduce costs for small and midsize business owners in a clear, transparent manner they can trust. Offering a suite of services ranging from payment processing, to payroll and point-of-sale, Beyond provides transparent pricing, flexible contract terms, and quality customer support.

To give your restaurant the competitive edge it deserves, we tailor our tools to the unique needs of restaurant owners. Our intuitive restaurant management software simplifies the complicated back office processes that slow you down.  

 

Sources:

  1. POS Sector
  2. Restaurant Engine
  3. The Balance Small Business
  4. Restaurant Innovations
  5. Software Advice