Originally Published: 01 September 2022. Updated: 21 May 20 2024.
Restaurant Failure Rate
As a restaurant owner or manager, you must be aware of the top 14 reasons your restaurant is about to fail within the first year in order to plan and manage it before disaster strikes.
According to various sources, restaurant failure rates range from 30% to 70%. So when a restaurant closes, unless you’re one of the stunned employees who didn’t know, it’s hardly breaking news.
How Often Do Restaurants Fail
In the past year, there has been a 41% increase in the number of restaurants that have been forced to close their doors. According to the accounting company Price Nailey, over 13,000 restaurants in the United Kingdom went bankrupt in the 12 months leading up to March 31, 2022. This is a 4% increase when compared to the previous 12 months, which saw 926 restaurant businesses go bankrupt.
Furthermore, new data from the accounting firm UHY Hacker Young, indicated that restaurant closures increased by 64% in the past year to May 2022.
Summary of the Article on UK Restaurant Insolvencies by Anthony Batty & Company LLP recently stated that:
- Alarming Surge in Insolvencies: The number of UK restaurants succumbing to insolvency has skyrocketed, marking a staggering 46% increase in the past year alone. This figure has surged from 1,517 in 2021/22 to a concerning 2,214 in 2022/23.
- Impact on the Hospitality Sector: This increase mirrors the struggles seen in the pub sector, with general inflation, rising energy costs, and reduced consumer spending as major contributing factors.
The Contributing Factors were:
- Staff Shortages: Ongoing staff shortages in the hospitality industry have driven up wage costs.
- Debt Servicing Costs: Increased interest rates have raised the costs of servicing debt, affecting restaurants that rely on debt finance for renovations and expansion.
- Overall Outlook: Insolvencies in the restaurant sector are expected to continue rising until there is a substantial reduction in interest rates and inflation.
As well as high prices and food cost inflation, there are too many chain restaurants on many high streets, which compete with one another for an increasingly small number of customers. Since profit margins are still being reduced due to high food and energy prices, many restaurants and companies will continue to be in danger of going out of business.
Why Do Restaurants Fail?
Subtle signs that a restaurant is in trouble and is about to fail to include:
- A restaurant with an empty dining room is a clear red flag.
- Bad Location.
- “Hands Off” Restaurant Owners.
- Poor Management Team.
- Tax Complications or Evasion.
- Bad Customer Service.
- Lack of Attention to Accounting Practices.
- Too Many Staff Members.
- Little or No Advertising.
Top Reasons Why Restaurants Fail
Signals That Your Restaurant Is About to Go Out of Business
- Low Customer Turnover
If customers are not coming in and leaving consistently, this likely means that the food isn’t worth it. Reduced foot traffic – if guests are noticeably less frequent than usual, this might mean that there is something wrong with the food, the service, or even the layout design of your restaurant.
The average restaurant has a customer turnover rate of around 100%. This means that for every 100 customers that visit a restaurant, only around 10 of them will stay for more than three months. This means that restaurants have to keep their customers happy to keep them coming back.
Solution: One way that restaurants can keep their customers happy is by providing excellent service at all times. If a customer feels that the staff is unhelpful or rude, they are likely to switch to another restaurant. Another way that restaurants can keep their customers happy is by offering great food. If a customer feels that their food is not up to scratch, they are likely to switch to another restaurant.
- Slow Sales Growth
If revenues are barely growing over time, this could point to several issues inside the kitchen (or even worse, an unsanitary environment).
Solution: Increase your marketing effort including local store marketing and social media. Menu engineering with subtle increments in the meal price
- Shrinking Staff
Servers and line managers are key bellwether: Servers will bolt if their numbers – and thus their income – starts shrinking. When managers begin talking about “looking elsewhere” and “making do with less,” know that difficult days are likely ahead for everyone.
Solution: Your team is your key asset, look after them well to make your restaurant business great.
Tasks And Strategies For Successful Restaurant Operations Management
- Losing Money On Food Served
If you are losing money on every meal you serve, beware. Restaurant owners are always looking for ways to cut costs, but it’s not always easy to find ways to make money while still serving good food.
When you serve food that costs more than it earns, it means that the restaurant is losing money on every meal it serves. When you serve high-priced items that don’t sell well and when you serve poor-quality food that people are likely to throw away is a recipe for disaster.
Solution: One way to make money while serving meals is to make money on each meal. Create menu engineering regularly to keep abreast of things. Negotiate with your suppliers for a lower food purchasing price.
- Beware the phrase “MINIMAL SERVICE”.
When everyday restaurants start “strategically” shutting down one or two days a week, there’s often nothing strategic about it. Customers receive the incorrect impression when the business decides to take vacation days off, close sooner than the hours that are shown on the website, or open later than the hours that are listed on the website.
This is especially the case when the hours that are displayed on the website directly contradict the actual hours that the business is open for business. When this happens, restaurant employees are aware that their pay will be cut, and customers will be quick to criticize, both online and in person, any establishment that is unable to maintain its regular business hours. This is not good for morale.
Solution: Some restaurants – especially new ones – don’t have the demand to justify staying open for longer hours, seven days a week. And sometimes they overstaff. The owner might just be finding the right balance before settling on a set opening time.
Customers will be quick to criticize any establishment that is unable to maintain its regular business hours so, beware!
- Unable To Compete With Competitors Successfully
There may have been a rise in the number of restaurants in the area. This has caused the competition to be stiffer than ever. Unfortunately, your restaurant is unable to keep up with the competition.
One of the main reasons why your restaurant is struggling is that you are not offering the same quality of food that the other restaurants are. You are also not offering the same customer service that the most popular restaurants are.
Solution: Your restaurant needs to offer the same or better quality of food and customer service if you want to stay in business. If you cannot offer these things, the
- Trouble Paying Bills
Suppliers and landlords are frequently the first to notice a decline in cash flow. Keep an eye on deliveries; if inventory falls short of expectations or servers notice a lack of linens or disposables, there is a problem.
A restaurant can usually control food costs and float money between vendors, but it’s a big problem if they can’t pay their employees or rent.
Solution: Do regular weekly and periodic cash flow and profit and loss calculations to stay on top of the business. Regular daily and weekly inventory count of high-cost food items. Monitor lights on and off procedures in the restaurant. Manage your utility bills and sundries expenses diligently.
- No Idea How To Market Your Restaurant.
You know that marketing is essential to the success of your restaurant but, you have no idea what to do. What kind of marketing is best for a restaurant? And how can you do it effectively? Here are some tips:
Solution: Choose the right marketing mix. The best marketing mix for a restaurant will vary depending on the type of restaurant, the location, and the market. However, some common elements of a successful marketing mix for a restaurant include advertising, public relations, and customer service. Be prepared to invest in advertising and social media.
- Your Employees Are Quitting Or Being Fired.
What do you do? There are a few things you can do to prevent your employees from quitting or being fired. First, make sure you have a good employee retention policy in place. This policy should outline the expectations of your employees, what is considered a violation of those expectations, and what actions are taken if an employee quits or is fired.
Second, make sure your employees are aware of their rights. Specifically, make sure they know their rights to privacy, free speech, and due process. Make certain that you have a strong communication strategy in place before moving on to the next step.
Solution: Management goes back to the basics, educating its staff and stressing that small things can add up to big gains.
- You Have No Idea How To Run A Restaurant.
You have no idea what you are doing when it comes to food and service management. You are not qualified to be in charge of a kitchen and your staff. You don’t know how to manage finances and your restaurant will not be profitable. Stop trying to open a restaurant and learn some basics before you do.
Solution: Enlist the knowledge of a consultant to help you.High-quality staff who knows what they are doing and train them well. Look into menu engineering. Replace the time-consuming, costly tasting menu with a more relaxed, cost-effective menu that better-suited neighbourhood demand.
- Cutting Quality
Be wary of a sudden shift to cheap or inferior ingredients. Cutting quality can anticipate job cuts. But, many cash-strapped restaurant managers or owners looking to cut food and beverage costs may begin making more subtle cuts.
Plates that were once overflowing with three tacos have been reduced to two, overnight protein amounts have been reduced, and everyday staples are running low.
Solution: Management goes back to basics, instructing employees and emphasizing the importance of small improvements adding up to big gains. A problematic dish may be overlooked if the staff is given the freedom to address it immediately to satisfy customers.
- Constant Diner Deals and Discounts
It’s one thing to provide a lunch bargain or Groupon deal every once in a while, but a steady stream of freebies can be a crippling crutch for businesses that are struggling to make ends meet.
It is not good for a restaurant’s business when they resort to using extreme discounting.
There is a possibility that sales will increase during that month; however, once the promotion has come to an end, sales will go back down to their previous level.
Solution: The management makes an investment in a public relations or marketing campaign that does not come off as overly desperate. These can be as straightforward as writing a narrative about the experiences that your chef has had, developing a new area of the menu, or experimenting with thematic bar selections. Displaying the photographs of your food and restaurant on your social media site.
- Owner No Show
The owner or manager not being present is usually a sign that trouble is brewing when hands-on owners start to become noticeably missing.
Solution: If an operator shows a willingness to identify critical problems by touching tables, tasting the food, and holding regular restaurant staff meetings to absorb ideas, he’s still in the game. A lot of restaurants were on the verge of going out of business before they found the formula for sustained success that allowed them to thrive.
- Negative Restaurant Social Media Feedback
Disastrous Yelp, Uber-eat, or Tripadvisor ratings or a trail of critical comments on Facebook can kill a once-thriving restaurant. Unfortunately, by the time a negative review appears the fire has probably been smouldering for some time. When you catch a problem, it’s generally something that happened a month or two ago, Sometimes it takes a while to rectify it because you need to win back customers.
Solution: An owner who heeds the critics and rights wrongs is worth sticking with, particularly if that means improving service and the menu through training or better management.
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Conclusion – Your Restaurant Is About To Fail
Slow restaurant sales growth is a common problem for small businesses. When sales growth slows, it can be difficult to keep up with the costs of running the business. This can lead to budget problems and a decrease in the quality of the customer experience.
There are several things that businesses can do to combat slow sales growth. They can review their pricing strategies, and restaurant businesses can increase prices without providing a corresponding increase in quality but it has to be done strategically.
Look at the solutions for the Top 14 reasons your restaurant is about to fail within the first year and take action as soon as any of these problems are found. The faster you fix the problem, the faster your restaurant will survive.
(FAQ’s) Fequently Asked Questions and Answers
1. How do most restaurants fail?
Most restaurants fail due to poor management, lack of capital, insufficient market research, high operational costs, and inadequate marketing. These elements can lead to cash flow problems, poor customer retention, and insolvency.
2. What is the #1 reason why customers do not return to a restaurant?
Poor service is the number one reason customers do not return to a restaurant, as well as slow service, rude or inattentive staff, and inconsistent food quality. A negative dining experience often discourages repeat visits.
3. What is the biggest problem in the restaurant industry?
The biggest problem in the restaurant industry is the high operational costs, which include rent, wages, utilities, and food supplies. These costs are exacerbated by economic factors such as inflation and fluctuating interest rates, making it difficult for many restaurants to maintain profitability.
4. How many cafes fail in the first year?
Approximately 60% of cafes fail within the first year. This high failure rate is often due to lack of experience, inadequate planning, and underestimating the competitive nature of the food and beverage industry.
5. How can you tell if a restaurant is going out of business?
Signs that a restaurant might be going out of business include declining customer numbers, frequent changes in staff, reduced menu options, poor maintenance of the premises, and visible financial strain, such as delays in paying suppliers or staff.
6. How long does it take for a restaurant to fail?
It takes about two to three years for a struggling restaurant to fail. However, many fail within the first year due to the inability to achieve sustainable profitability and market presence.
7. What is the average lifespan of a restaurant?
The average lifespan of a restaurant is about five years. Successful establishments may thrive longer, but the industry’s high failure rate means many do not survive beyond this period.
8. Why is nobody coming to my restaurant?
If nobody is coming to your restaurant, it could be due to several reasons, including poor location, ineffective marketing, inconsistent food quality, unappealing menu, subpar customer service, or negative reviews. Addressing these issues can help attract more customers.