Why most restaurants fail within the first three years

An estimated 60 percent of restaurants go out of business within their first three years. The first year is always the hardest— with 44 percent failing to get off the ground.

Christine Letchinger, an associate professor at Chicago's Kendall College, provided some insight into what goes wrong in "The Anatomy of Restaurant Failure: Dead Man Walking," published exclusively on menucoverdepot.com.

Menu Cover Depot offered us the chance to summarize highlights from the 5,000-word article and they are included below.

Location, location, location

The causes behind quick failure range from a lack of clarity in the concept's development to choosing the wrong location.

Success is heavily dependent on the strength of the concept, however most restaurateurs confuse concept with menu. Restaurants are more than their recipes, and concept development should also entail location, marketing, service, design, price, positioning and a long-term strategy.

Concepts should be simple, clear and communicable in one sentence. Operators should also think beyond opening day tasks (signing the lease, ordering equipment, etc.) and anticipate obstacles. They need operational and exit strategies to guide their research and planning efforts, and they also need to be open to modifications of their original ideas.

The following should be considered when opening a restaurant:

  • How many units do you plan?
  • Do you plan to franchise?
  • Do you plan to grow and sell?
  • What is the ROI you're going for? 
  • Do you want to be the first to market with a concept, or the best?
  • Do you want to be an operator or absentee owner?
  • Should you bring a partner on board?

Market and location

Operators also need to consider the size of the market and economic condition of the neighborhood they choose for the concept. They also need to thoroughly analyze competition, including direct and indirect competition, their price points, strengths and weaknesses.

Other details that should to be vetted include:

  • Zoning laws and restrictions.
  • Parking.
  • Any urban renewal plans.
  • The state of the neighborhood — deteriorating or surging? (Costs of property rise in surging areas).

Menu

The menu requires a balance between number of items, price levels and the right mix of trendy versus traditional offerings. The biggest keys to the menu are filling a need in the market and offering an advantage over the competition.

Five common menu mistakes are:

  1. All over the place with nothing to tie it together. An eclectic menu will not necessarily attract more customers, but rather confuse them;
  2. Too broad, which creates production and inventory problems, and slows down service;
  3. Too narrow, which can limit the potential to attract a large crowd.
  4. Too trendy, with foods that have a limited shelf life.
  5. Too ambitious, with dishes that are beyond the skill level of the cooks or have limited availability.

Conversely, successful menus have the following:

  1. Signature items to secure reputation.
  2. Extensive testing to solidify production procedures.
  3. Precise recipes and specs, to ensure consistency.
  4. Sales patterns are monitored on a daily basis, and introductions and removals are frequent.
  5. Menu items have been priced based on market demand and competitor pricing.
  6. Menu items are priced to promote upselling beyond entrees.
  7. Pricing is "consistent with the concept and conducive to financial goals."

Systems and procedures

Beyond the food, it's the systems and procedures that tend to protect the business for the long haul. This includes hiring the right people, controlling quality levels and producing consistent results. Create a plan to address your staffing needs, determine job descriptions and devise training systems for all employees.

Also, the person who checks food deliveries should have the aid of a detailed purchase sheet or purchase order to ensure accuracy.

Ongoing monitoring of sales trends, inventory and productivity levels is critical.

Marketing

A marketing plan should be in place before the restaurant opens. This includes a well-designed website and press releases for local media. Social media should also be leveraged. Consider a soft opening versus a grand opening. Also consider promotional events and sponsorships to strengthen community relations.

Read more "The Anatomy of Restaurant Failure: Dead Man Walking" here.

Read more about operations management.

Photo provided by Wikimedia.

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