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5 Reasons Why Restaurants FAIL To Survive In The First Year


Today we’re going to be talking about the top five reasons why restaurants, food and beverage industry has failed.

These are the five common pitfalls which you, if you know, can avoid. More than 60% of restaurants within the first year of operations fail.

That means that six out of 10 people that run restaurant that has a beautiful idea, who wants to be able to bring their dreams into reality, fail within the first year. And a lot of the reasoning behind why they fail can be avoided if only they know about these five common pitfalls.

1.) Poor Understanding of Location Characteristics

The number one reason why restaurant businesses fail is because of the owner’s poor understanding of the nuances of their location.

Even at a basic level, you must understand the fundamental differences between a High Traffic Location and Destination Location. Although they sit on the opposite side of the spectrum, the nuances matter. High Traffic Locations tend to be in expensive urban areas like Downtown or Financial Districts. These spots have a large number of foot traffic, which means it has a high potential for more revenue.

Destination Locations are the opposite and tend to be located in side streets and sees less foot traffic. People need to drive over specifically for your restaurant and having a really high intent. Potential for customers for Destination Locations are much lower – slotting their rent to be way more affordable than High Traffic spots.

For instance, our ice cream shop is located in a spot that doesn’t have high foot traffic and not in the Downtown core. People would have to drive to our store or get there by transit.

5 Reasons Why Restaurants FAIL To Survive In The First Year 1

A lot of people make the error thinking…”Hey, you know what? I want to pay $10,000 in rent and I’m going to be making $100,000 in revenue because I’m paying so much money for rent and this high traffic place.”

But it DOESN’T work that way.

High Traffic only means higher potential for customers coming into the restaurant. It doesn’t equate to more customers. It doesn’t guarantee that people walking by your shop will come into your store.

You still need to do the work in attracting walk-by traffic. You still need to have a product-market fit.

And if you are running a Destination Location, you need to do the RIGHT amount of marketing. Doing too little means no one will know you exist. You need get your food offering in front of your ideal customers. You don’t have the same privilege as High Traffic spots to put a banner out your door and have maybe X number of people walk in just by doing that.

You need to do A LOT of things right to get someone to drive or transit specifically to your place. It may be community building, it may be promos, or it may be leveraging reviews to push people over the edge to come.

If you understand where your location falls in the spectrum and the unique elements of your restaurant location (e.g. accessibility, crime rate, visibility, and community) then you’re going to be able to prep your restaurant for success and you’re going to avoid much more pitfalls.

2.) Poor Team Management

Everyone in the restaurant industry knows that staffing is a huge problem. That it is hard to find good staff, keep them, yada yada yada. I get it.

But that’s because the HR scene in the industry is at a very substandard level. The care – the effort – the standard (if any) – is terrible. Add in a pinch of ego and you’re in a wonderful place (/sarcasm). It’s clear that certain people are placed into a position to hire, when they shouldn’t be. That’s problem #1.

Next, you need to hire people that have the same aligned values as you. If the way you do things and the ways they do things don’t align, then you’re in big trouble.

If you guys are not speaking the same language or don’t have the same mission, you’ll always be butting heads. That trickles down to them cutting corners, not caring about their work and not having any accountability. And this could have detrimental effects for a restaurant. It isn’t because they are a bad person or have poor work ethic either – they just didn’t align with your values and culture.

Sometimes I see owners treat their employees like trash. What I mean by that is giving them minimum wage, cutting on the benefits, not giving them development opportunities, not trusting them, always looking over their shoulders and micromanaging them at every turn.

Just think about it – how would you feel if you’re not treated with respect? How would you feel if you’re not empowered to take actions?

How are you actually able to actually take any accountability if there is no trust in you, which is a reason why we need to empower our staff.

For us at 720 Sweets, we have a $10 rule. That means: anything below $10 our staff has the ability to void, to comp, to actually give out products for that amount.

That way, they can bring a pleasant experience for customers and feel like that they have trust – that they can make a decision – they don’t need to go through us. This allows them to be much more accountable for our business, treating it like their own, right?

For those of you that think, what if someone ends up abusing this $10 rules?

I can tell you that people do abuse it. But those people don’t align with business because their values are different. They’re not high in integrity, they are not trustworthy. They would be cut.

Since we really try our best to make sure our hires align with our values, we already vetted 90% of those bad apples out. Which is why this $10 rule works very well for us.

Your team – whether they are front-of-house (FOH) or back-of-house (BOH) – are human. And if you treat them poorly or don’t have the proper hiring standards, then your business will be affected greatly.

3.) Bad Ego

5 Reasons Why Restaurants FAIL To Survive In The First Year 2

It’s okay if your food sucks. There’s room for improvement.

It’s okay that your customer service is not the greatest. People are willing to give you another chance if you have the right attitude and are willing to improve.

People understand that if you’re genuine and putting in the work and actually improving your food offering, then they’ll be much more likely to support you along the journey.

Why a lot of people fail is because of ego.

Imagine getting feedback from a customer that your food is underwhelming or service was lacking. You take it personally and ignore it because…what do these guys don’t know, right?

If one person tells you that, it’s not a big problem.

But if 10 people tell you that your food sucks, then you should better take action to improve and tweak it.

What some restaruant owners do wrong is let their ego gets in the way of them seeing clearly that customers are trying to tell you something is not right.

Same thing with customer service. They can take it personally. They think that, you know what? My customers are picking on me. You know what? My process, this is something that I’ve been doing for the last 20 years. It’s okay because it’s been working for the last 20 years. Well, sad to say it.

The world is not fair and they’re not willing to adopt and change because they have this idea about their recipe is amazing or people don’t know what they are talking about. Well, that’s the reason why they fail.

They’re failing because their ego is in the way of them improving, delivering better customer service, better food offering.

So if you want to succeed, make sure your ego is not blocking your judgment. Make sure you’re able to take in that constructive criticism and actually do something to improve upon it.

That way, you’re going to be able to bring your customer along the journey with you for this whole development and create an amazing experience for your customers.

5 Reasons Why Restaurants FAIL To Survive In The First Year 3

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4.) Not Knowing Their Numbers

5 Reasons Why Restaurants FAIL To Survive In The First Year 4

Do you really know the costs of goods sold (COGS) for your restaurant? Are you keeping tabs on the percentage that you’re actually spending on labor? And do you know how much rent actually accounts for your total revenue?

If you don’t know these numbers, these golden metrics and these golden margins, you’re not going to be successful.

If you don’t know the numbers, how can you know if someone isn’t stealing from you? How do you know whether you’re overspending on one part of your business compared to the industry standard? How can you manage your cash flow properly for expansion?

Let’s stick with food cost here. Knowing your numbers allow you to manage your food costs properly.

Let’s say your burger costs $3 to make and you sell it for $10 a pop. Then all of a sudden the COGS raises to $5. If you’re tracking things, you’d know that something is wrong.

Maybe you’ve been throwing away a lot of ingredients recently because you’ve over-ordered and now they’re expired.

Or maybe someone is stealing from you. You’re buying $500 worth of burgers, but you only have $400 worth of ingredients.

What’s going on?

By tracking and knowing your numbers, you can see when the numbers don’t add up and then play detective to find the problem. It may be developing a better system to reduce spoilage or reducing meal comps.

Same thing with scheduling. Are you working at the most efficient labor force? Can you stagger the amount of people that comes in? Are you maximizing the amount of revenue that people can bring in?

If you don’t know your labor costs, you’re not going to be able to control any of these elements.

Which is a reason why a lot of businesses fail. They do not understand their golden margins and run their restaurant into the ground.

5.) Blindly Running Restaurant Promotions

5 Reasons Why Restaurants FAIL To Survive In The First Year 5

The fifth and final reason why restaurants fail it is because they keep running promotions BLINDLY.

And what I mean by that is we often see someone being super successful running promotions. Our competitors are having lineups around the block because of their big promotion. It’s buy one, get one free.

Since you want to be just as successful, you run the same promotion. People are buying and redeeming the promotion, but at the end of the month you find that you’re not making any money. What gives? So you’re like, “Wow, I can’t survive if I keep running this promotion, but yet my competitor is doing it.”

But your competitors are successful right?


That’s the problem. You’re actually running your restaurant to the ground because you don’t understand why they’re doing the promotion. What is their objective? Maybe they are running at a loss and they are okay with it.

But are you?

Some franchise stores, they have the budget to run these restaurant marketing activities and promotions to gain awareness. It is a marketing cost and they’re okay with it. But for your small business, is this something you can afford, and is this a strategy you want to employ for your business?

Whereas if you’re running a promotion for the sake of gaining profit, then the type of offering may be completely different from a buy one get one free offer. It could be maybe an upsell in form of a meal bundle.

It is appropriate to be inspired by what a competitor is doing. It is dangerous to blindly copy a promotion when you don’t know their objective and business situation.

At the end of the day, you need to really, truly understand the foundations of your business before you run any promotions at all. When you are running a promotion, ask yourself: what’s the objective? Why are you running it? Is it to gain awareness for your business?

So there you go, the top five mistakes restaurant owners make that end up driving their restaurant and food business to the ground. If you’re thinking about starting a restaurant/food business or in the process of building one, make sure you join our free Facebook group, that is filled with food entrepreneurs just like you. Join the group here.

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