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Why Do Restaurants Fail? 14 Reasons And How To Avoid Them

Austin Chegini
15 Nov 2023

Starting a restaurant is not an easy task, yet thousands of people dive into the industry each year. Sadly, the majority of new restaurateurs give up their business in the first year. Even worse, 80% of new restaurants will close within five years of opening. 

Preparing for this cut-throat service industry is key. Before you even think about naming your business, you will want to look into why restaurants fail and how to avoid similar mistakes. 

Why do restaurants fail?

Even veteran restaurant owners run the risk of failure, so pay close attention to the items on this list. 

1. Experience

The majority of restaurants are small businesses. Restaurant owners sometimes come from the service industry, but many do not. Past experience running a business certainly does help when it comes to operating a restaurant, but that might not be enough to cut it. 

A restaurant is made up of many moving parts. An owner who hasn’t spent time waiting tables, prepping and cooking food, or sorting out inventory will be at a major disadvantage. 

All it takes is one poor calculation or oversight to cause serious problems. With the possibilities of health code violations and labor lawsuits looming overhead, it is best to have a veteran restaurateur on your team. 

2. Poor resource management

Leading a team is natural for some people, but they might struggle when it comes to creating a schedule and recognizing talent. If too many people are scheduled for a shift, you will bleed money. If too few are on duty, your service will be slow and substandard. 

Likewise, you may have employees who butt heads from time to time, or maybe a group of friends who have too much fun on the job. Failing to staff these employees on different shifts can get them into entirely avoidable situations.

There are stories of entire restaurant teams walking out on a busy night because of poor management. Brushing up on your management skills or partnering with a seasoned pro can help you manage inevitable flare-ups and scheduling conflicts.

3. Accounting mistakes

Maybe you’re an excellent cook with years of management experience, but can you balance a budget? Restaurants need positive cash flow to keep the lights on and the staff compensated.

Accounting not only keeps you financially solvent, but it also keeps you out of legal trouble with the Internal Revenue Service and other authorities. In an industry where many workers receive tips, paying legal wages and accounting for cash payments is crucial. While only 1 out of 100 businesses is audited on average, poor accounting can raise your chances of catching unwanted attention.

Thankfully, the latest restaurant point of sale software can link with QuickBooks and Xero to make accounting a breeze.

4. Mixed customer service

Unless your restaurant is known for ironically offering poor service, you want to make sure your staff treats every guest as part of the family. Welcoming smiles, prompt seating, and personalized attention all help create a positive atmosphere. 

However, things go wrong, so you want to prepare now. By creating a standard operating procedure and spending time on training, you can prepare your staff for the inevitable upset guest. 

On top of offering excellent customer service, you need to know how to respond to bad restaurant reviews. In our digital world, poor reviews travel fast and can damage your reputation. In fact, businesses can lose 22% of customers from a single negative review.

5. Inconsistent quality

People go out to eat for the atmosphere, to meet friends, and, most of all, to sample delicious food. To nobody’s surprise, serving underwhelming food is a big reason why restaurants fail. 

Many restaurants start out very well, serving delicious meals and gaining rave reviews. Somewhere along the line, maybe after three or four months, employees start to become complacent. Cooking becomes a routine, and the staff might skip a step while preparing meals. After time, these modifications can take your food from amazing to awful. 

Training and oversight can prevent this problem. Mandating the staff follow standard operating procedures will ensure consistency across shifts. 

6. Unfit location

You might have a waterfront restaurant that perfectly captures the sunset, but no one will visit you if the drive is too long. Likewise, food delivery companies can charge higher fees if you are in a hard to reach area that requires extra attention to detail. Even if you start a restaurant in a prime spot, the market might be saturated, making competition more difficult.

When considering your location, go over the following questions:

  • How far will customers travel to reach your restaurant?
  • Where is the closest food distribution center?
  • Is it easy for deliveries to reach your business? 
  • How many cars can fit in the parking lot?

7. Absentee restaurant owners

Many successful people dream of owning a restaurant and waltzing through a crowd of happy guests. While this goal is certainly attainable, it becomes much harder to achieve if the owner is not actively involved. Without proper oversight, other members of management can cause significant harm. 

To see an example of this, look at the dozens of failed restaurants owned by celebrities and star athletes. Star power might have brought in the initial wave of guests, but it could not sustain the restaurants. 

We are not saying you have to be involved in your business’s daily affairs, but you must be present. Delegate tasks to key decision-makers, and schedule frequent meetings to stay in touch with your restaurant.

8. Poor management team

Leadership can make or break morale, and in a high-stress environment, you need level-headed, motivational managers. But some people who do well during interviews can be detrimental to your business. If they alienate employees, you will constantly be filling vacancies and wasting resources on hiring. Even worse, poor managers can hurt your profits by giving away meals to friends and taking complimentary drinks for themselves. 

When hiring your management team, you need to learn about their leadership style. Try asking these questions during the interview, and engage in role-playing situations to see how they react on the fly. 

9. Ineffective advertising

When you are in a new town and want food, do you stop at the first restaurant you see or turn to the internet for advice

Getting your name in front of people is crucial, especially since 85% of people search for local businesses online. Similarly, 94% of people visit restaurants based on reviews. Advertising on search engines helps you get your name at the top of the page, especially since most people do not go past the first page of search results. 

Local advertising is also important. Billboards, flyers, and newspaper ads all create name recognition in your community. If you want to get even more involved locally, you can sponsor sports teams and host fundraisers. 

10. Too high/too low-profit margins

Have you ever sat down for a sandwich and thought, “How can two slices of bread and some meat cost that much?” Well, the price of food at a restaurant factors in much more than only the ingredients. 

Restaurant profit margins are very slim, with many places only making 10% or less of profit on a single item. The industry is very competitive, and restaurant owners must walk a fine line when calculating prices. Price a meal too high, and guests will go to a competitor. Price a meal too low, and you can’t afford to pay your staff. 

11. Not enough starting capital 

How long does it take a new business to turn a healthy profit? It can take several months for a restaurant to gain traction and become self-sustaining. Many new restaurateurs fail to stock up enough liquid funds to cover expenses during this period. 

To avoid this situation, do not start your restaurant until you have enough cash to cover six to twelve months of expenses. Be sure to account for rent, labor, food, utilities, taxes, and other operating costs. 

12. Failing to research the competition

The restaurant market in Los Angeles is much different than the market in a small town in the Midwest. Failing to analyze competitors and learn what makes them work is one of the biggest reasons why new restaurants fail. 

Consider these factors when launching a new restaurant:

  • What type of food do your competitors sell?
  • What prices do other restaurants charge?
  • What makes them special? Do they have a nice view, unique atmosphere, waterfront seating? 
  • Who is their clientele? What do they order, and how much do they spend?

13. Hiring family members 

Many restaurants have been passed down across generations, but that doesn’t mean it is good to hire your relatives as employees. The industry is very stressful, and you don’t want to carry those tensions with you at family gatherings. 

Here’s an example: Imagine you hire a relative to be a server. After a few shifts, they show up late and then start slacking off at you. How do you handle the situation?

If you discipline this relative, or even fire them, you will sour your relationship and make family functions awkward. If you ignore their poor performance, your staff will respect you less because of the unfair treatment. Either choice will negatively affect you and add an unwanted stressor to your restaurant.

14. No common mission

Many people dream of opening a restaurant, and then they make it happen — but then what? Failing to set goals and create a plan to achieve them will cause your business to flounder. 

Once you establish your annual, five-year, and ten-year goals, you need to get your staff to buy into this vision. Start by instilling a company culture that gets everyone focused on the shared vision. Lead by example and be sure to promote from within so all workers can see a future at your restaurant. 

Grow your restaurant with Epos Now

Aside from addressing the issues laid out above, you need to focus on growth. With our restaurant management software and deep analytics platform, the Epos Now point of sale system can take your business to the next level. 

Speak with a consultant to learn more about our system.