A 2003 study by Ohio State University found that 60% of restaurants fail within their first 3 years of operation, and 80% fail before the 5th year.
It may seem glamorous from the outside—providing delicious food, and drinks while creating a foundation for the fun experiences that enrich people’s lives on a daily basis. An ideal profession, right? But one deep look into the underlying business dynamics that go into running a restaurant provides insight into the incredibly high failure rates of the restaurant business.
1. Low Profit Margin
According to a 2014 study by Sageworks, average restaurant industry net profit margins in 2014 were just 5.1%, up from a low of 0.4% in 2008. For comparison, Google’s net profit margin has never fallen below 21%. Why such a contrast? Here are 3 of the biggest reasons:
- High competition: The sheer number of options consumers have limit the prices restaurants can charge
- High fixed costs: Incumbent rent, wage and ingredient costs suck profit out of every sale
- Lack of visibility: The one-off nature of every reservation leaves restaurants weekly at the whim of economic cycles, consumer trends and even bad weather
2. Extremely Complex Operations
While the beautiful plates of food and delicious cocktails delivered to the table may not seem all that complicated, the truth is that offering 20–100 different food options nightly and a near unlimited number of drink options to every single customer on a daily basis is extremely difficult.
The vast array of necessary ingredients required to create hundreds of unique products each night leads to high inventory costs, and the mere act of managing these hundreds or thousands of food and bar-related ingredients, all purchased weekly from different vendors, is an incredible logistical challenge when operating on low margins with limited cash resources and space for storage. Contrast these operational challenges with a company that sells, let’s say, software, and deals with only one set of customers all with a similar problem to solve, and the operational difficulties of running a restaurant become clear.
3. Long Hours and High Employee Turnover
Late nights…long weekend shifts…sleep deprivation. Sound familiar? You’ve probably worked in the restaurant industry. It’s not uncommon for the late night closing shift to bleed into the morning opening shift after 5 straight days of work. And we know, it’s not easy work!
Eight straight hours on your feet ends with locking the doors, closing out the register, bussing tables, and preparing for the next morning, when you’ll be doing it all over again. Add on 5–15 hours of weekly or monthly inventory counts, product ordering, sales reconciliations, and profitability analyses, and your end result often comes out to 60+ hour workweeks.
And the worst part? This grind makes it near impossible for managers and owners to retain good talent, thus leading to constant recruiting and training of new personnel that will likely leave as well. A vicious cycle indeed.
So, Why Should You Open a Restaurant?
Yes, it’s a challenging industry. But is anything more rewarding than providing people with those wonderful life experiences centered on food and drink?
Birthdays, promotions, engagements—what’s the first thing people do when they have something to celebrate? Make a reservation of course! Though a difficult industry, it’s also an industry that never dies. Volatile, yes, but the right concept and operational efficiencies can, in fact, withstand the test of time. And to have people seek out your business to celebrate life’s greatest moments is truly a unique feat.
The best part of all is that we are living in the age of technology, and, like most industries, utilizing new technology can directly address the business challenges laid out here. With the proper tools and inventory management, you now have the ability to strengthen your operations and identify your weaknesses before they become a problem, so you can ensure that your restaurant won’t become one of the 60%, or 80%!