Why Do Restaurants Fail Within The First Year?
Ferrao & Associates / Food and beverage Consultants
Having being in the hospitality industry for 18 years of my career in the middle east, Far East Asia and India, I have seen so much and feel its right to share some valuable information to upcoming entrepreneurs and existing restaurant owners. Let’s talk about the Indian market. According to National Restaurant Association of India (NRAI) report60% of restaurants shut down within the first year of operations, and up to 80% of restaurants close their operations in the first five years. No matter how lucrative the restaurant business seems from afar, running a restaurant business is an arduous task. These figures may make you think, ‘Why Restaurants Fail’ that too ever so often. Lack of proper information about what the industry entails ultimately leads restaurants to their failure. In this scenario, information is the key area you need to focus on. Most restaurateurs do not even know that they are doing something wrong until it is too late.
there are not much industry barriers, poor business acumen, no management, and lack of financial planning among first-time restaurateurs are some of the primary reasons why restaurants fail.
1. The Lack of Planning and Vision: PLANNING as the name says it all…. means, “the processof thinking about the activities required to achieve a desired goal. It is the first and foremost activity to achieve desired results. It involves the creation and maintenance of a plan, such as psychological aspects that require conceptual skills” Every business owner should vision what their business would be at some point in the future. There’s been a growth in opening of restaurants in the last 4 years post 2020. People get into the business to take a detour to see stars but lack a solid vision which leaves them regretting to become a successful hotelier or restauranteur.
2. Thefts &Pilferage: Most of the time it’s too late till owners realize the flaws and gaps in their restaurants. The second most important reason why restaurants fail is due to thefts and pilferage. On-counter thefts and inventory thefts take many forms and can bleed the restaurant dry. Any average restaurant can lose up to thousand and up to five crores in five years due to pilferage and thefts. Internal thefts add to food costs of the restaurant, and so the restaurateur is suffering the same amount two times over once when the employee steals it and next when he/she has to cover up for the loss from the restaurant’s profits. According to a survey by the National Restaurant Association, theft represents an average of 4% of a restaurant’s food costs. With the dawn of technology a lot of new software is available in the market depending on the size of a restaurant. Use a sophisticated POS with robust inventory management and an anti-theft system to keep a complete check on all business transactions and inventory. Assign unique roles and permissions for each job to keep a check on thefts. Credit: Information based on top research and industry expert, POSit 3. Bad Location: Location. Location. Location. A bad location is one of the biggest—if not the biggest—reasons a restaurant fails. Poor visibility, no parking, and no foot traffic is a combination that makes it nearly impossible to turn a profit. Picking the right location can even make up for some of the other deficits in this list, but should not be used as a crutch or excuse for bad service or negligence. 4. Poor Customer Experience: If your customers are not enjoying coming to your restaurant, it is only a matter of time before they stop coming to you altogether. Know how you can deliver stellar customer service. 5. High Expectations: Depending on the type of restaurant you plan to open; you may need hundreds of thousands of Rupees or more to cover payroll and vendors until you turn a profit nowadays most entrepreneurs and managements that run restaurants don’t understand the financials (CAPEX & OPEX) and expect returns from initial months. It’s important to have flow of cash for 12-16 months in reserve to keep the business moving unit one starts making profits.
6. Miscalculated Food Cost Percentages: Knowing how to properly price
your restaurant menu is the first step toward making a profit. Do you know how to cost out menus on a per-plate basis? Most owners do not. Adding caviar to a menu item as a supplement can be a good idea to capitalize on a low-cost dish.
Replacing parmgiano with grana padano will cut your risotto bill in thirds. Many tricks can help keep food costs down with taste remaining the same. The golden rule of spending 30 - 35% of the menu price on food and beverage costs will help you keep menu items in line. It means an item that cost you INR 10 will translate into a minimum INR 45 on the menu.
7. Manpower Challenges at all levels: Firstly, If anyone is standing still, the business is overstaffed. When several servers, three or four cooks, and a bartender are standing around, the restaurant is probably haemorrhaging cash in payroll costs. Another common problem with a high payroll is paying any single employee more than they are worth. Chef- driven restaurants are notorious for underpaying cooks and overpaying the executive chef, despite the fact that almost everyone is replaceable.
Secondly, your staff represent you and your brand, not hiring people with similar vision or not providing proper training results in failures. Every hospitality business is about gelling along with your team in other words “TEAMWORK” . The owner or manger should consistently be reminding the team of standards, expectation, vision and core values are.
Thirdly, You hire someone you think will be a great manager, or executive chef or a bar manager since the person has experience and excellent reference. Few months down the road things start to crumble, they alienate the team, drink away the profits, or steal money – or all three. Unfortunately, the pressures and hours of the industry can crumble even the strong links, so check in regularly with management to ensure they are working at their highest potential.
8. Little or No Advertising: As more and more restaurants open across the country, advertising and marketing are both key in establishing a new restaurant's reputation. Most people think you need to pay substantial amounts to bring in customers, but with social media and word-of-mouth marketing, you can spread news to a targeted demographic for little or no money.
No one’s perfect and mistakes tend to happen. If we are sick we would go and see a Doctor. So if our restaurants aren’t doing well the way you thought it would Its best to use Experienced Consultants and Chefs who have been in the industry for a long time.
Need help with your restaurant re-opening plan? Contact Ferrao & Associates Food & Beverage Consultants at (0091)8408822683 or firstname.lastname@example.org