The restaurant business is tough. Everyone in it knows it. Everyone looking to get in it ignores it.
The cold fact of the matter is that opening up a restaurant may be one of the worst investments you could make with your money. That’s a horrible, sobering statement coming from someone like me who’s in the business of helping restaurants succeed, but it’s the truth. Most restaurant fail. Oh, the failure rate isn’t the “90%” you may have heard from friends and family, but according to Cornell University, and the National Restaurant Association, 60% of restaurants fail within the first three years of operation. After five years, the number might be as high as 75%.
Why the hell would anyone want to get into this business with a failure rate like that? Risk and reward my friend, risk and reward.
As with other high risk investments, opening the right kind of restaurant in the right kind of market can pay off very well financially. Some of the better chains can see average net profits approaching, and even exceeding 30% of sales. That’s a great return! While the risk of opening a restaurant is huge, the reward can also be huge. If you happen upon the right concept, and manage it well, you could see your investment paid off in 3 years or less, and have lots of residual cash flow to boot.
Certainly there has to be some sort of magic formula you can follow to make sure your restaurant gets these incredible returns, isn’t there?
Unfortunately….. no. There is no magic formula. Experienced operators have businesses go belly up every day, and just as often, novices open up with no clue of what they’re doing, and make a killing. While experience does give you a better chance of succeeding in the high risk world of restaurant ownership, I’m going to give you some points of consideration even more important than experience.
These are the top reasons why restaurants fail.
1) No unique selling point
Your customers need a reason to come to you instead of your competition. While I know you’d love to think that your food is so good that people will line up out the door to eat it, you’re mistaken, just as millions of mistaken restaurant owners before you who are now out of business.
Good/great food and/or service is NOT a unique selling point. “Isn’t that the reason people go to great restaurants?”, you ask? No, it’s not. Now, I don’t want to understate the importance of great food and service, but it isn’t the reason someone is going to try your restaurant. Having great food and/or service is not a UNIQUE selling point. While you may honestly believe that your food is better than your competition’s, I guarantee you your competition thinks the same thing, and they are telling everyone they know. This means that your profession that your food is better sounds just like the message of every one of your competition. THAT is not unique. If you don’t believe me, just step back and listen to all the other restaurants out there. They make a lot of the same claims, don’t they?
If you want to offer something truly unique, you need to move past food and service. Yes, you need to have great food and service, but by having great food and service, you are only meeting the minimum expectations of your customers. You are not giving them a reason to eat with you that your competition isn’t claiming as well. What you need is something original to sell. Something other than the best food or the best service. Your need a UNIQUE selling point.
Sonic offers “nostalgia” with their 50’s style drive-in and car hops.
Burger King offers “accomodation”. “Have it your way!” they tell you.
Applebees markets themselves as “Your favorite neighbor”. They put up local memorabilia when possible, and build in smaller towns. They use stained glass fixtures and tacky decor you might find at that old couple’s house next door.
Hooters sells “sex” with cute waitresses in tight tops and shorts.
A truly unique selling point isn’t the best food or service. It’s an emotion you offer to people, whether it be nostalgia, accomodation, sex or something else. People remember emotions long after they remember food and service. If you make a real, emotional connection with your customers, they will remember how you made them feel for decades to come, long after they forget what they ate and who waited on them. Food and service can support a unique selling point, they just can’t be a unique selling point.
This is a VERY common killer of independent restaurants. As an independent operator, you’ll get pressure from customers to have certain items on your menu. You’ll also have pressure to keep certain items when you make a menu change. You’ll get requests. You’ll get complaints when you change things.
You have to realize that this is all part of the process. YOU CAN NOT PLEASE EVERYONE. It’s a waste of time to even try because you’ll lose your own identity in the process.
Large menus create several problems within an operation:
Large menus lack focus. When you try and offer EVERYTHING your customers like, you aren’t giving them more choices and more reasons to come back, you are confusing them. They don’t know what your specialties are, what you supposedly do well, what they should order, and how to describe you to their friends. If your message is focused and easy to convey, more of your customers will convey your message.
Large menus take longer to order from. The more choices you have on your menu, the longer it takes each table to peruse that menu, and the longer it takes for them to order. For every minute they are NOT ordering, you are NOT making money for the seat they are occupying. Take this statement to heart if you want to be successful in the restaurant business: You will only ever be as successful as your peak period of service. 80% of revenue, and 100% of profit is made during peak periods. Anything that limits your ability to serve customers and collect money during your peak periods is limiting your potential for profit.
Large menus require more inventory items. The more items on your menu, the more ingredients you need to buy to make those items, and the more items you’ll have on your shelf. Every item on your shelf represents a possibility for loss. It can be stolen, it can be mishandled, mis-prepped or stored incorrectly and spoiled. The less inventory items you have, the less waste you’ll have. The less waste you have, the more profit you’ll have.
Large menus require more equipment and personnel to produce. The more items you have on your menu, the less opportunity your staff has to cook multiple orders at once. Less multiple orders means more burners, grill space, fryer grease, and hands are required to produce the same number of dishes. All these additional tools cost you money.
Large menus mean longer ticket times. When you have too many different dishes cooking at once, and less multiple orders in the same pans, it means more time to produce whatever is being ordered. Beyond the fact that Americans are no longer willing to wait 45 minutes to have their dinner prepared for them, you should be thinking about how long ticket times limit your ability to process people through your dining room. The longer it takes to serve each table, the less tables you can turn during peak periods.
It is inherent in people to assume that somehow offering people more will make you appealling to more people. It’s just not true. When you try to be all things to all people, you end up being very little to very few. People need to know what you’re about. Keep your menu focused.
3) All talent and no brains
So you can cook. Your food is fantastic, and everyone you cook for confirms it. You’re ready to open a restaurant then, aren’t you?
Not to burst your bubble, but a lot of people are excellent cooks. Many of them have original ideas and fantastic food that no one has ever offered in a restaurant before. That doesn’t make them, or you, a good candidate to open a restaurant.
Owning a restaurant isn’t about cooking. It’s not about having good food. While those things are components of a good restaurant, they are not the reason for it’s success.
Once you have the perfect menu for your market, knowledgable staff to serve your market, a trained line to reproduce your food, and plenty of booze to ply your guests with, you’re 1/3 of the way there. “WHAT?”, you say? “That’s it! I’ve got all the pieces in place! I’m ready to go!”. No, you’re 1/3 of the way there.
What most new restaurant owners don’t realize is that having good food and service is only 1/3 of the battle. The other 2/3rds include marketing their restaurant and managing their restaurant. We’ll talk about marketing after this, but managing is a very important piece to the puzzle that most new restaurant owners overlook. Beyond making good food and selling it to people, you need to know how to collect data and analyze your business to make sure you have the necessary information to run a profitable business.
You need to know:
How many people I’m feeding each day/shift/hour
What items they’re buying, and how many of each
What gross profit those items are contributing
What those items should have cost me to sell
What my actual cost of selling those items is
What my labor is compared to my budget
How many labor dollars I spend per sales dollar
How many labor hours I spend per sales dollar
What I purchase each day, and how to categorize each purchase for analysis
What my sales are compared to what they should have been
What my profit and loss is for EACH WEEK
That’s a lot of things to worry about, and that’s only the tip of the ice berg. There are many other managerial concerns. This is why I’m telling you that your great ideas for a menu, and incredible talent for cooking will only get you 1/3 of the way to operating a successful restaurant.
4) Poor pricing strategy
Strategy? Yes, strategy. You need to have a method for pricing your menu. You can’t just look at what everyone else is charging, and charge the same. The financial picture of your business is different than every other business out there, and you need to have a pricing strategy that takes your unique financial situation into account.
When considering pricing strategy, I first need to tell you what is being done out there now, in restaurants all over the country, even the world, because the point of this article is to tell you what mistakes everyone else is making.
The predominant method to pricing menus in the food service industry is to use a budgeted cost percentage to formulate prices that will yield that budgeted percentage when the sale of all your different items is taken into account. This method assumes that if you sell X dollars of food, and Y percentage of those dollars go to pay for the food, then you will get Z profit.
The major problem with this pricing method is that most operating expenses within a restaurant do not fluctuate as a percentage of sales. The rent of a restaurant is not always 5% of sales. If sales are down, the percentage goes up, if sales are up, the percentage goes down. Simply achieving a target food cost percentage does not guarantee that a restaurant will make the profit they priced for.
The common sense alternative to pricing by a target percentage is pricing according to the markup you need to cover the expense of doing business, leaving you with a profit you find acceptable. This method is called pricing by gross profit dollars. The basic principle of this method states that you can assume, through calculation, how much every person that walks through your door will cost you to serve, and that with this number you can price your menu to yield an average gross profit greater than the cost necessary to serve every person who walks through your door, in addition to your needed profit. Adjusting these prices according to market price points yields a gross profit that will cover your operating costs, your product costs, and the profit that you decide you need to make for this venture to be worth your time.
Pricing by gross profit is the only method of pricing that takes into account every cost of operating a business, including profit.
5) No marketing skill
This may be the biggest restaurant killer of them all. I’ve talked to hundreds of restaurant owners in my day. I have yet to meet ONE that didn’t underestimate the importance of marketing. As I stated earlier, marketing is 1/3 of the reason you succeed or fail. I may even have to give marketing the extra 1% of the 100% possible when splitting reasons for success into 1/3rds, and say that it is even more important than good food and service, or management skill.
If I have a catch phrase about marketing, it’s this:
“No matter how great your food is, if no one knows, it won’t sell.”
The worst fallacy I see new restaurant owners buy into, is that they can market their new restaurant through “word of mouth”.
Yes, word of mouth marketing is fantastic. New customers are more likely to act on the recommendation of a past customer than they are an ad by you. That much is true.
The problem with assuming word of mouth marketing is going to make throngs of people do the Tennessee Waltz through your door is that when you’re new, NO ONE KNOWS ABOUT YOU! You CAN’T depend on word of mouth marketing until you’re established!
For this reason, a marketing program driven by “word of mouth” marketing for a startup restaurant is a recipe for failure. You need a better plan.
While I won’t go into great detail as to what that plan should include in this post (you can certainly pay me to tell you though), I will tell you that the absolute best marketing tactic you can employ in any retail business or restaurant, is to gather contact information from EVERY person that comes through your door, and market to them. Marketing to existing customers represents an exponentially greater opportunity for increased sales than spending dollars trying to reach new customers. These existing customers are a better source for new customers than any marketing method out there targetting people who haven’t been in your restaurant and aren’t already familiar with your product.
6) Bad negotiation skills
Most new restaurant owners don’t know what they SHOULD be paying for the services necessary to successfully operate a restaurant. That’s a problem.
Every vendor out there, whether they be a food distribution company, point of sale software provider, chemical company, paper goods, linen, liquor, beer or wine distributor, or a credit card processor, has clients who get great deals, and clients who get taken advantage of.
Normally, the difference between a vendor giving you a good purchase rate, and taking advantage of you, is your knowledge of the goods your buying, and what other people are paying for them.
Two thing are a given in negotiating a purchase contract:
If you don’t know what other people are paying for the same goods you’re buying, you’re not getting the best price
If you aren’t making your purveyors COMPETE for your business, you aren’t getting the best price
While there are other negotiation tactics to consider when trying to get premium pricing from a vendor, these two are the most important to remember.
Know this. There is a sucker in every negotiation. If you don’t know who that sucker is, it’s you.
I realize there are other important factors to operating a successful restaurant. These are the six that immediately come to mind while writing this article. I see these six problems in most restaurants and food service ventures I see fail. Keep these six in mind, and maybe, just maybe, you won’t become one of the majority of restaurant owners that fail.
O’Dell Restaurant Consulting
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Just the righ information that i need for brainstormin for my soups cafè
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I definitely agree with you on the whole over-sized menu deal. They are to overwhelming, and make the dining experience a frustrating one. When my husband and I opened our restaurant a few years back, we decided to make everything simple! From our custom menu covers, to our dishes, to our menu theme. It seems to be working for us.
got my hands burned in starting a restaurant food was great, best steak, best ribs ever had all over the world , every thing made according to the taste buds,got good tips, but cld not survive due to high rent and high cost in bank charges, which no one takes notice,every month attacked by vandales
Great post… I’m glad marketing is the most important part because I can’t cook. Marketing is the only thing I am good at.
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yeah al this ideal is great,but people forgot that every business fal and rise by the people who control it.management of customers in any business is the the to success
Call me crazy, but I can’t recall the last time I went (or returned) to a restaurant that had lousy food and service, but I kept returning because I LOVED the marketing!!! Lol!
Why would anyone return for lousy food?
Lol!? Do you remember him saying this ““No matter how great your food is, if no one knows, it won’t sell.” Read the article once more VERY carefully as it’s clear you missed some very important points. All the best.
True but the point of marketing is to reach people who and attracted potential new customers who otherwise wouldn’t have even known the restaurant existed ( thats something more for larger cities in smaller towns things are noticed more since its so small and not usually not a ridiculous amount of choice like in the city)
I think what there really getting at in this article is if you start a restaurant plan to spend money on radio advertisements promotions, a billboard or two etc not nesseraliy all of that but something to get your name into the publics ear. And quality service and food shiuld be assumed as a requirement and thought out before even opening up in the first place
Maybe you haven’t, but millions do. Applebee’s is a prime example of a very successful restaurant that thrives despite having subpar food, and inconsistent service. Hooters is another example. Other than the wings, their food is awful, and the service is often inconsistent or poor. The flirty waitresses in skimpy uniforms are the hook (marketing).
You wrongly interpreted what the article says. He says good marketing is important to bring in more customers instead “word of mouth”. It doesn’t mean it’s okay to have a crappy food and service.marketing helps to bring in customers , whether they stay with u or not, depend on how well ur service and food, as well as post marketing.
One of the problems I see in the industry is that the owners don’t know how to lead by example. The don’t know how to work along side of the staff as a leader. Always being on top and in charge of all situations is a must. You must be there to succeed in this area. Don’t expect that the employees to think like the owner should. Train and retrain is a slogan that never goes away.
Excellent article and some very important points for me to consider in completing my business plan. Thanks Brandon.
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Good article! In montreal, a good percentage of restaurants are cook owned and marketing is inexistant. However there are accessible marketing startegies, like using pictures instead of text heavy menus… There are tons of app doing it, and some like chopchop.menu can also be used on websites. It costs almost nothing and it is efficient.
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your marketing ideas are stuck in the 90s.
It’s not an article about marketing Arty. Thanks for the constructive input. I’m sure it’s enlightened everyone.
I just cannot find a restaurant worth its salt. I think the Ramseys, Roux’s, Ill Buli’s and Hestons of the world (although they’re making it big what with TV) miss the point. They’re ungenerous. When you watch a programme like that of Roger Mooking you think this fringes almost on a religious experience. Even the bible says that the smell of a lamb on the fire is pleasant to G-d’s nostrils. Those huge beasts with some local delectables on the side make pathetic those smeared large plates with the hole in the centre and all hands on decorating of food then they pour in a bit of wet stuff (nowadays called tea) on the side). Oh my goodness what the h-ll is that? When you can go to a barbecue and have delicious fat marbled briskets, lamb slices steeped in herbs and oil, suckling pigs on rotisseries and it’s that generosity of spirit that is incomparable. I can no longer face that smear.
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My husband was saying when we walked into a restaurant the other day that they needed a cafeteria consultant and I was like “what is that”. I think that is a lot of what you just provided here. I will have to share this with my friend that owns that restaurant (we were in) and let them know the reason they should consider his suggestion. Thanks for sharing.
Thanks for the article, it’s so useful! Would you say that all of this applies to opening a café too? Do you think there is less or equal risk in trying to open a coffee shop that serves up good, substantial food?
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This website was… how do I say it? Relevant!!
My Restaurant is 3 months old, for the 1st 1 and half month it couldn’t run it’self. I had to cough up from my pocket but now its 70% running itself. All the tips and comments mentioned above are so true and i can relate. Thank you.
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This article was awesome. My name is Blane Margaretten and I am a senior at Tulane University, where I study Management Consulting and Marketing. I have 7 year of experience in fine dining, roughly a third of my life. I enjoyed what you wrote about having a limited menu, because it is so true. If a restaurant does not define the scope in which it operates, it’s strategy becomes unstreamlined. The restaurant becomes overwhelmed. The most successful restaurant in my hometown has an offering of only 6 main entrees, with a couple of specials and appetizers that rotate through the mix. People order faster, the food is more consistent, and restaurant in question is able to firmly cement their reputation. I liked when the author of this article recognized how many chefs have talent, but no brain. I believe this is a fatal flaw of many chefs. Overall, I think this article is well written and very spot on!
Blane Margaretten Tulane University Freeman School of Business
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I think a good concept always keep thing the same and there’s always room for upgrades
Agree on all the points. large menus and No unique selling point are some important points that you have discussed above. A menu should be well designed and some No unique selling point should be there to attract and delight the customer.
Great article, but a few things are missing that are also important.
I was once a restaurant owner and went back to servering because I love that job.
1) hiring servers that have “some” experience and not training properly, also not realize how they interact with crew members.
I have worked with the “I know what I’m doing” people, yet they jump in and think they can wing it. They don’t want to take direction from other servers and are combative in every way possible.
They want to make tips, but don’t want to put in the real work of learning the menu or how things are cooked, they don’t learn the in and out of items that might be an issue for some customers. They don’t take initiative to think “out of the box* to make patrons happy or accommodate foreseeable issues.
2) the new employees feel they should given the better shifts and become hostile or shut down when they have not proven their worth.
It doesn’t matter how good of a server or employee, they have not paid their “dues” and feel they are being over looked for this issue.
This creates backstabbing and servers not to work as a team.
3) allowing employees to do anything and everything they want without consequences to their actions or behavior.
Allowing employees to be late as stated is a unforseen issue and it happens, but the habitual late person that is never repremanded for these actions never see that they put stress on all the other employees, the same employee that is late also feels they can do as little as possible on side work or act as entitled so everyone else needs to do their job and the other employees.
I remember something when I was an owner “I can be a nice boss, but I am still your boss and your still my employee. I can be your friend or I can be your boss, but I cannot be both.” I have learned that some people will try to befriend their bosses and use that manipulation tactics to get their way.
4) playing favorites is not a good thing. I always treated my employees the same, I knew who was stronger at certain tasks and who was weaker.
I would watch how people would suck up to me and it showed me that those people didn’t really care about their jobs in most cases. They just wanted the illusion of them loving their jobs as they got their way or so they thought.
Reward employees on merit and hard work, don’t be a sucker for someone that is kissing your ass, they are usually the ones that cannot be trusted.
5) making your best employees leave due to a paranoid manager or boss. Stress is a hell of a thing and running a restaurant can put anyone in a negative mind at times.
Don’t accuse your employees of doing something that is baseless, don’t make them the butt of jokes because that makes someone less loyal, don’t make excuses for someone that is slacking and don’t make your other employees do their job and the lazy employee.
Hold your employees accountable and hold yourself accountable, that is how you show your employees you can be trusted and they can trust you as you work together for a common goal.
6) don’t bully your employees and don’t make them work thinking they can be fired at any time. No one will make any effort if they feel it is for a worthless cause. I always said ” I will never ask someone to do something I cannot do myself”. If your employees see you working as hard as they do, they will respect you and you will have great team. Stand up for your employees and don’t allow customers to treat them like servants. No one likes to be abused, protect your employees and customers will appreciate that in returning time after time.
Set expectations for all your employees and don’t allow them to talk you out of that. There will always be employees that won’t do their share of the work and feel they never need to pull their share of the responsibility. Be firm, not a demanding lunatic!
If you sit on your ass and bark orders, they will find another place to work that does respect them. No one wants to feel they carry all the burden and feel responsible for everything, that’s unrealistic of employees by bosses most of the time.
Remember, we were all employees at one time.
Don’t think because your an employer you have it made, there is a long road to go and a lot of hard work ahead. You will stumble and have doubts. You will wonder ” what the hell was I thinking?”. Plus, don’t be arrogant and think you know everything, that will be your downfall by being that way.
Menus can be changed, people will come and go, it’s how you approach every situation that will make or break a restaurant.
Welcome to the club and good luck!!
The restaurant business is tough, it’s frustrating, it’s mentally and physically stressful. But, if you take stock in your employees, your dreams and know you will make mistakes. Realize you are not in this alone and the right decisions can make a successful business.
Hello Sir/Ma’am, My name is Shalvik. I am a Chef. I had a restaurant which closed down last month due to numerous reasons. Your article was really helpful. Before taking a second leap I am aiming at becoming financially stable. Would be glad if you can share some piece of advice. Thank You!
Your concept is very good.and unique style. menu list is very good also.
The Restaurant business certainly is tough making the right decision which we think can be in fact the wrong choices. doing more homework will help you at least maintain an successful restaurant
Your concept is very good , doing more research will help in a successful restaurant. The restaurant business is tough and frustrating.
I think reading this I have a good concept on how to run my business
The concept is well. It gave me good ideas to help me with mines.
Understanding the concept of properly running a restaurant , to making the menu so eye appealing , making sure your workers are happy will also helps . Make your business very profitable .
As a customer, I know I don’t want a big menu. unless it’s at the “Golden Coral” even then it’s overwhelming! you can also see a loss in quality. No one at the table eats at the same time, someone is waiting, that’s a bad idea! making sure you have everything on the menu is very important so a smaller menu avoids much of a large menu’s problems. a staff that know the items they sell and make sure your staff have good resources and taken care of, so they can and will take care of you!
I think all the information is very helpful for the mission of opening a restaurant and planning on a successful
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All the information given is a great tip in opening a business. Gaining customer so they will not go to component is grat to read.