Top 5 reasons why restaurants fail in the first year

To be fair, in a restaurant, there are a million-and-one things that are likely to go wrong and you need to be the master juggler at a circus to stay on top of everything (or, better, have a good team who does).

However, here are five key areas you need to focus on to ensure a better chance of success through the first year.

1 – Location

Not understanding the difference between destination locations and high traffic locations, also termed A and B in the UK market.

If you are looking at a location in an area classed as “A” (high traffic), it will usually be a more central location with a high footfall. It will often have higher rent and business rates based on the potential you have for more sales.

A “B” restaurant location will be more a destination restaurant. Somewhere often in the suburbs or off-centre from the town. Close, but far enough away that you need to do something to entice people to find you.

There are also “C” locations and these are usually rural and would be classed as a purely local restaurant where you won’t expect people to travel miles to reach your village.

If you have an “A” location, you have a high footfall outside of your doors. But if your concept doesn’t fit this style of location then they won’t walk through the door and translate into sales. Your concept must fit the location – it’s not guaranteed to work just because you’re in an “A” location.

Destination locations (“B” locations) will need more marketing as you need to get the customers to come to you. They might not be aware you are there until you do spend this extra cash. Remember to plan for this.

Choose your location carefully and make sure your concept fits that location. Also think about other hygiene factors such as crime locally as this may affect your trade. Will people visit late at night? Will the employees feel safe walking home?

2 – Poor Team Management

You need to hire people with the same values as your organisation. If you don’t know what those are you’ll have random chances of success finding the right team. If the employee’s values don’t align with yours, then you won’t see results from them or a drive to perform. The results will be lacklustre.

You also need to factor in the human element – rota, wages, respect, empowerment and accountability. Employees are not simply tools like pots and pans in the kitchen (though I have seen some owners spend longer on kitchen equipment decisions than they do on hiring new employees). And they are often expected to work hours when the rest of the population isn’t.

Employees need to be enabled to run the business for you or you will get burnt out trying to micromanage them. They need training and nurturing to be able to perform. Naturally, you will need to have a firm hand if they do something that warrants discipline (like stealing) and be fair how you implement it, but if they do not feel like a strong team you won’t have a strong team who can run things the same way your customers expect them to be whether you are there or not.

3 – Ego

Things can always be improved if you are willing. Be flexible and open to change if your customers want it; don’t be stubborn. You’re there for your customers, not for yourself.

Invest time and resources into research and development to help your restaurant evolve. Make sure your offering is to the taste of your guests – not just what’s on the plate but from the first contact with the business to the last. And remember, just because it’s always been done that way doesn’t mean it’s the right way to do it.

You need to get out of the way of your business and let it perform.

4 – Financials

What are your COGS (Cost of Goods Sold)? The percentage of revenue you spend on employees? The percentage you spend on rent and rates costs? Utilities?

Good management accounts will help you manage these elements effectively, and I cannot emphasise enough that having a good accountant who understands and has experience with the nuances of the restaurant business is essential. The nature of the numbers is different from other forms of business and requires a special eye for details.

For example, if your numbers change unexpectedly you can quickly see where there is a problem. If the COGS jumps up, maybe there’s a lot of wastage or maybe somebody is taking home some of the food. You can investigate and implement remedial action as needed.

5 – Constant Promotions

Some restaurants succeed with this, but they have a specific model or more cash available to support it. If you don’t understand their model and how it differs from yours, don’t run like-for-like promotions on the hope they will make you successful. Any promotion that you decide to offer must be built around your concept and designed to upsell or cross-sell and not just discount.

Remember more guests at less revenue per head equates to higher COGS and therefore less profitability. You may also need more employees to deliver your “special offer” which adds a further cost on your bottom line.

I have worked with restaurants in the past that went down this avenue and kept offering 2-for-1 deals. Sadly they ran out of cash eventually and failed.

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