By Roger Robinson, Ph.D., SCORE Mentor

This is the third in a series of posts on what it takes to open and run a restaurant. Restaurants are different from other businesses. It takes a lot more than just good food to have a successful restaurant.

Here are some of the key reasons restaurants fail:

5 key reasons restaurants fail and how to avoid themFalling in love with the concept

Even experienced operators can fall into this trap. You’d love to see your name on the sign above the door. You think your food or your mother’s family recipes are so great that people will just flock to your establishment.

Lack of experience, not really understanding the business

We covered this in part 1 of this series. Just because you know how to cook, doesn’t mean you can run a restaurant.

Insufficient startup capital

You need sufficient capital to see the operation through the first year if it makes no profit:

  • To ensure enough funds for menu development,
  • To ensure enough funds for wet and dry inventory
  • To ensure enough funds for personnel hiring/training
  • To ensure enough funds for marketing
  • To ensure enough funds for always present, unforeseen problems.
  • To ensure sufficient enough funds until break-even which takes up to 6-12 months
  • To ensure sufficient credit or operating capital to cover worst case projected cash flow.

Avoid spending disproportionate amounts of money on the beginning phases such as excessive food, liquor, furniture and equipment purchases. Do your homework so you can make educated buying decisions. Risks are certainly high and depending on building size and scope of the operation. Start-up costs can range up to $500,000 for small to medium, to over $1 million for new upscale restaurants.

Inadequate Marketing

Every Business Needs a Marketing Plan. Your food-service is no exception. Research by the National Restaurant Association reveals that word-of-mouth is still the best method of advertising. Four out of five consumers choose a restaurant they haven’t patronized before on the basis of a recommendation. Make the foundation of your marketing program an absolutely dazzling dining experience that customers will want to talk about and repeat.

To create complete marketing packages know your market, and it’s not enough to just gather demographic information once. Markets change, and food-service businesses that don’t change their marketing strategies with population shifts are missing out on a lot of opportunities.

Step back and a look at each element in your facility. Everything from the parking lot to the interior decor to the printed items contributes to your marketing message. Is each should be an accurate reflection that message? Ask every new customer how they found out about you, and make a note of this information so you know how well your various marketing efforts are working. You can then decide to increase certain programs and eliminate those that aren’t working.

Identify your category, concept and your target markets, the specific demographic groups your restaurant concept is most likely to attract. Target the age groups and lifestyles you are most familiar with. Create the menu, décor and prices they seem to like. Plan your advertising, social media and public relations campaign to begin well before the restaurant opens. Contact the food editor of the local newspapers about an article, connect online with local food bloggers, consider church newsletters and circulate flyer’s to announce your grand opening.

Not being aware of costs exceeding these key guidelines:

  • Space / occupancy costs – rent (mortgage) + common area maintenance (CAM) should never exceed 10% of gross income, ideal = 7-8%.
  • Food (inc. shrinkage of 2-3% reflecting portion control, waste, theft, employee meals, etc.) should be approximately 30% of gross or less. Food costs at high-restaurants (Morton’s & Flemings run 40%+, others as low as 25%).
  • Labor (inc. benefits & taxes) should be approximately 30% of gross or less
  • Combined food & labor should not exceed 60%.
  • Restaurants with alcohol, pour costs should not exceed 28-32%, night clubs pour at 20-24%.
    • Liquor – 15-20%
    • Draft Beer – 10-20%
    • Bottle Beer – 30%
    • Wine – 30%
  • When alcohol is involved sales goal is 70% food & 30% alcohol.
  • Supplies, equipment and property repair and maintenance, utilities – 10%
  • Legal, accounting, insurance, property taxes, misc. – 5-7%
  • Advertising & promotion @ 3-5%
  • Profit – 10% (note: must cover return on investment, all debt service, etc)

Part 2: The Business Plan

About the Author:

Roger_RobinsonRoger Robinson, Ph.D. has been a SCORE mentor for over 16 years. His specialties include non-profits, business planning, specifically in restaurants and hospitality, recreational and arts and Entertainment verticals. Read more about Roger hereClick here to schedule a free mentoring session with Roger or another SCORE mentor.