5 Main Reasons Restaurants & Food Businesses FAIL
Today we’re going to be talking about the top five reasons why restaurants fail.
More than 60% of restaurant owners fail within the first year of operations. That means that six out of ten people who own a restaurant, who had a beautiful idea, who wanted to be able to bring their dreams into reality, fail within the first year. Many of the reasons for failing can be avoided, if only they knew about and avoided these five common pitfalls. Make sure you stay tuned in and pay attention.
Here are the five most common pitfalls which you can avoid, if you know them.
The number one reason why businesses fail is the wrong location. They do not uncerstand the difference between a destination location and a high traffic location. In essence, high traffic means a lot of people walk by, and in turn, has the potential for customers coming in; whereas a destination is where someone actually drives specifically to your restaurant after having a really high intent to visit.
A lot of people mistakenly believe that they will be making a high revenue because they are paying so much money for rent in a high traffic place. High traffic only means higher potential for customers coming into the restaurant. It does not equate to more customers. You still need to do the work to bring them in. You still need to have a product to market fit. You still need to have high visibility for your food and beverage establishment. This doesn’t make sense for a lot of people who actually pay super high rent and have this expectation that their business will survive and prosper just because they have a lot of foot traffic.
Now, on the other hand, if you are running a destination location, people don’t understand that you need to do the right amount of marketing. You need to be able to appeal to the right market and bring your food offering in front of your core constituents and the ideal customers minds and eyes in order to be able to and actually entice them to come over to your destination location. In this case, you need to understand the different variables and elements that come into play, whether it be visibility, crime rate, accessability. Only then are you going to be able to prep yourself much more for success, and you’re going to avoid more of the pitfalls.
Wrong Staff Management
The second reason why they fail within the first year is because they don’t manage their team properly. What I mean by that is, first of all, you need to make sure you hire people who have the same aligned values. Because, if the way you do things and the ways they do things don’t align, then you’re in big trouble, because you are not speaking the same language, and you are always going to butt heads. They’re not going to have that accountability. They’re not going to have that common sense, which you expect from them. And in turn, you cannot work towards that better vision you’re trying to communicate.
How do we actually train staff, how do you retain staff, and how do you create the right culture in order for you to be able to bring in and build an all-star team? A lot of people neglect treating your staff like humans. What I mean by that is giving them a fair wage, giving them proper schedules, so they can actually do things outside of work, especially in the food and beverage industry.
The schedules are so whacky. Whenever there are holidays, they’re working. Whenever it’s happy hour, they’re working. They’re basically working hours that a lot of people don’t, and at the end of the day, we as owners, need to take care of them, because, if we do, they are going to be able to take care of our business. And that is how we succeed.
In order for you to be able to align with them, and in turn, have them run your business for you, and not have you running your business day in day out and getting burnt out, what do you need to avoid? Some of the poor examples that I see is that owners treat their employees like trash. What I mean by that is giving them minimum wage, always cutting the benefits, not giving them development opportunities, not trusting them, always looking over their shoulders, and micromanaging them. In turn, just think about it, If you’re on the other side of the table, how would you feel if you’re not treated with respect? How would you feel if you’re not empowered to take actions? How are you actually able to take any accountability if there is no trust in you, which is a reason why we need to empower our staff?
One solution is the “$10 rule.” Give your staff the ability to comp anything below $0, actually to give away products for that amount. That way they can bring a pleasant experience for customers. On top of that, the staff feels good about being trusted. They have power to make a decision. They don’t need to go through us, and in turn, this allows them to be much more accountable for our business, treating it like their own.
For those of you who think they end up abusing this $10 rules, I can tell you that those who do abuse it, those are people who don’t align with us, because their values are different, They’re not high in integrity, they are not high on empowerment. Because we, whenever we hire, have this really strong sense of alignment in terms of values, we know we have already vetted out 90% of those bad apples, which is why this $10 rule works very well.
I hope my sharing some of these strategies with will inspire you to to treat your team properly, to empower them, and to give them proper training. So then, you go build an all-star team that’s going to be able to take care of your business while you’re away traveling and taking care of your family.
Too Much Of An Ego
The third reason why restaurants fail within the first year is because of ego. If your food isn’t any good, or there is much room for improvement, or if your customer service is not the greatest, that’s okay, because customers are willing to give you a chance if you have the right attitude, if you’re willing to improve, and if you’re putting in the resources for development and constantly creating and nurturing that relationship and molding your offering until it fits your customer’s palate. People are okay with that, because we’re all human. We all understand that. If you’re genuine and putting in the work and actually improving your food offering, then people are much more likely to support you along the journey.
Why a lot of people fail is because of ego, and what I mean by that is, if I’m given a feedback that my food is no good, and I just take it personally, and I think that people don’t know they are talking about, these guys just don’t understand my offering.
Well, if one person tells me that it’s not a problem, but if ten people tell me the same, then I should better take notice and some action to improve and tweak it; but a lot of business owners let their egos get in the way, and now they think that everyone is picking on them. The world is not fair, and they’re not willing to adopt and change, because they have this idea their recipe is amazing. And that’s the reason they fail.
Same thing with customer service, They take it personally, they think customers are just picking on them.
This goes even for a long established business: they may try to justify themselves by thinking they’ve been doing the same for the last 20 years, because it’s been working for the last 20 years. Sad to say, this is the reason why they’re failing, because their ego is in the way of them improving, delivering better customer service, better food offering.
So if you want to succeed, make sure your ego is not at play. Make sure you’re able to take in that constructive criticism, and actually do something to improve. That way, you’re going to be able to bring your customers along the journey with you, and in turn, create an amazing experience for your customers.
Don’t Know Their Numbers
The fourth reason why restaurants fail is because they don’t know their numbers.
What I mean by that is, do you really know the cost of goods sold for your restaurant, are you keeping tabs on the percentage that you’re actually spending on labor, and do you know how much rent actually is compared to your total revenue? If you don’t know these numbers, these golden metrics, and these golden margins, you’re not going to be successful. If you don’t know the numbers, how can you know if anyone is stealing from you? How can you know how much you’re making? How can you manage your cashflow properly for expansion? You can’t do any of this if you don’t know your numbers.
At end of the day, numbers would allow you to actually manage your food costs properly, So, for example, if you’re throwing away tons of food because they go rotten, because they get stolen, then you know there is a problem you need to fix right away.
I’ll, give you an example. If your cost of goods sold for the burger is $3, and you sell it for $10, and all of a sudden, your cost raises to $5, and you’re selling it for $10, you know for a fact that something is wrong: either you have been throwing away and wasting a lot of ingredients because you’ve over ordered and now they’re expired, and you have to throw everything away, or someone is stealing from you because you’re buying, let’s say $500 worth of burgers, but you’ve used only $400 worth of ingredients. What’s going on?
That’s the reason you need to know your numbers. That way, you can actually work on it. You know if you need a better delivery system to ensure least amount of spoilage; or you know people are stealing. These are all things that you need to work on, and that you can work on, if you know your numbers.
Same thing with scheduling: are you working with the most efficient labor force right now? Can you stagger the amount of people that comes in? Are you maximizing the amount of revenue that people bring in compared to the labor cost? If you don’t know your labor cost, you’re not going to be able to control any of these elements.
Which is a reason why a lot of businesses fail. They do not understand their golden margins. If you want to be successful in the restaurant business, make sure you understand and know your golden margins.
The fifth most common reason why restaurants fail is because they keep running promotions. What I mean by that is we see someone being super successful running promotions, our competitors are having lineups around the block because of their big promotion. It is buy one, get one free. In turn, you run the same promotion, and as you’re running that promotion people are buying, but you’re not making money, and you’re asking yourself, “Wow. I can’t survive if I keep running this promotion, but yet my competitor is doing it.” You just copied them, and you’re running yourself into the ground, because you don’t understand why they’re doing the promotion.
You need to really understand the foundations of your business before you run any promotions at all. If you’re running a promotion, you need to know why are you running it.
Is it to gain awareness for your business? Some franchise stores have a the budget to run these promotions to gain the awareness. It is a marketing cost and they’re okay with it. But, for your small business, is this something you can afford, and is this a strategy you want to employ for your business?
Whereas, if you’re running a promotion for the sake of gaining profit, then that type of offering would be different, completely different, from a buy one get one free. It could be an upsell. So, for example, if you create a meal bundle and push it out to the market, then you can actually optimize the amount of people that are buying these things.
So, have an understanding of the foundations of how you run your business, and let your promotion be a key to running it. Do not just go blindly in offering a copy of the competitors just because they’re offering something that you’re not.
So there you go, the top five mistakes you should absolutely avoid, and some suggestions for correcting them, when it comes to running your restaurant.
The first one is bad location, not understanding the fundamental of choosing the right location for your offering. The second is mismanaging your team, not aligning with their values, and not incentifying them, not treating them like human beings. The third is your ego: make sure your ego is in check, and be receptive to people’s suggestions. The fourth, not knowing the numbers: get to know your numbers, and you will know which lever to throw in order for you to maximize the amount of profit that you can make. Fifth, and finally, don’t blindly follow what your competitors are doing and running promotions without understanding the fundamentals.
Make sure you avoid all these pitfalls, and you are on your way to running a successful restaurant business.
If you want to learn more about how to start and run a restaurant business, and how to become an international food chain, make sure come back to this blog, as we will cover that in more detail soon. We’ll be talking about finding the right location, negotiating free rent, finding and assembling the right team, understanding what our customers want, what to offer them, knowing the numbers, crazy marketing strategies, raising funds. All these types of information is forthcoming.
Again, come back and check it out. Now, leave a comment in the section below, and do subscribe to our upcoming articles here. See you back here soon.
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