1851 Unhappy Franchisees: Six Reasons Why Restaurants Fail

When you launch your restaurant concept, you plan to be in it for the long haul. You really can’t go into it any other way.

But with an estimated 60% of independently-operated restaurants failing in their first year, this is one topic that needs to be tackled head-on.

And if that news wasn’t unsettling enough, some studies claim that number is as high as 90%. If you look further out, 80% fail in the first three to five years of operation.

So why so many failed restaurants? Here are 6 reasons we see all the time.

1. Location, Location, Location

Just like when homeowners are searching for the perfect home and location, you need to follow suit when selecting your retail space. I’d even say you can’t be too picky when it comes to this make-or-break decision.

Because if you don’t look at a prospective location from all angles, especially a patron’s viewpoint, you’re liable to wind up with one or more of the following problems:

• Poor visibility
• Insufficient parking
• Limited foot traffic

Solution: Start out with the end in mind. Complete your market research before you begin searching for a space. Map out your ideal customer and your competitors, so you know where your customers are and how other restaurants have fared before you. And if you’re unfamiliar with the area, working with a real estate professional can be invaluable.

2. People Problems

I’ve always said, “My business is people.” And when I counsel restauranteurs, I encourage them to embrace this same mantra.

Your team – your people – represent you on the front lines. If you’re having “people problems,” it could be due to a whole slew of reasons:

• Ineffective hiring – Hourly vs salary ratio.
• Being consistently understaffed.
• Lack of focus on proper training – i.e. operations, customer service, leadership.
• Unclear workplace culture.

Solution: The upside of having people problems is that you can initiate significant change, just by acknowledging the issues. Oftentimes, it’s not that your staff is “bad,” it’s that you haven’t set the expectations properly.

And once you’re aware of this, things can only get better. For example,

• Get creative in your recruiting. Think beyond Craigslist. Contact trade schools, use social media, LinkedIn, hiring fairs, etc.
• Hire tough! This doesn’t mean you have to be cutthroat, but you do need to be impartial. Create interview tools, like screen forms, to make evaluating and comparing candidates easier.
• Define and “sell” your vision and purpose. Pinpoint it, and then live it and breathe it. Your enthusiasm will be contagious and your team will be excited about being part of it.
• Hire managers and leaders who have similar visions, values, and goals.
• Identify ideal candidates for each position. Do you need someone with a flexible schedule, management background, or a culinary education?
• Don’t rush the hiring process. Finding quality candidates takes time.
• Ditch the complex manuals and create simple, easy-to-understand operational and customer training materials.

3. Poor Customer Experience

Customers come to your restaurant for more than the food. They come for an experience. And if their experience offers more negatives than positives, you could be headed for trouble.  

Your customers may have a poor or average experience due to the following:

• Disengaged staffed – not smiling, no energy, or visible lack of comradery with coworkers.
• Unclean or disorganized restaurant or small details overlooked – bathrooms not stocked, dirty windows, or soiled menus.
• Poor food quality – dishes take too long to prepare or delivery to table is slow.

Solution: This is another area you have a tremendous amount of influence over. Set the precedent and expectations early on by:

• Defining what you want the customer experience to be.
• Training your staff in accordance. Talk about it regularly and reward for it even more often.
• Hiring crew that are naturally nice and genuine. Everyone will have an off day now and then, but you don’t want your employees being “fake” nice. Customers see right through that. Being selective with who you hire, by conducting thorough interviews, is so important at all levels!

4. Trying to be Everything to Everyone

It’s not just a popular pop song from the 90’s! Trying to be everything to everyone is a recipe for disaster. The most successful restaurant concepts know their niche…and nail it.

If you can’t, or won’t, hone in on your specialty, you’ll encounter these issues:

• Overcomplicated menu – too many food items, changes too often, staff unable to keep up with the new, ever-changing menu.
• Lack of uniqueness.
• Jack of all, but master of none.

Solution: Time and time again, defining a niche – and sticking to it – can pay dividends. Just consider recent successes like Chipotle and In-N-Out Burger. These widely successful, fast casual concepts have simple menus, largely because they know who they are and what they’re good at.

• Identify your niche, know who you are, and be the best at what you do.
• Properly test new menu ideas/items. When added to the menu, train staff properly.

5. Overspending

Overspending is an enticing trap for newbies. It’s easy to think if you just spend more money on advertising or remodeling the dining room, that business will boom.

Before you make that jump, consider how else overspending can creep up on you:

• Spending too much before opening – excessive remodels, updates, and other possible non-necessities.
• Failing to closely watch – and reign in – cash flow.
• Not understanding food costs.
• Payroll growing too high.

Solution: This can be tricky to combat. On one hand, you obviously need money to start your restaurant. On the other, throwing more money at a problem rarely fixes it.

• Develop a budget early on – and stick with it if at all possible. Meeting with other successful restauranteurs can be helpful in establishing that initial budget too. Listen and learn from their mistakes.
• Understand all of your numbers, including your cash flow situation. If you don’t understand something, make sure your accountant – or somebody – explains it until you do.

6. Lack of Systems

Developing systems that are customized to your operation is vital for success in those early years and beyond. Your time is limited, so establishing systems – along with checks and balances – allows you to auto-pilot select tasks.

For example, are you spending too much time on payroll, compliance, training, and HR tasks? If so, this takes time away from running a bustling restaurant. Divided attention will hinder your development.

Solution: Fortunately, you have lots of options here too.

• Establish internal systems to help get you organized, and then train operators to use those systems in your absence.
• Consider outsourcing HR-related tasks. These are some of the best to outsource to professionals, because of the clarity a third-party perspective brings.

Carrie Luxem is a human resources professional specializing in the restaurant industry. In 2010, she founded Restaurant HR Group where she partners with dozens of restaurateurs to take care of their greatest assets — their people. With a career that has spanned nearly 20 years, Carrie is frequently sought out for her modern, yet simple and effective advice and has been featured in Entrepreneur, Restaurant News, and Independent Restauranteur. Connect with her on social media or learn more at CarrieLuxem.com.