Why Do Restaurants Fail? 16 Mistakes & How to Prevent Them

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5 min read

Jan 25, 2023

Why Do Restaurants Fail? 16 Mistakes & How to Prevent Them

Whether you’re just entering the restaurant business or are a veteran, you may be asking yourself, “why do restaurants fail?” While there are many factors that can lead to a restaurant’s demise, high overhead, low profit margins, and external factors like a labor shortage and inflation make it difficult to stay in business. 

However, when you know why restaurants fail, you can better prepare to avoid these challenges. We’re sharing 16 reasons restaurants fail and best practices for avoiding this fate.

1. Lack of Business Data

If you don’t have data about your business or customers, or access to actionable reporting, you’re going in blind. Without data, you could make business decisions that run you into the ground, or waste time and money on marketing initiatives that don’t move the needle.

Solution: Today, access to guest data is essential for creating personalized experiences and elevating hospitality. Look for a CRM and point-of-sale system that gives you intuitive reports and information about your customers’ preferences and habits so you can cater to their needs. For example, when you can pull up a list of guests who prefer white wine to red wine, you’ll know exactly who to invite to a ticketed white wine-tasting event at your restaurant.

2. Low-Traffic Location

If your restaurant is hard to find or located off the beaten path, you won’t generate as much foot (or car) traffic as you would in a more prominent spot, which could lead to your downfall.

Solution: If you’re stuck in a lease and can’t move your restaurant, invest more in marketing. Leverage advertising to attract new customers and implement a loyalty program and marketing automation to retain existing customers.

Offering delivery and pickup through online ordering can also help you combat a poor location.

3. Staff Turnover

Staff turnover is notoriously high in the restaurant industry. In fact, the average restaurant employee tenure is just 110 days. High turnover coupled with a global labor shortage means it’s difficult for restaurants to find and retain talent.

Solution: According to a study of nearly 4,000 restaurants, restaurant employees leave because of low wages, scheduling inflexibility and lack of manager recognition. Combat these issues by offering competitive wages and benefits, more flexibility around scheduling and opportunities for upward mobility.

4. Rising Wages

One of the main solutions to poor staff retention is increasing pay. But doing so can be difficult for restaurants struggling with cash flow due to high overhead costs and slim profit margins. Therefore, one of the reasons why restaurants fail is increased salaries and wages.

Solution: There are a number of ways to ameliorate this issue, including increasing menu prices and retaining employees by offering benefits as an alternative to increasing pay. You can also use technology, such as mobile order and pay solutions and self-ordering kiosks, to automate tedious tasks and reduce labor costs.

5. Negative Reviews

If bad reviews pile up on Yelp, TripAdvisor, Google and social media, they could keep customers away. In fact, a recent survey found that consumers don’t trust businesses with an average rating of fewer than four stars on online review sites.

Solution: Pay attention to what customers want by sending post-meal surveys, reading and responding to reviews and implementing feedback.

6. Insufficient Marketing

Marketing helps you reach new customers and encourage existing guests to come back. If your restaurant’s marketing efforts don’t extend past your grand opening, you could fail to attract customers and stay top of mind.

Solution: Make marketing a regular part of your business operations. For example, marketing automation can help you engage customers before and after their visit to help elevate the guest experience and boost loyalty. 

Learn more about marketing automation in our Marketing Automation Guide for Restaurants.

7. Failure to Retain Customers

Returning customers spend 31% more than new customers. If you can’t cultivate a loyal customer base, you may not generate enough sales to sustain your restaurant. 

Solution: With a marketing automation tool, you can set up a “we miss you” campaign to nudge guests to make a reservation if they haven’t dined with you in a while. A restaurant loyalty program can also gamify frequenting your restaurant and incentivize customers to come back. 

8. Poor Customer Service

Reason number eight for why restaurants fail is bad service. Mixed-up orders, long wait times and rude or inattentive servers will keep guests away. When customers have a bad service experience, not only do they not come back, but they also warn others to stay away, whether through word of mouth or reviews.

Solution: Maintain high service standards with thorough server training, anonymous diner audits and guest feedback surveys. Listen to customers and implement their feedback.

9. Inflation

Rising food, labor and rent costs are affecting consumers and businesses in every industry. With consumers tightening their purse strings and restaurants experiencing low profit margins and cash flow problems, inflation can shut restaurants down.

Solution: Data from your restaurant technology can help you see where you can afford to cut costs without lowering your standards. Automation also helps reduce labor costs, which make up the majority of operating costs. For example, by having dine-in guests order on their mobile devices via QR codes, front-of-house staff can focus less on repetitive tasks and more on providing great service.

10. Increasing Food Costs

Food costs more due to unprecedented inflation rates. If your menu prices stay the same, you may not have the money you need to run your business.

Solution: Re-price dishes regularly or reduce portion sizes to make sure you’re earning a profit on each plate. Swapping paper menus for digital menus will make it easier to update prices as often as you’d like.

11. Rising Rent

According to TouchBistro’s State of Restaurants in 2023 report, rising rent was the greatest cause of financial strain for 23% of U.S. restaurants. When rent is higher, you need to generate more revenue to keep up with your bills. If you can’t generate more sales, you can’t afford to stay in business.

Solution: Optimize your floor plan to generate more sales with the same amount of space. With a CRM like SevenRooms you can implement revenue management strategies to upsell and seat guests at the best table for sales generation.

12. Outdated Technology

If you only accept takeout orders and reservations over the phone, run a cash-only operation, do all of your marketing manually or use an outdated POS, you’re wasting time and money. Not keeping up with the times can hurt your restaurant.

Solution: Update as many of your systems as you can afford to increase efficiency, reduce costs, and boost sales. One study found that restaurants increased revenue by 17% after adopting an online ordering platform. Take everything you can online, from reservations and takeout orders, to digital menus and floor plans

13. Disorganization 

Being disorganized can cause you to forget to pay staff on time, miss inspection deadlines or order too much or too little inventory, which could lead to your restaurant’s downfall.

Solution: Create systems for every aspect of your business. Use payroll software to automatically pay staff on time. Create reminders for important deadlines in your digital calendar. Use inventory management software to keep track of what you have in stock and what you need more of.

14. Poor Food Quality

Terrific service and a wonderful ambiance can’t save your restaurant if your dishes are bland, inconsistent or otherwise bad. If you’re serving subpar food, it’s only a matter of time until customers catch on and stop visiting your restaurant.

Solution: Pay attention to online reviews and ask guests for feedback while they’re dining with you. If you notice a pattern of certain menu items getting lots of complaints, fix their recipes or take them off the menu. Hire a recipe consultant if needed to rework a few dishes or overhaul your menu.

15. Competition 

With more than one million restaurants in the United States, competition can get fierce. If consumers prefer your competitors to your restaurant, they could run you out of business.

Solution: Focus on generating repeat business through great service. Collect data about your customers through guest profiles in your CRM to personalize every guest interaction and make customers feel special. 

16. Lack of Funding

You’ll need between $175,500 and $750,500 to launch your restaurant. If you don’t have enough money to properly fund your business at the beginning, running it for a long time will be a challenge.

Solution: Instead of relying only on your savings, seek investors or look for alternative funding options for your business, like inKind Capital, which gives you upfront capital in exchange for food and beverage credits.

Foolproof Your Restaurant

Don’t let your restaurant become a statistic. Foolproof your business in the new year by conducting an audit. Which of these mistakes are you on the brink of? What can you realistically fix? Where do you need to outsource help?

As you plan for the new year, make data-based decisions rather than decisions based on a gut feeling. By implementing or upgrading the technology in every aspect of your business, you can improve customer satisfaction and loyalty and reduce costs to be successful in the new year and beyond.

Why Do Restaurants Fail FAQs

1. What Are the Signs of a Failing Restaurant?

Poor online reviews, a lack of business data, high staff turnover, outdated technology, subpar food quality, disorganization and lots of competition can indicate that a restaurant is in danger of failing.

2. What Is the Number One Reason Restaurants Fail?

There’s no single reason why restaurants fail. Instead, it’s a combination of factors, such as poor cash flow, low profit margins, inexperience, disorganization and high staff turnover, that contribute to restaurants closing.

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