Why New Restaurants Fail?

Every year, in every country in the world, countless entrepreneurs open restaurants. It can be a family-run affair, a small group of friends, or a rugged individualist with a concept thought to be compelling to the dining public. It may be based on a great recipe for buffalo wings or a winning personality combined with a love of entertaining guests. A few may be successful but most are not. Even with all of the advances in technology, the restaurant business remains one of the most difficult, yet fundamentally simple, businesses to operate.

The restaurant new business failure are at a high in between 57% to 59% range. According to a study the highest failure rate for new restaurants occurred during the first year when about 26% of the restaurants failed. Approximately 19% of new restaurants failed in the second year, and approximately 14% of new restaurants failed in the third year. Among franchised chains, the failure rate was 57% over the three years; and among independent restaurants, the failure rate was 61% over the three years. A year 1991 study by hospitality professors at Michigan State and Cornell universities, which found a failure rate of 57 percent over three years and 70% after 10 years coincides with these facts.

One of the most common causes of restaurant failure is under-capitalization of the business. Because there are no traditional lending sources for new, independently operated restaurants, money to start a restaurant typically comes from personal savings, loans from family members, or small investments by friends and business associates. Occasionally a talented chef will come along who develops a following while working for someone else, and then gets the backing from a few devout fans to open his or her own restaurant. Why then do so many start-up restaurants fail?

My theory as to why the failure rate is so high is related to the lack of traditional lending sources, such as banks. While there are some lenders which specialize in restaurant loans, they typically require the borrower to have an operating history of at least three years and two or more restaurant properties as collateral. As a result, the individual operator new to the business is unlikely to be able to obtain access to outside lending sources.

When a traditional lender is involved, as is the case when building a hotel or retail center, the lender requires that a market study and appraisal be performed prior to making a loan. The market study assists the lender in determining whether there will be a demand for the real estate product and the potential value of the improved real estate that will be the collateral for the loan. The lender is then able to assess the risk of being repaid by the borrower, which in turn determines the amount of the loan, terms of the loan, and interest rate on the loan.

Without a lending institution requiring a market study and appraisal as a condition for making a loan, the independent restaurateur passes up an opportunity to save hundreds of thousands, if not several millions of dollars, by discovering early in the process whether or not there is a market for his concept.

Market studies can be obtained at a relatively modest cost in a time frame that will not unduly delay the development timetable for the new restaurant. The person performing the market study will expect the operator to provide information regarding such items as menu concept, theme of décor, target market, price points, opening target date, seating capacity, and intended location. It is important to note that in today’s “information age”, there is more data available than any one small restaurant operator can absorb.

Further, it is not enough simply to gather the available and appropriate data, one must have the ability and experience to analyze and draw conclusions from the data. An experienced restaurant consultant travels frequently to different markets around the country and consequently, is exposed on a regular basis to both successful and unsuccessful new concepts.

Well this is what I think, you have a conflicting view, do make me know we can put forward each others points and can get a comprehensive study on "Why New Restaurants Fail".