Based on a 10-year study conducted by researchers from Cornell University and Michigan State nearly 30% of new restaurants will fail in the first year alone, with that number increasing to 50% after three years.
The failure rate is alarming for any new owner hoping for restaurant success.
But not to worry. The factors contributing to these failures are well documented and can be avoided by establishing a strategy for success.
To protect either a new or established restaurant against becoming another statistic among the graveyard of failed restaurants, six basic components must be considered:
Effective business planning and execution
Differentiating the brand
Prioritizing service and value
Hiring and retaining employees
1. Effective Business Planning & Execution
Many restaurant owners approach their new business with a burning passion for cooking and food. However, some owners have little to no actual business experience and soon find that passion will not keep the restaurant doors open.
Possessing passion and culinary prowess are certainly important qualities within the restaurant industry, but they are not sufficient to operate a successful business. When you find yourself struggling with the practical business side of the restaurant, try taking the following steps:
Create a Solid Business Plan & Stick To It
Using a business plan template, evaluate all aspects of the business and create a detailed plan which assesses SWOT (strengths, weaknesses, opportunities, and threats). When you approach the business from an analytical perspective, making business decisions becomes more rational and less emotionally driven.
Understand Your Competition
Since restaurants are local businesses, having a thorough understanding of local demands and existing competition is important to the success of a restaurant. Filling a need in an area where the competition falls short is a key component of a sound business plan.
Let a Professional Handle the Numbers
Hiring an accountant to handle the books, costs, and financial reporting is one of the best decisions that a business owner can make. Being presented with numbers on a regular basis by a financial professional helps you maintain realistic expectations regarding costs and profits in order to make financially responsible decisions.
2. Differentiating the Brand
Offering great food and service is important, but is not always a unique selling point. With over 660,000 restaurants operating within the U.S., how will your restaurant stand out to consumers? Creating a brand that differentiates one restaurant from another is an important component of restaurant success. Here are a few examples:
Applebees uses the slogan, “Good food. Good people,” and markets themselves as a friendly, neighborhood bar and grill.
Cracker Barrel defines themselves as the “Old Country Store,” with a simple mission of pleasing people with home-cooked meals. Their unique positioning adjacent to interstate highways allows them to excel in their market, feeding home-style meals to travelers.
Chipotle Mexican Grill offers “Food with Integrity,” and appeals to a socially responsible demographic with fresh, local ingredients, and a model of sustainability.
Johnny Rockets is reminiscent of the 50’s style diner, serving up “The original hamburger.” With a classic, all-American theme that extends to their menu items, decor, and service style, Johnny Rockets offers a nostalgic trip down memory lane.
All four of these brands offer great food and great service, but their positioning in different niche markets creates a likelihood of success.
3. Prioritizing Service and Value
Customer service is a priority in every business, but should be the primary focus of a restaurateur. A survey found that 86% of customers are comfortable spending more on a higher quality experience.
From the moment the customer arrives, each staff member they encounter should present a professional and accommodating attitude – from the hostess to bus staff to the head chef. Customers tend to come in hungry and most likely on a time table. Communicating delays, making menu suggestions, and promptly addressing dissatisfied customers are a few ways to guarantee repeat business.
Personalizing the guest experience is also important. Advances in technology, such as mobile POS systems, empower staff with the tools needed to provide that level of customized, consistently exceptional customer experience.
According to consumer trends, customers (especially from Gen Z or Millennial generations) actually feel technology improves the guest experience. Using technology to enhance the customer’s experience is no longer a luxury or something that’s “nice to have.” It’s become an expectation amongst the majority of restaurant diners.
4. Managing Costs
Food and labor are historically known to be the most significant costs on a restaurant’s profits & loss sheet, with food and beverage costs averaging about 33% of sales dollars and labor costs accounting for an additional 33%. Add in an estimated average of 10 to15% for waste and it’s no surprise that turning a restaurant into a profit-positive business can be challenging.
Here are some of the best ways to manage your costs:
Reduce Order Errors
When an order is incorrect, not only do you compromise customer service but you also increase costs, which drives down profits. Implementing a POS system that allows for efficient, customized order placement will reduce wait times and order errors. An inventory tracking system that integrates with your POS also allows wait staff to stay updated on the availability of menu items in real time.
Diligently Track Spending
Taking advantage of detailed spending reports generated from a POS system assists management with understanding where every penny is spent and provides valuable insight used to develop cost-cutting strategies.
Manage Labor Expenses
Keeping a close eye on “sales to labor ratios” will help managers make both short-term and long-term staffing decisions that will positively affect the bottom line. With a POS that provides labor and sales data by the minute, managers are able to make important on-the-fly decisions, like cutting staff on a low-sales night.
5. Hiring and Retaining Employees
A restaurant’s staff is its top resource, which means it’s imperative to assemble your staff strategically. Once the application process has begun, consider these hiring tips:
Ask behavior-based prompts during the interview, such as, “Describe a time when you felt that you were treated with exceptional service.”
Provide an opportunity for the applicant to ask questions, in order to help you gauge their curiosity and interest level.
Pay attention to nonverbal cues such as whether as the way they’re dressed and whether they make and maintain eye contact.
Consider offering a test run. This will allow an opportunity for the manager to assess on-the-job strengths and weaknesses.
Once someone is hired, set clear expectations to help them reach their full potential. A team that is working together towards the same clear and understood mission becomes a well-oiled machine. Establishing best practices, putting policies in writing, encouraging staff dialogue, and hiring an attentive general manager to enforce policies and encourage growth will foster a staff that is fully invested.
6. Ongoing Marketing
While word of mouth marketing is certainly important – since customers are more likely to act based on the recommendation of a trusted friend – marketing should not end there. Thoughtful marketing plans that extend long past the launch of a restaurant are essential for success. From email marketing, to social media, to hosting events, there’s no shortage of ways for you to strategically market their business.
A deep understanding of the restaurant’s target demographic will help craft a multifaceted marketing strategy to not only bring in new customers, but also remind repeat customers of their past positive experiences and draw them back in. Gathering information from every customer that comes through the door – either through your POS, a social media check-in, or an old fashioned sweepstakes – gives you an opportunity to market to existing customers with menu updates, special offers, and events.
Hiring a part-time social media manager is a smart choice when you need to attract new customers. Encouraging community interaction in the form of restaurant reviews and photo “tagging” through Instagram or Facebook is a great way to engage the community and create a buzz around the restaurant. Running special promotions through social media is a great way to create exposure, and encourages first-time customers to engage more deeply with your brand. For example, offering a half price appetizer if guests “check-in” to your restaurant on Facebook is a great way to get new customers in the door.
While many factors will ultimately play a role in the success of a restaurant, approaching the creation and management of a restaurant with these six factors in mind will ensure a greater possibility of success for years to come. Excelling in the kitchen does not qualify a person for restaurant ownership. A love of great food must be paired with a strategic business plan, qualified and motivated staff, and value that exceeds customer expectations.
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Dana is the former Content Marketing Manager at TouchBistro, sharing tips for and stories of restaurateurs turning their passion into success. She loves homemade hot sauce, deep fried pickles and finding excuses to consume real maple syrup.