Why Restaurants Fail by Robert Irving


Thanks to Joe at Amadio’s Pizza for the link…

According to the article…

According to a frequently cited study by Ohio State University[/URL] on failed restaurants, 60% do not make it past the first year, and [URL=‘http://www.restaurants.com/blog/why-do-restaurants-fail/#.UwfKr0JdURI’]80% go under in five years.

But if you go to the study, the abstract says…

In contrast to frequently repeated statistics, a relatively modest 26.16 percent of independent restaurants failed during the first year of operation.

Emphasis mine. And this study researched turnover rates, not direct failures. The “80% go under in five years” claim was taken from another article, which mentions the Cornell study but doesn’t cite it. The actual study found that 71% of restaurants opened “fail” by the 10 year mark.

Remember that “fail” in this study is turnover, which was discovered by analyzing health department records. When I sell my business, I will be selling the assets and goodwill - not the actual business. My health department permit will be closed and a new one issued under the purchaser’s business. So my 10 year old, profitable restaurant would be considered a “failure” in this study despite it continuing on happily along.

According to one of the study’s authors:

The Dun & Bradstreet report, a well respected business journal, did a survey of business failures that suggests “eating and drinking” places have a failure rate of about 106 per 10,000 units, which is only 1.06 percent – however, it uses the conservative definition of failure, which only includes those that went bankrupt or closed with unpaid financial obligations

It’s unfortunate to see a publication (and I LOVE Business Insider) propagate the restaurant failure myth, and even more because they mis-quoted the very study they cited that disproves it. If only somebody would have taken 20 seconds to read just the abstract…

Here’s the actual study.

This myth unfortunately makes it much more difficult to obtain financing for new restaurants and also affects the prices of our businesses come time to sell.

Thank you for debunking the popular myth Piper! I wonder why people are so willing to believe things like the 60% first year failure rate when they can look around themselves and see that that is clearly not the case. 20% failure in the first year does seem like a realistic number to me though. I would take it a step further and separate the adequately prepared start-ups from the clueless. What I see, in a town with about 100 restaurants, is that the ones that start up with three key factors: Enough money to get open properly, an acceptable location (not necessarily great, but not stupid) and a key person, owner or manager, that has run a restaurant before have a much lower failure. In fact, adequate funding should eliminate first year failure altogether.

I did enjoy the article otherwise. The statements about experience and accounting skills are right on the money. The number of operators that do not track the key variable expenses and, in fact, could not do so since they do not know how is staggering. Those are the ones that end up circling the bowl without even knowing it!

Running a pizza store is not rocket surgery. As businesses go, it is a pretty simple set of challenges, the most difficult of which is the people factor followed by marketing and customer service. Keeping the place clean, managing inventory and labor cost and producing a quality product are all things an attentive high school student can do… no engineers or CPAs required!

It’s always good to remember the old saying: There are three kinds of lies: Lies, darned lies, and statistics.