Why Restaurants Fail Essay

4757 words - 19 pages

seven pages on why so many restaurants fail to be successful. well researched, good sourcesDarren AtleeEconomicsJanuary 13, 1995Topic: RestaurantsSpecific Topic: Failure of RestaurantsQuestion:What are Five factors which contributeto the failure of new restaurants?Definition of Business Failure: Business that ceased operation following assignment or bankruptcy; ceased operation after foreclosure or attaching; voluntary withdrawal leaving unpaid debts.It is a common assumption in the restaurant industry that restaurants fail at an exceedingly high rate, the highest failure rates in the U. S. economy. In researching this topic, statistics numbers and percentages fly around routinely. All give somewhat the same concept; in the starting years, most restaurants fail. The most often cited statistic is the 95/5 ratio. 95% success and 5% failure. Conversely, another favorite concept exists. Somewhere between 50 to 80 percent of all new restaurants which open this year will fail within the first 12 months of opening their doors. The same conventional wisdom also suggests that about 50% of the remaining restaurants will fail in their second year of operation and another 33% in the third year. This means that if 100 new restaurants were to open this year, 50 to 80 would fail before their first anniversary. That would leave 30 restaurants open in the year two. Half of these 30 would subsequently fail in their second year, and a final third of those remaining would fail in their third year. As a result, there is about a 90% compound failure rate over the first 3 years of a restaurants lifespan. (Mullen & Woods, 61)You are not alone if you feel intimidated by the numbers. They can be quite blunt and negative which attributes to one simple fact - it takes planning, research and risk to venture into the restaurant world. There are five major factors which can lead to success or, in this case, failure of new restaurants: capital, type of establishment, location, labor and management.In order to start any business, an entrepreneur needs money or capital. This capital could include all expenses, such as loans, rent, payroll, and insurance. Some argue this is what causes restaurants to fail. Given the information that restaurants are most likely to fail than succeed, it is always difficult and often impossible to interest bankers in making loans to entrepreneurs who operate in a high risk industry. Even when loans for restaurants are available, restaurateurs often must pay higher interest rates or provide more extensive collateral requirements to secure these "high risk" loans than might be required for another "less risky" venture. (Mullen& Woods 61)It is not difficult for a restaurant to fail when it has poorly planned financially. Many times restaurateurs fail to accommodate the business with enough cash flow to support the projected three year start period. Some expenses cannot be avoided nor controlled like raw materials which are essential regardless...

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