Do Most Restaurants Lose Money - Ultimate Guide
This ultimate guide will be updated gradually to provide information for restaurant owners on their business. The guide will be outlined by
- Do Most Restaurants Lose Money?
- Why Restaurants Lose Customers? (Upcoming)
- What is the most profitable type of restaurant? (Upcoming)
- How much does a restaurant owner earn annually (Upcoming)
Do Restaurants Lose Money?
Gordon Ramsay, a popular celebrity chef, closed around 23 restaurants since his start in the business. Around half of his restaurants are still running amidst the various economic crisis.
According to an Ohio State University study published in 2005 about failed restaurants, 60 percent close or change ownership in the first year of business, with 80 percent closing within the first five years. There are many reasons restaurants fail, from health-related closures to consistently bad reviews.
Running a Restaurant seems easy on the surface if you looked at the below National Restaurant Association (NRA) performance index which showed business is generally positive except for the 2008 crisis.
Furthermore, the National Restaurant Association shared that
- Restaurant industry sales will hit $899 billion in 2020, up 4% over 2019 (1.2% adjusted for inflation).
- Restaurant sales will grow thanks to an expanding economy and positive consumer sentiment. Both support spending in restaurants.
- Consumers’ pent-up demand for restaurants is high; nearly half of consumers say they aren’t using restaurants as often as they’d like.
Then why do restaurants still lose money or even closed down? These are 7 reasons why restaurants lose money:
- Fast-Changing Lifestyle trend: In the past, meat was everything. In 2020, the hottest food offerings include plant-based proteins like Beyond Meat and Impossible, healthy bowls, and global cuisines
- Manpower Issues: Even with the advent of technology, many of the businesses still require humans. Good people are hard to hire as the industry is competitive, long working hours or shifts, and pay is not high.the rental and staff costs, keep your food cost down (reducing wastage from over-ordering and price hike due to supply shortage), electrical and water bills.
- Copy-cat businesses: If you are performing well, the odds are still stacked against you. The rental will go up as your landlord will see your business is great. Competitors will imitate your best dishes or sabotage your business. The bigger and richer food chain will try to interrupt your business model and steal your customers or undercut you till you bleed out first (remember how Uber started?).
- Grocery and non-Food companies will have food business: It is no longer a product industry and more of selling the experience and lifestyle to customers. Many companies, like Muji and Ikea, are having a food business within their outlet to keep the customers longer and happy. Therefore, your restaurant must have a purpose or reason to keep customers away from them in the future.
- Reviews are blunt and direct. Customers expect more and will leave negative reviews if they don't like your staff's service or food. Luckily, review sites use a Bayes-average (hard to explain but it is not simple average and less affected by outlier that much). Nevertheless, a negative review will still harm your potential new customers (Some hotels religiously even spend time replying back at hotel booking sites, why don't restaurants do more?)
- Increased Regulatory Costs: In the past, the food industry was lightly regulated and you could make do with just minimal training. Nowadays, you must ensure food safety, comply with proper waste management (for countries that encourage reducing food waste and recycling). These costs will only increase over time as more food incidents would happen and oversight by staff leading to regulatory penalties and fines.
On the good side,
- Marketing is really more direct now and people love it
- It is easier to directly talk to your customers. If I have a business with no customer, I would follow what Gary Vee, a great marketer advocate.
- Just go to Instagram and find people who post around you. (preferable 5 top and 5 recent)
- Offer a great deal of free food to exchange for a post.
- If you have a budget to spare and need to quickly build up your business, you could even pay using Facebook at a certain radius
- Food takeout will increase over the years
- This is a good business as you are no longer limited by your restaurant size. In fact, many countries adopt a central kitchen concept where you build a few concept stores and then have a central kitchen that delivers food to the outlets or customers to reduce rental costs.
We recommend reading this article to learn more about the restaurant industry in 2030. https://restaurant.org/Downloads/PDFs/Research/Restaurant2030.pdf