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The truth about restaurant failure rates

It was eight years ago that the NBC television network broadcast a program entitled Restaurant: A Reality Show. During the show, an advertisement by American Express alleged “90% of restaurants fail during the first year of operation.” A high restaurant failure rate was an enduring myth even before that broadcast.

A research study published in the Cornell Hotel and Restaurant Administration Quarterly in 2005 examined both restaurant failure rates and the reasons for failures. Rather than just look at bankruptcy statistics, as did many past studies, the researchers examined 2,439 restaurant operating permits from the Columbus, Ohio, health department over a three-year period and held interviews with current and former restaurant operators. This allowed the research to examine closures and ownership changes, as permits had to be renewed each year and any change in ownership required a new permit. Ownership changes were counted as a failure in the study, although the sold restaurants remained open. (If ownership changes had not been considered a failure, the failure rate would have been lower.)

The graph and chart below show the research findings for restaurant turnover rates (turnover rate does not necessarily mean restaurant closings as those restaurants that were sold, continued to operate):

During the first year of operation, slightly over one-quarter of all restaurants closed or changed ownership. By the end of their third year, just short of 60% of all restaurants closed or changed ownership. The turnover rate varied little between independent and chain restaurants

Cumulative Restaurant Turnover Rates
Year 1 Year 2 Year 3
All Restaurants 26.2% 45.4% 59.7%
Independent Restaurants 25.5% 45.1% 59.4%
Chain Restaurants 24.1% 42.7% 57.2%

The study also examined restaurant turnover rates based upon the density of restaurants compared to population in different areas of the city. Restaurant turnover was highest in areas with higher concentrations of restaurants. In other words, the greater the number of restaurants for a given population, the greater the failure rate. This is not at all surprising, as the greater the number of restaurants for a given population, the greater the competition is for each customer’s restaurant expenditures, indicating that market demand research should be a prerequisite before opening any restaurant.

The study’s authors not only examined quantitative data, but also conducted a qualitative study to determine reasons for both success and failure. Twenty independent full-service restaurant operators who had been in business for at least five years and 20 failed full-service restaurant operators were interviewed.

The key finding of the qualitative study was that a successful restaurant requires focus on a clear concept that drives all activities. Concept is different than strategy. Whether or not operators had elaborate strategic plans was not a determining factor for success, but clarity of concept was. Successful restaurant owners all had a well-defined concept that not only provided a food product, but also included an operating philosophy, which encompassed business operations as well as employee and customer relations. Failed restaurant owners, when asked about their concept, discussed only the food product. The researchers concluded it was obvious from the interviews that food quality does not guarantee success; the concept must be well defined beyond the type of food served.

About Randy White

Randy White is CEO and co-founder of the White Hutchinson Leisure & Learning Group. The 25-year-old company, with offices in Kansas City, Missouri and Doha, Qatar in the Middle East, has worked for over 500 clients in 32 countries in North and Latin America, Africa, Asia, Europe and the Middle East. Projects the company has produced have won sixteen 1st place awards. Randy is considered to be one of the world’s foremost authorities on feasibility, brand development, design and production of entertainment, eatertainment, edutainment, play and leisure facilities. Randy was featured on the Food Network’s Unwrapped television show as an eatertainment expert, quoted as a children’s entertainment/edutainment center expert in the Wall Street Journal and Time magazine and received recognition for family-friendly designs by Pizza Today magazine. One of the company’s projects was featured as an example of an edutainment project in the book The Experience Economy. Numerous national newspapers have interviewed him as an expert on shopping center and mall entertainment and retail-tainment. Randy is a graduate of New York University. Prior to repositioning the company in 1989 to work exclusively in the leisure and learning industry, White Hutchinson was active in the retail/commercial real estate industry as a real estate consultancy specializing in workouts/turnarounds of commercial projects. In the late 1960s to early 1980s, Randy managed a diversified real estate development company that developed, owned and managed over 2.0 million square feet of shopping centers and mixed-use projects and 2,000 acres of residential subdivisions. Randy holds the designations of CSM (Certified Shopping Center Manager) and Certified Retail Property Executive (CRX) from the International Council of Shopping Centers (ICSC). Randy is also a partner in Eatertainment Venues 4.0, a company that is developing eatertainment venues, a co-Regent and presenter at the 10-year-old Foundations Entertainment University, a 3-day long training seminar for the family entertainment center industry and a partner in The Optimus Group, a consultancy for the development of fully integrated sports, entertainment, recreations, retail and dining projects. He has authored over 100 articles that have been published in leading entertainment/leisure and early childhood education industry magazines and journals and has been a featured speaker at conventions of over 20 different leisure trade groups.
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