Top 10 Reasons Why Restaurants and Coffee Shops Fail (Study)

Last updated on November 9th, 2017 at 09:45 am

Thanks to Jamie Oliver, Gordon Ramsay, Heston and Hugh and the Masterchef winners who go on to open their own restaurants with consummate ease and associated glamour, it seems like everyone wants to open a restaurant these days.

The thing is these TV personalities make it all look deceptively easy when the truth is that the cafe and restaurant business, in particular, is far from soft and fuzzy as it appears; it’s ruthlessly Darwinian.

Even Gordon and Jamie have a list of failed restaurants on their CVs. You can see Jamie’s here and Gordon’s here, and Gordon has had to close 23 of his 49 restaurants that he has opened in his career. And this infographic from top-business-degrees-net shows that 60% of independent cafes and restaurants fail in the first year, 10% above the normal business failure rate.

Cafes are a very high-risk business and it seems that many people underestimate just how challenging the restaurant and cafe trade is — and not to prepare or adapt sufficiently — and fail. Would-be cafe or restaurant owners need to understand the common pitfalls to avoid and understand the key success strategies if they are to have a chance of making a success of their cafe or restaurant venture.

So, what are the chief reasons that cafes and restaurants are failing, what are the common pitfalls to avoid?

1.) A saturated market. Are there simply too many restaurants in the area in relation to the supply of customers? The failure rate has been shown by studies to be much higher in areas with a high concentration of restaurants. Be very careful to check that the market/local area you are entering is not already saturated.

2.General Business Incompetence. 46% of businesses fail not because of lack of knowledge of the line of goods and services (e.g. food and drink), but a lack of knowledge of business, e.g. emotional poor/pricing, bad planning, bad financial management etc…Below you can find the Top 3 Must Read-Books For Coffee Shops Startups:

  1. The Daily Grind: How To Open and Run a Coffee Shop That Makes Money, by Andrew and Claire Bowen. 4.5/5 star aggregated reviews score on Amazon. It’s got a lot of valuable tips and advice from people who have actually run successful coffee shops and contains many real-life scenarios you might face in a coffee shop.
  2. The Coffee Boys’ Step by Step Guide to Setting up and Managing Your Own Coffee Bar: How to open a coffee bar that actually last and makes money. 4.5/5 star aggregated reviews score on Amazon. This is another book that is loaded with helpful tips and advice from successful coffee shop entrepreneurs who really have been there and done that. It’s very practical and written in a humorous tone.
  3. Start and Run Your Own Coffee Shop and Lunch Bar: 2nd edition (How to Small Business Start-Ups)4.5/5 star aggregated reviews score on Amazon. This is the book is written from the perspective of a first-time coffee shop owner’s perspective.

The following 8 reasons for failure are taken from the research paper, Why Do Restaurants Fail? An analysis of Micro and Macro factors by the UCF Rosen College of Hospitality Management.

3.Lack of capital. 

Surprisingly, the most commonly cited reason for restaurant failure is lack of capital. Due to entry barriers being low, would-be restaurant entrepreneurs attempt to start-up their venture with low capital, just enough to open the doors, but not enough to sustain life during the first few lean months. They often don’t even have enough funds to properly market their business. Try this must-read book from the FT to help you better manage finances.

4.Location. Another common reason for restaurant failure was being situated in the wrong location, with either the wrong demographic to suit their offering or not enough foot-fall. This was not always under their control as the socio-economic and commercial factors could lead to a change in customer profile and volume over-time that could not be reasonably foreseen.

5.Quality of life. Are too many people sucked in by the seemingly wonderful charming and fanciful lives that our celebrity chefs have? Are too many people fooled into thinking it will be anything other than a hard slog? The study shows that most restauranteurs work 60 hour weeks and hence the quality of life or lack of-of was a key reason that owners closed restaurants. 

6. Lack of industry experience. Most successful restauranteurs tend to have previous industry or related experience, found the study.

7.Fail to execute on the brand. The study found that one of the key reasons for restaurant closure was a failure to create and build a brand. They did not incorporate the 12 Ps of restaurant branding,( Place, Product, Price, People, Promotion, Promise, Principles, Props, Production, Performance, Positioning, and Press), and failed businesses also intended to incorporate all fives senses into the brand experience to create emotional connection and moments of truth. Below are a couple of excellent more marketing orientated books that will help you make more money in your coffee shop.

8.Name of the restaurant is too long. Typically restaurant names have 13 letters, comprising 8 consonants and 5 vowels. A restaurant that has a name that is too long and not descriptive has been shown to be less likely to succeed than a restaurant with a name that is brief, descriptive and attractive.

9.Lack of differentiation. Fields (2007) has found that a brand concept that is not differentiated is one of the prime reasons for restaurant failure.

10.Poor financial controls. Most restaurants that have failed had prime costs, (labour costs and food costs), that exceeded 60% of revenues which indicated a greater potential for failure. Try this must-read book from the to help you better manage finances.

Alternatively, you could utilize a high-quality restaurant staff scheduling tool that automatically calculates AND forecasts future staff costs giving you much greater control of your operational finances.

11. Paying unrealistically high rent for a prime location. Many of the restaurants that fail were shown to have paid too high a rent for the revenues that could be achieved. The researchers suggest that the rule of thumb for rent/lease/mortgage fixed costs is 7-9% of revenues.

More tips for success in a coffee shop business

1.Learn the trade with a franchise. According to Francdocs only 2 to 4% of franchises with a proven franchise concept fail, compared to a 60% failure rate for independent restaurants. Why not start your business as part of a franchise, to learn the trade, and once you become a master, you can branch out on your own with a much more masterful skillset behind you.

2.Work your way up in a successful store. Since lack of experience and lack of appreciation of what it really takes to run a restaurant was a key reason for failure, why not work your way up from the bottom, in a successful cafe or restaurant chain, all the way up to restaurant manager. This means you’ll have a 360-degree review of what it takes to run a food retail business and will learn lots of insider secrets and best practices on the way. You’ll understand the strengths and weaknesses of their food retail business and see opportunities to improve which you can explore in your own restaurant. You’ll also, understand the needs of the customer better and see how this successful chain meets those needs, and you’ll also gain insight into pricing, marketing, and hiring strategies — and incorporate this learning into your own, superior cafe venture.

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