Two weeks ago, I focused on the changing face of retail. Long-time well-known retailers are fading from the business landscape while others are emerging. These changes are even more pronounced in the restaurant business where large restaurant chains often struggle to stay current and relevant with changing consumer preferences such as the current movement toward healthful, organic and locally produced foods.
The most successful restaurant groups as determined by sales growth over the last year were: 1) Five Guys Burgers and Fries; 2) Chipotle Mexican Grill; 3) Jimmy John’s Gourmet Sandwiches; 4) Yard House; 5) Firehouse Subs; 6) BJ’s; 7) Buffalo Wild Wings; 8) Raising Cane’s Chicken Fingers; 9) Noodles & Company, and; 10) Wingstop.
The fastest growing restaurant franchises based on the number of new locations are Subway, Dunkin’ Donuts, Chester’s, Jimmy John’s Gourmet Sandwiches, Pizza Hut, Papa Johns, Taco Bell, Denny’s, McDonalds and Red Mango Yogurt. As a sidenote, three of the ten fastest growing franchise concepts at present relate to commercial cleaning services, a service many restaurants and businesses use.
Restaurant chains with the greatest percentage of stores closing over the last ten years were: 1) Bennigan’s with 88% of locations closing following their 2008 bankruptcy; 2) Ground Round Grill & Bar with 81% closing (2004 bankruptcy); 3) Country Kitchen at 79%; 4) Damon’s Grill & Sports Bar at 78% (2009 bankruptcy); 5) TCBY “The Country’s Best Yoghurt at 77% (2008 bankruptcy); 6) Tony Roma’s at 72% (2005 bankruptcy); 7) Don Pablo’s at 71% (2004 and 2007 bankruptcies); 8) Big Boy at 65% (2000 bankruptcy); 9) Ponderosa/Bonanza at 64% (2008 bankruptcy) and; 10) Blimpie Subs at 60%.
In most cases, failing restaurant chains suffered from an inability to adjust to changing consumer trends as well as business models that were built on debt and insufficient capital.
Another key factor is patron frequency. Using Tony Roma’s as an example, how often does one go out for barbeque? Conversely, a place like Yard House has a menu and theme that encourages more frequent patronage.
As for the urban myth that 90% of restaurants fail, a Cornell University study found that 26% of all restaurants fail in the first year with 60% failing over three years. There is very little difference in failure rates between franchises and independent operators. The single biggest cause of failure is a bad concept. Other key problems include inexperience, a lack of passion for the business and the dedication of too little time to the business. Conversely, successful restaurants had owners with high energy levels, a passion for and knowledge of their business.
The most likely restaurant type to change hands (also called turnover) over a three-year period is a Mexican restaurant with an 86% turnover rate. Seafood and burger restaurants had the lowest turnover rates at 33%.
With all of this as a backdrop and with the expectation that you have a decent location, if you are thinking of starting a restaurant, do your best to avoid these five key pitfalls: First, keep your overhead down. Many go to a local restaurant supplier for equipment and local stores like Costco for their food. This approach often adds 50% to your equipment and food costs. Second, bad service and a lack of consistency in the food you serve is one of the fastest ways to alienate customers. Third, watch expenses as this industry typically works on thin margins. Fourth, what makes your restaurant unique and differentiates it from others? That said, is the theme so unique that people would not visit on a regular basis? Fifth, watch for employee theft whether that is equipment, free food and drink for themselves or patrons or dipping into the cash drawer.
