Want to hear some good news? Your chances of success are better than most people think. According to the Bureau of Labor Statistics, survival rates for all new businesses created between 1998 and 2002 reveal that 66% of them are still open two years after their creation.
A Cornell University study of restaurants in three major markets showed a first-year failure (or closure) rate of 27%, with a minimal difference (4%) between franchised and independent restaurants.
Regardless of how the statistics are calculated, and I should add that it is difficult to find quality statistics for the restaurant industry, approximately 30% of all new restaurants in the first year fail on average. This means you have a 70% chance of success in the first year if you have a viable and well thought out concept in a worthwhile location.
It is important to keep in mind that of the 30% of restaurants that close in their first year, most of those operators were undertrained, undercapitalized (the most common reason), or unwilling to commit the time necessary to get the job done.
Why do I focus on the first-year survival aspects? Because statistics and logic say that if you make it through the first year, the percentages are in your favor beyond the first year. How can you minimize risk in your first year?
The following tips will help ensure your survival:
Tip #1.
Know your market. The easiest and quickest way is to do a feasibility study. I know a restaurateur who was looking to place a Mexican restaurant in a major metropolitan area. His feasibility study revealed that a rapidly expanding localized chain was inevitably going to diminish his potential success, so he changed his concept, thus avoiding a potentially costly failure.
You can also avoid a major failure by knowing your market and focusing heavily on your biggest competitor. If you can't or won't fight for market share, reconsider your concept niche or location.
Tip 2.
Find your niche. We've all heard this before, but you can't be everything to everyone, and do it well. Select the market you like and have experience in. If you know everything about the burrito business, and you know for a fact that your burritos are of superior quality, then pursue that great location, know your market and fill that niche. It's important to minimize competition in your chosen niche, and if you do it right, you can own the entire niche market. Why compete when you can own the market?
Tip #3.
Have a plan. Don't shoot in the dark with your capital resources. Pay for a quality business plan and have a qualified restaurant consultant do it. You pay for legal and accounting advice because they are professionals in your industry. The same goes for your restaurant consultant. A business plan is not cheap, but it will guide you on the path to growing your business profitably, and you will find that your business plan will pay for itself quickly.
Tip #4.
Know the industry or pay for the knowledge. A few quality tips at the right time can save you thousands of dollars. Did you know that if your restaurant consultant negotiates prices with your food service providers, you will get better prices than if you had negotiated them yourself? The author of this article was Director of Business Development for a large foodservice distributor, and is able to reduce his food cost significantly by representing his interests with his suppliers.
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