Why do restaurants fail so often and how to minimize them

Finding success in the restaurant industry isn’t easy, and this pandemic has illustrated that restaurants are failing hard. Having worked and met chefs, bartenders, business owners at various levels, here are the most common scenarios I’ve gathered on why the restaurant business fails most of the time.  

Insufficient cash reserve for the first year 

There will be hiccups in the first 12-16 months of operations. It would help if you set aside enough cash reserve in the first year of financial operations. 

“Our business model is to have a cash reserve that can weather through at least three to six months on losses. Our profits go to the bank and we do not operate our cash flow on a “day to day” whereby whatever earnings made today is distributed among the partners tomorrow. “Nico of Concubine KL, which gained a reputation as the must-visit restaurant bar in Chinatown Kuala Lumpur. 

High rental 

“If the rent is too high, don’t take it up, even if it is a golden location. My range is always not more than 10% of expected revenue: the better the concept, the less important the location. One Michelin starred 80/20 BKK is our best example. A restaurant can help establish a community within a neighbourhood.” Choti Leenutaphong of Foodie Collection in Bangkok, which consist of Vesper Bar (World’s 50 Best Bars, Asia’s 50 Best Bars 2020), one Michelin starred 80/20 BKK, il Fumo, La Dotta, and 1919 – the only Campari flagship bar in Thailand. 

Staff management 

Your employees are your most significant assets. Pay attention to your staff morale. Disgruntled staff can damage your restaurant’s reputation. 

At the opening of every Foodie Collection restaurants, Choti always motivates the team by giving a speech. “We want our team to take pride in being a part of our group. 

We aim to be an institution that develops people to be better when they first started with us.

Choti Leenutaphong, Foodie Collection Group, Bangkok

For Indra Kantano, co-founder and director of Jigger & Pony Group in Singapore shares, “My role in the Group is to cultivate a great community culture.

It is understood that the turnover rate in this industry is high.

We created a set of shared values and a corporate purpose that guides us up until today.

Indra Kantano, Jigger & Pony Group, Singapore

The group reinforce these shared values with their staff by:

1. Having the statements posted up in all outlets
2. Annual Shared Values Awards ceremony whereby 5 standout staff will be the recipients for individual values, and 1-star individual that embodies all 5 values will be crowned Pony of the Year.
3. Incorporated into annual performance reviews

Jigger & Pony Group consists of Jigger & Pony (World’s 50 Best Bars, Asia’s 50 Best Bars 2020), PONY, Humpback, Gibson, The Flagship, Caffe Fernet.

“Staff morale is most likely to be low everywhere in such a crisis, as part of the management team or as a business owner, this is when you need to surface and hold the fort. You will need to inspire your team to take on your side.” Hui Ying, Director of Marketing, Platform Hospitality Group in Kuala Lumpur. Since 2016, Platform Hospitality Group has launched notable brands include Entier and Botanica+Co. 

Be present 

For a newlywed couple, the real journey starts after the wedding ceremony. Similarly, the real work begins after your doors are open. 

Building your brand is a constant conversation. If your restaurant doesn’t have a dedicated person doing marketing, the best way is to put yourself forward.

Hui Ying, Platform Hospitality Group, Kuala Lumpur 

“We were very hands-on as we want to learn everything. We are here all the time to take care of the customer’s need. We fix issues immediately. We want to see what customers want.” Debbie Leenutaphong of Foodie Collection when they first opened World’s 50 Best Bar, Vesper Bar

Spending unnecessarily on fit-outs 

Spending on the ‘not-so-important’ items is one of the fatal mistakes as a first-time restaurateur. A restaurant which runs out of capital even before it can run optimally to make a profit is heading to failure. 

“A good experience for the guest need not be in the form of a nicely-designed menu or decorated ambience. Instead, tasty food and drinks cooked with soul, and a personal connection could make the guest return,” says Hui Ying, Platform Hospitality Group.

Oversight on finances

Financial planning plays a critical role in the success of your restaurant. Analyze your POS reports to identify the areas of gaps, where is bleeding money and mitigate them. Joel Foong of FIN, which grew from a pop up to 40 seaters restaurant devised a three scenario model to keep their business in check: 

1. Scenario 1: bare minimum – before breaking even
2. Scenario 2: breakeven – where we make a close to marginal profit 
3. Scenario 3: profit-making 

“Start with food cost, followed by fixed costs. Next, we input the sales data from Year 1 onwards, which would give an estimation of our projected sales. We’ll break it down to scenarios where my fluctuating operating costs will be based on a percentage of my total food costs. With all these factors scaled in, we would have our breakeven benchmark and daily sales target we need to meet. Referring to Scenario 3, my target goals would be where everyone gets their increments, and business is doing well.”  

Overlooked on the financial aspect was one of the factors why Malaysia’s pioneering bar Omakase + Appreciate have to close after six years. 

Internal theft and pilfering

Even your top-performing staffs will have the tendency to succumb to theft. The first step in reducing employee theft is to be prepared for the most common forms: 

1. Food or inventory thefts –  Employees take food for themselves
2.  Cash checks voids – Employees edit the order to reflect a smaller balance due and pocket the difference. Employees tell the customer the cash till is out of order and issue a manual receipt and pocket the cash
3. On-counter thefts – Employees emptying the cash counter and disappears
4. Dine and dash – Some customers would pay the exact amount and leave it on the table, but employees claim diners left without paying for their meal.

The most successful restaurants will continuously improve their business by finding opportunities to reduce costs and increase profits.