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Why Restaurants Fail

Authors:

Abstract

Past research on restaurant failures has focused mostly on quantitative factors and bankruptcy rates. This study explored restaurant ownership turnover rates using qualitative data, longitudinal data (1996-1999), and data from Dun and Bradstreet reports. In contrast to frequently repeated statistics, a relatively modest 26.16 percent of independent restaurants failed during the first year of operation. Results from this study indicated marginal differences in restaurant failures between franchise chains (57.2 percent) and independent operators (61.4 percent). Restaurant density and ownership turnover were strongly correlated (.9919). A qualitative analysis indicated that effective management of family life cycle and quality-of-life issues is more important than previously believed in the growth and development of a restaurant.
10.1177/0010880405275598
Why Restaurants Fail
by H. G. PARSA, JOHN T. SELF, DAVID NJITE, and TIFFANY KING
Past research on restaurant failures has focused
mostly on quantitative factors and bankruptcy rates.
This study explored restaurant ownership turnover
rates using qualitative data, longitudinal data (1996-
1999), and data from Dun and Bradstreet reports. In
contrast to frequently repeated statistics, a relatively
modest 26.16 percent of independent restaurants
failed during the first year of operation. Results from
this study indicated marginal differences in restaurant
failures between franchise chains (57.2 percent) and
independent operators (61.4 percent). Restaurant
density and ownership turnover were strongly corre-
lated (.9919). A qualitative analysis indicated that
effective management of family life cycle and quality-
of-life issues is more important than previously
believed in the growth an d development o f a
restaurant.
Keywords: restaurant failure; dinner-house opera-
tion ; e n t r e p r e n e u r s hip; restaurant
bankruptcy
I suffered from mission drift. When things didn’t work, I
would try something else, and eventually there was no “con-
cept” anymore.
A failed restaurateur
The restaurant industry and its analysts have long
pondered the enigmatic question of why restaurants
fail. Restaurant failures have been attributed to eco-
nomic and social factors, to competition and legal
restrictions, and even to government intervention. In
the current complex environment of the restaurant
business, we believe that it is imperative that prospec-
tive and current owners understand why restaurants
fail (see Sidebar 1).
Most hospitality research has focused on the rela-
tive financial performance of existing restaurants
instead of examining the basic nature of restaurant fail-
ures, and most of these studies considered only bank-
ruptcy reports.1Most bankruptcy studies are limited in
their scope, however, because many restaurant clo-
sures result from change-of-ownership actions, rather
than bankruptcies. These change-of-ownership trans-
actions are treated as legal matters instead of actual
bankruptcy procedures and may not be included in
public records. Furthermore, because the focus of aca-
demic research has remained primarily on bankruptcy
studies, the qualitative aspects of business failures
have received little attention. In writing this article, we
hope to determine the underlying factors that
determine the viability of a restaurant.
Types of Restaurant Failures
Restaurant failures can be studied from economic,
marketing, and managerial perspectives. Of these three
perspectives, we observe that restaurant failures have
been studied primarily from the economic perspective.2
304 Cornell Hotel and Restaurant Administration Quarterly AUGUST 2005
© 2005 CORNELL UNIVERSITY
DOI: 10.1177/0010880405275598
Volume 46, Number 3 304-322
Economic perspective. This category
includes restaurants that failed for eco-
nomic reasons such as decreased profits
from diminished revenues; depressed
profits resulting from poor controls; and
voluntary and involuntary bankruptcies,
involving foreclosures, takeover by credi-
tors, receiverships, or frozen assets for
nonpayment of receipts.3
Marketing perspective. This category
consists of restaurants that cease to operate
at a specified location for marketing rea-
sons, such as a deliberate strategic choice
of repositioning, adapting to changing
demographics, accommodating the unre-
alized demand for new services and prod-
ucts, market consolidation to gain market
share in selected regions, and realignment
of the product portfolio that requires
selected unit closures.4
Managerial perspective. This category
consists of restaurant failures that are the
result of managerial limitations and
incompetence. Examples of this group
include loss of motivation by owners;
management or owner burnout as a result
of stress arising from operational prob-
lems; issues and concerns of human
resources; changes in the personal life of
the manager or owner; changes in the
stages of the manager or owner’s personal
life cycle; and legal, technological, and
environmental changes that demand oper-
ational modifications.5
Definitions of
Restaurant Failure
Complicating the analysis, we could
find no universal definition of restaurant
failure, despite the fact that the way a busi-
ness’s failure is defined can greatly alter
the failure rate. Studies that use a narrow
definition of failure, such as bankruptcy,
necessarily have the lowest failure rates,
AUGUST 2005 Cornell Hotel and Restaurant Administration Quarterly 305
WHY RESTAURANTS FAIL MANAGEMENT
The Myth of the Restaurant Failure Rate
In summer 2003, the NBC television network broadcast a pro-
gram titled
Restaurant: A Reality Show
. Among other occur-
rences on this show, an advertisement by American Express
claimed, “90 percent of restaurants fail during the first year of
operation.” To verify the possibility of 90 percent first-year fail-
ure, we conducted several spreadsheet simulations. The sim-
ulations were based on assumptions that roughly parallel the
study in the accompanying article: fifteen hundred restau-
rants in the market; new-business failures during the first
year, 90 percent (the American Express figure); average indus-
try turnover of 10 percent per year (similar to our study’s 1999
finding); number of new restaurants opening per year, 15 per-
cent; and average market growth rate, 3 to 4 percent per year
(a national average as reported by the National Restaurant
Association). In the second series of simulations, we replaced
the 90 percent first-year failure rate with a 30 percent rate,
drawn from our study (see the accompanying exhibit).
Comparing those two calculations over a twenty-year period,
we concluded that if 90 percent of restaurants actually failed
during their first year of operation, we would see fewer restau-
rants at the end of each year, a finding that is contrary to the
observed reality in the restaurant industry. In addition, when
90 percent failure was inserted in the equation, simulations
indicated that, in twenty years, the market would shrink from
1,500 units to 254 units, or a loss of 84 percent of the existing
restaurants. Taking that simulation to its inevitable conclu-
sion, no restaurants would remain in about ninety-four years.
These results are practically impossible under normal condi-
tions and run contrary to the National Restaurant Associa-
tion’s observed 3 to 4 percent growth rate (www.restaurant.
org).
On the other hand, the 30 percent failure rate resulted in the
market’s growing by 219 percent, to 3,287 units, a more realis-
tic number. We conclude, therefore, that the reported 90 per-
cent restaurant failure rate is a myth. These results are
strongly supported by the outcomes of economic data simula-
tions reported by the Sydney and many other academic
research studies showing that restaurant failure during the
first year of operations is about 30.0 percent. Indeed, when
American Express was asked for its data, it stated in writing
that it could not provide data supporting the 90 percent failure
assertion it made.—
H.G.P.
and
J.T.S.
while studies that use a broad definition,
such as change of ownership, show the
highest failure rates. The definition cho-
sen is usually dictated by the data that the
researcher has available, with each defini-
tion subject to its own inherent advantages
and disadvantages.
Because no reports are required when a
business closes, gathering such data
involves subjective appro ache s. An
advantage of bankruptcy as the definition
of failure, for instance, is the relative ease
of obtaining data. The disadvantage of
bankruptcy data, however, is its narrow
nature. Restaurants that close for any other
reason would simply not be included—
even for a financial reason, such as failing
to achieve a reasonable income for its
owners or investors.6On the other end of
the spectrum, the change-of-ownership
definition or “turnover rate” includes all
types of business closures. Consequently,
turnover rates are much higher than bank-
ruptcy failure rates, regardless of whether
the turnover was due to the owner’s retire-
ment or due to a change of ownership,
such as when a sole proprietorship adds a
partner.
Organizational Life Cycle
As with all business organizations, res-
taurants follow certain stages in a life
cycle.7At any point along these life-cycle
stages, a business can suffer setbacks cata-
st rophi c enoug h to lead to failu re.
Throughout the life cycle, the first stages
are the most vulnerable, which is why the
highest proportion of businesses that close
are relatively new.8This “liability of new-
ness” has linked organizational adoles-
cence to increased organizational mortal-
ity rates.9One reason for early failure is
that new businesses typically have limited
resources that would allow them to be
flexible or adapt to changing conditions.10
Following that logic, it is believed that
the longer a company is in business, the
less likely it is to fail. Prior research has
found that as each year of survival goes by,
the failure rate is likely to go down, and by
the fourth, fifth, and sixth years, only a
modest, but steady, number fail each year.
After seven years, the propensity for fail-
ure drops dramatically.11
Competitive Environment
The environment in which the restau-
rant operates helps to determine its suc-
cess or failure. Some attributes of the com-
petitive environment that can influence a
restaurant’s failure are the business’s
physical location, its speed of growth, and
how it differentiates itself from other res-
taurants in the market. In addition to the
problem of having less cash to handle
306 Cornell Hotel and Restaurant Administration Quarterly AUGUST 2005
MANAGEMENT WHY RESTAURANTS FAIL
Comparison of First Year Restaurant Failures:
Myth (90% ) Vs Reality (30%)
N
u
m
3500
3000
b
e
r
2500
2000
1500
of
U
n
i
t
s
1000
500
0
1 2 3 4 5 6 7 8 9 10 11 1213141516 17 181920
Number of Years
30% First Year Restaurant Failure Rate
90% First Year Restaurant Failure Rate
SIDEBAR 1 EXHIBIT
Restaurant Failure Simulation: 90 Percent versus 30 Percent
Note: The figure shows the number of restaurants in a hypothetical market under the assumption that 90 per-
cent fail in the first year (bottom line) or that 30 percent fail in the first year (top line). Other assumptions
reflect national averages and findings of the accompanying study, as follows: average annual industry turn-
over, 10 percent per year; number of new restaurants opening, 15 percent per year; and average market
growth rate, 3 to 4 percent per year.
immediate situations, operators of new
restaurants are often unable to manage
rapid growth or changes, lack experience
in adapting to environmental turbulence,
and usually show inadequate planning.12
An additional failure factor for independ-
ent restaurateurs is the ability of chain res-
taurants, with their economies of scale, to
outspend the independents to gain greater
market share.
Firm Size
In addition to the age of the firm,
research has found a correlation between
size and survival. In this regard, the larger
firms are more likely to remain in business
than small operations.13 Richardson stated
that “both suppliers and bankers are preju-
diced against smaller firms. They tend to
take longer to act against a slow-paying . . .
large enterprise than they do against a
smaller firm, because they equate bigness
with safety and security.14 That said,
small firms tend to be positioned for
growth, but if that growth occurs too rap-
idly, a restaurant’s propensity to fail actu-
ally increases because of the ensuing
financial stresses.1 5 These financ ial
stresses include a high cost of goods sold,
debt, and relatively small profit margins.16
Blue, Cheatham, and Rushing discussed
how, at each stage of expansion, there is
increased financial risk for a small opera-
tion, which increases the likelihood of
failure.17
Restaurant Density
A restaurant’s location in its market and
its ability to differentiate itself from its
competition also help determine whether
it will survive.18 While a restaurant can
benefit from close proximity to competi-
tion and restaurants are often located in
clusters to attract more traffic, as in a “res-
taurant row,” an operation could find itself
in a cluster of restaurants within which it
cannot compete effectively. In that regard,
a restaurant’s inability to differentiate
itself from its competition can be fatal.
The restaurant’s reaction to competitive
pressures from excess density depends in
part on the nature of its ownership.
External Factors
External environments can change rap-
idly and companies may not be able to
change accordingly.19 Knowing the nature
of one’s market is of primary importance
to success. Many restaurants fail each year
from an inability to understand, adapt to,
or anticipate market trends, especially
given that some market trends are more
difficult to foresee than others. For
instance, many restaurateurs must have
been shocked by the wild popularity of the
Atkins-inspired low-carbohydrate diet,
followed almost as suddenly by its appar-
ent abandonment by many customers. To
provide the products desired as market
preferences shift, operations must trust
and have working relationships with their
suppliers. Because the resources neces-
sary for business survival come from the
external environment, this relationship is
important in explaining restaurant failure.
O’Neill and Duker found that government-
related policies affect business failures.20
Along that line, Edmunds pointed to the
heavy burden of taxation and regulation as
contributing to increased business-failure
rates.21
Jogaratnam, Tse, and Olsen suggested
that successful independent restaurant
owners must develop strategies that
enable them to continuously adapt to the
changing environment and find ways to
“link with, respond to, integrate with, or
exploit environmental opportunities.”22
Typically, external environmental factors
AUGUST 2005 Cornell Hotel and Restaurant Administration Quarterly 307
WHY RESTAURANTS FAIL MANAGEMENT
affect a segment of the industry broadly,
rather than hit any single brand, for exam-
ple, when a seafood shortage causes prob-
lems for all seafood restaurants or high
prices for beef hurt hamburger and steak-
house segments. Consequently, the rate of
restaurant ownership turnover may differ
across different restaurant segments.
Internal Factors
Management capabilities are of pri-
mary concern in preventing restaurant
failure. Haswell and Holmes reported
“managerial inadequacy, incompetence,
inefficiency, and inexperience to be a
consistent theme [in] explaining small-
business failures.23 Poor management can
be connected to “poor financial condi-
tions, inadequate accounting records, lim-
ited access to necessary information, and
lack of good managerial advice.”24 Other
internal factors affecting failure rates of
restaurants include poor product, internal
relationships, financial volatility, organi-
zational culture, internal and external
marketing, and the physical structure and
organization of the business. Managers’
“inability to manage rapid growth and
change” can lead to business failure, con-
cluded Hambrick and Crozier.25 Sharlit
wrote, “The root causes of many business
problems and failures lie in the executives’
own personality traits,26 while Sull com-
mented that managers may suffer from
“active inertia.27
Makridakis believes that corporations
fail due to “organizational arteriosclero-
sis,” overutilization or underutilization of
new technology, poor judgment in risk
taking, overextending resources and capa-
bilities, being overly optimistic, ignoring
or underestimating competition, being
preoccupied with the short term, believing
in quick fixes, relying on barriers to entry,
and overreacting to problems.28 West and
Olsen determined five strategic factors
used to determine the grand strategy of a
firm. The management or owner’s strate-
gic positioning has a strong influence on a
business’s success.29 In agreement, Lee
stated, “The most important criterion for
success . . . is management. Managers . . .
direct the marketing, oversee product
quality and standardization, and decide
when and how to adapt.30
Studying Failure
We investigated restaurant failure using
qualitative and quantitative methods in
two independent steps. Step I consists of
findings from quantitative assessment of
restaurant failures using longitudinal
data from 1996 to 1999; step II reveals
findings from qualitative investigation of
managerial perceptions and views of
restaurateurs.
Step I: Quantitative
Investigation—A Success-
Filled Industry
Step I of our study involved the analysis
of restaurant ownership turnover data
from 1996 through 1999. The data were
collected with the help of the health
department of Columbus, Ohio, a major
metropolitan area in the Midwestern
United States.
Most of the earlier studies assessing res-
taurant failure have used either telephone-
directory business listings or bankruptcy
data. To overcome the incomplete nature
of data from bankruptcy filings and tele-
phone directories, our study used data on
2,439 operating-license permits from the
Columbus health department. (We
removed from the data set the licenses for
other food-service facilities, such as
daycare centers, hospitals, and grocery
stores, to achieve our total Nof 2,439.)
308 Cornell Hotel and Restaurant Administration Quarterly AUGUST 2005
MANAGEMENT WHY RESTAURANTS FAIL
Not only must every restaurateur renew
the health permit annually, but any change
in t he resta urant ’s l egal owne rship
requires a new permit.
The health department ascribes to each
restaurant location a specific identifica-
tion number. This ID is a permanent num-
ber that does not change with a change in
ownership. Similarly, each restaurant
owner has a specific identification num-
ber. A comparison of the ownership and
location ID numbers reveals any change in
restaurant ownership, as well as providing
information regarding multiple locations
operated by the same owner.
Diminishing Failure Levels
Restaurant ownership turnover rate was
calculated for one-, two- and three-year
periods from 1996 through 1999. Failure
rates declined for each year, with the high-
est failure rate noted during the first year
(26.16 percent) followed by the second
(19.23 percent) and the third year (14.35
percent) (see Exhibits 1 and 2). Likewise,
the highest restaurant ownership turnover
occurred during the first year. These
results are consistent with several other
studies.31 In his 2004 study of 24,000 res-
taurants in the Los Angeles area, for
instance, John Self reported a first-year
failure rate of 24.3 percent and a three-
year cumulative rate of 50.9 percent for
1999 through 2002.32
The three-year cumulative restaurant-
failure rate for franchised chains was
57.22 percent, while it was 61.36 percent
for independent restaurants (Exhibit 3).
This difference is statistically significant
(p< .05). The failure rate is slightly higher
for independent restaurants (4.14 percent-
AUGUST 2005 Cornell Hotel and Restaurant Administration Quarterly 309
WHY RESTAURANTS FAIL MANAGEMENT
Exhibit 1:
Restaurant Ownership Turnover (ROT) in the Test Market, 1996-1999
Year Year Year In
One Two Three Business Total
Total ROT 638 1,107 1,457 982 2,439
ROT percentage per year 26.16 19.23 14.35 40.26 100
Cumulative percentage 26.16 45.39 59.74
Number of independent
restaurants failed 408 699 910 573 1,483
ROT percentage 27.51 19.62 14.23 38.64 100
Cumulative percentage 27.51 47.13 61.36
Number of chain restaurants
failed 230 408 547 409 956
ROT percentage 24.06 18.62 14.54 42.78 100
Cumulative percentage 24.06 42.68 57.22
Ratio of independent to chain
restaurants 1.77 1.71 2.22 1.40 1.55
age points) than for chains. Again these
results are consistent with earlier studies.
The descriptive statistics indicated that
most independent restaurateurs owned
two or fewer units, and by definition, all
franchise restaurants had a minimum of
three units. Thus, one of the major differ-
ences between franchised and independ-
ent restaurants was the size of ownership
me a sured in numbe r o f units. The
310 Cornell Hotel and Restaurant Administration Quarterly AUGUST 2005
MANAGEMENT WHY RESTAURANTS FAIL
26.16%
19.23%
14.35%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
Year 1 Year 2 Year 3
Years
Exhibit 2:
Restaurant Business Failures per Year, 1996-1999
59.74%
26.16%
45.39%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
Year 1 Year 2 Year 3
Years
Exhibit 3:
Cumulative Percentage of Restaurant Business Failures, 1996-1999
obtained higher restaurant ownership
turnover rate (61.4 percent) among the
independent restaurants as compared to
the franchises (57.2 percent) indicated
that small firms had higher ownership
turnover rates than did the large firms.
The density of restaurants was mea-
sured using U.S. Postal Service ZIP code
data. ZIP codes in the metropolitan area
were ranked according to restaurant con-
centration per ZIP code, which closely
reflects population density. The data were
then compared with the restaurant owner-
ship turnover rate in the corresponding
ZIP codes. Results indicated that the res-
taurant failure rate is highest in the ZIP
code areas where restaurant concentration
is also the highest (see Exhibit 4).
In addition, the restaurant ownership
turnover rate was also calculated across
various segments of the restaurant indus-
try by the type of food served. For the
three years of our study, Mexican restau-
rants reported the highest three-year
cumulative ownership turnover rate (86.8
percent), followed by sub shops and bak-
eries, coffee shops, and pizza restaurants.
Cafeterias and seafood restaurants had the
lowest cumulative ownership turnover rate
for the three-year period (see Exhibit 5).
Implications
We see the following implications from
this portion of our study:
1. Contrary to the oft-repeated myth that 90
percent of restaurants fail in their first year,
we note a failure rate closer to 26 percent—
and the cum ul at ive failure rate never
exceeded 60 percent in the three years we
studied.
2. Failure rates were notably higher for small,
independent operations than they were for
relatively large, franchised restaurants.
Thus, we suggest that the financial commu-
nity make itself aware that the restaurant
industry comprises different segments with
varying levels of failure rates and, thus, dif-
ferent levels of risk.
3. In that regard, the banking community
could consider lower interest rates for all
restaurants and particularly for those ven-
tures that are statistically more likely to suc-
ceed. Purported high business failures have
often resulted in high interest rates for res-
taurateurs. In addition to gaining more
AUGUST 2005 Cornell Hotel and Restaurant Administration Quarterly 311
WHY RESTAURANTS FAIL MANAGEMENT
Exhibit 4:
Top Ten U.S. Postal ZIP Codes in the Test Market by Restaurant Density and Res-
taurant Ownership Turnover (ROT), 1996-1999
Restaurant Number of
Density Percentage Failures in Percentage
ZIP Code by ZIP Code
a
Density Three Years Failure
43215 315 22.69 193 23.03
43229 241 17.36 146 17.42
43201 181 13.04 103 12.29
43232 108 7.78 63 7.52
43235 111 7.99 59 7.04
43228 87 6.27 57 6.80
43204 87 6.27 56 6.68
43214 85 6.12 54 6.44
43207 98 7.06 54 6.44
43219 75 5.40 53 6.32
a. Total number of restaurants per ZIP code.
favorable terms from the banking commu-
nity, restaurateurs should also be able to
gain better rates when borrowing from the
federal agencies such as the Small Business
Administration and state and local eco-
nomic agencies. Moreover, although restau-
rants (i.e., eating and drinking places)
topped the list of failed businesses in the
1996 records from Dun and Bradstreet
Bankruptcy Reports, several other busi-
nesses were much higher when one consid-
ers the loss per failed unit, as shown in
Exhibit 6.
This study may also help spread a more
positive image of the restaurant industry
in the financial community, thus encour-
aging more capital investments in restau-
rants and casting the restaurant industry in
a more positive light compared to other
retail endeavors.
4. Given that an overconcentration of restau-
rants may lead to more failures, city plan-
ners should undertake identification of an
optimum point for restaurant saturation.
5. These findings clearly demonstrate that
even though restaurant failures may be high
in pure numbers, they do not leave much
financial burden on the local community,
unlike failures in many other industries.
Thus, city or town planners may want to
consider these positive aspects while evalu-
ating local grants, tax rebates, and zoning
restrictions.
Step II: Qualitative
Investigation
It became increasingly difficult to balance
the demands of operating the business with
the needs of the family. I decided it was best
to move on.
Don Braddy, Fort Collins, Colorado33
We supplemented our quantitative
analysis with qualitative study to allow us
to analyze relationships between events
and external factors more effectively than
quantitative procedures (see the illustra-
tion in Sidebar 2).34 Qualitative data were
obtained by interviewing twenty success-
ful full-service restaurant operators who
had been in business for at least five years
and twenty failed restaurant operators
who once ran a full-service restaurant and
are no longer in business. Five years of
312 Cornell Hotel and Restaurant Administration Quarterly AUGUST 2005
MANAGEMENT WHY RESTAURANTS FAIL
Exhibit 5:
Cumulative Restaurant Ownership Turnover Percentage by Restaurant Segment,
1996-1999
Restaurant Segment Cumulative Three-Year Turnover Percentage
Mexican 86.81
Subs and bakeries 76.69
Coffee and snacks 70.00
Pizza 61.25
Chicken 57.88
Casual dining 53.13
Asian 51.43
Family dining 45.00
Steak 42.86
Buffets and cafeterias 38.46
Italian 35.29
Burgers 33.70
Seafood 33.33
continuous operations was suggested by
the local restaurant association as a mea-
sure of success in the restaurant business.
Restaurant owners whom we interviewed
were screened to be independent opera-
tors (not franchisees). This is a conve-
nience sample, composed using contacts
and local business people. While this is
not a random sample, the purpose of our
interviews was to elicit and explain diffi-
cult to assess ideas and phenomena associ-
ated with restaurant success and failure.35
A tested questionnaire was used for all the
interviews. The obtained qualitative data
were r ev i e w e d and co d ed by t w o
independent researchers.
The qualitative study proceeded in two
phases. First, as part of master’s project, a
graduate student interviewed five success-
ful and five failed restaurant owners. In
this phase, interview participants were
limited to those from full-service restau-
rants in the casual- and fine-dining seg-
ment to reduce group variation. It is
believed that different factors may affect
different segments of the restaurant busi-
nesses; therefore, for the purposes of this
initial study, it was important to look at
only one segment of the restaurant indus-
try. Based on the experiences from the ini-
tial interviews, the instrument was modi-
fied slightly to decrease the length of the
questionnaire.
Subsequently, we interviewed fifteen
more currently operating restaurateurs
and fifteen more restaurateurs who are no
longer in the restaurant business. The
interviewees who no longer own restau-
rants were restaurant managers who are
working for other companies after closing
their restaurant businesses and ex-restau-
rateurs who are no longer in the food-ser-
vice business. Selected students from an
undergraduate hospitality marketing class
took part in this data collection during Jan-
uary, February, and March 2004, typically
a slow time for restaurants. Each research
team, consisting of two students, inter-
viewed one successful owner and one
failed owner in interviews that lasted from
sixty to ninety minutes. As one student
asked questions, the other student took
interview notes. Most of the successful-
operator interviews took place in the res-
taurants. In the case of failed restaurants,
some of the interviews were conducted by
telephone, as the owners had moved out of
state.
We surveyed independent restaurant
owners because their success or failure
rests more directly on their own decision
making (as compared to franchise owners)
and because of independent restaurants’
relatively high failure rates.36 Franchise-
restaurant failure may have causes that are
specific to the franchise system and may
AUGUST 2005 Cornell Hotel and Restaurant Administration Quarterly 313
WHY RESTAURANTS FAIL MANAGEMENT
It Is the Milkshake, Stupid!
Cameron Mitchell is a multiunit, multiconcept restaurant oper-
ator. One day Mitchell took his family to a full-service restau-
rant to treat his son on his birthday. When the birthday boy
asked for a chocolate shake, the waiter replied that the restau-
rant could not make milkshakes. As an experienced operator
and a graduate of the Culinary Institute of America, Mitchell
became furious. “Do you have milk? Do you have chocolate ice
cream? Do you have a blender?,” he asked. “Well, you can
make a chocolate milkshake.” The server went back to the
kitchen and talked to the manager, but the answer was the
same: no milkshake. About a week later, one of the people who
had heard Mitchell tell this story told him that the exact same
thing had happened to him—at one of Mitchell’s own restau-
rants. Since then, Mitchell has made sure that every new
employee gets a milkshake and hears that story on his or her
first day of training. “We want our people to have the attitude,
‘The answer is yes. What’s the question?”’ he says.
Source: Barnet D. Wolf, “Cameron: Now, Most Likely to Succeed,Columbus Dispatch,
October 26, 2003; and www.cameronmitchell.com.
not be in the control of the local operator.
The questionnaire that the students used
consisted of various topics, including
operations, leadership, and marketing.
The investigation also included explora-
tion of quality-of-life issues and their
impact on the restaurateurs’ business
decisions.
We decided to interview the owners and
former owners so that we could obtain
details about the beginning of the opera-
tion, including choice of location, concept
development, and culture, which manag-
ers might not know. We also hoped to find
factors in owners’ family life cycles, their
personal value systems, and their percep-
tions of the industry and the environment
that determined their business decisions
and, ultimately, their survival or failure.
By comparing the views of current opera-
tors with those of failed operators, we
hoped to establish the factors contributing
to restaurant failure and success.37
Concept over Strategy
Perhaps the key finding was that a suc-
cessful restaurant requires focus on a clear
concept that drives all activities. In this
finding, concept is distinct from strategy.
A remarkable outcome of the interviews is
that we found few differences in having a
well-defined strategy between successful
and failed restaurant owners but consider-
able differences in clarity of concept. In
fact, some of the most successful manag-
ers did not have a well-defined strategy
(they “adapted and changed along the way
as needed”)—and some of the failed res-
taurateurs had elaborate strategic plans.
Bey o n d m u d d l e d concepts, failure
seemed to stem in large part from an
inability or unwillingness to give the busi-
ness sufficient attention, whether due to a
lack of time, passion, or knowledge. Suc-
cessful restaurateurs attributed their suc-
cess to their ability to concurrently man-
314 Cornell Hotel and Restaurant Administration Quarterly AUGUST 2005
MANAGEMENT WHY RESTAURANTS FAIL
Exhibit 6:
Ranking of Top Twelve Retail Businesses by Number of Business Failures and Total Financial Liabilities
Total Number of Total Industry Liability per
Industry Name Failures (1996) Rank Liability (1996) Rank Failed Unit Rank
Eating and drinking places 3,901 1 $550,268,532 3 $141,058 11
Furniture and home furnishings 1,437 2 $1,464,289,154 1 $1,018,990 1
Food stores 1,210 3 $415,586,659 4 $343,460 7
Apparel and accessory stores 1,194 4 $1,197,880,414 2 $1,003,250 2
Other retail stores 1,164 5 $120,880,116 10 $103,849 12
Automotive dealers and
service stations 1,061 6 $172,979,289 7 $163,034 10
Nonstore retailers 604 7 $130,446,603 9 $215,971 8
Gift, novelty, and souvenir shops 547 8 $91,898,049 12 $168,004 9
Building materials and
garden supplies 541 9 $311,799,779 5 $576,340 4
Sporting goods and bicycle shops 433 10 $162,116,636 8 $374,403 6
Jewelry stores 193 11 $110,197,501 11 $570,972 5
General merchandise stores 190 12 $189,509,276 6 $997,417 3
Total retail trade 13,476 $5,060,452,369 $375,516
Source: Dun and Bradstreet Bankruptcy Reports. See http://www.dnb.com/us/.
age the family life cycle and the business
cycle. In contrast, most of the failed res-
taurateurs attributed their failure partly to
family demands (e.g., divorce, ill health,
retirement). Family sacrifice was men-
tioned by both successful and failed own-
ers, but the successful owners were either
good at balancing their family and work
lives or they were not married. On the
other hand, five of the failed owners said
that they closed when they were no longer
willing to make those family sacrifices.
This outcome is consistent with the results
reported by Ghiselli, La Lopa, and Bai in
their study on quality of life issues with
restaurant managers.38
Most successful owners attributed their
success to their marketing savvy (espe-
cially relationship marketing), whereas
the failed owners often blamed their fail-
ure on competitors’ intensive marketing
activities. Thus, it is clear that knowledge
of marketing functions is essential for suc-
cessful operation of restaurants.
Successful owners had a passion for
business and high energy levels, whereas
the failed restaurateurs lacked the high
energy levels necessary to motivate them-
selves and their employees—symptom-
atic of the “burnout” stage of one’s career.
At some point during the interview, each
of the failed restaurant owners mentioned
the burden of the immense time commit-
ment required for a restaurant.
Critical factors contributing to a restau-
rant’s success were food quality and the
characteristics of the owner-manager,
including knowledge, drive, skills, deter-
mination, and passion. Another critical
factor discussed was the staff, including
employees’ training, personality, and
diversity. Capital and financial manage-
ment were important, as were location and
a well-defined concept. These factors
mostly stem from the owner’s own person-
ality traits, relationships with customers
and staff, and dedication to providing a
quality product.
The critical factors cited by failed res-
taurateurs as contributing to their restau-
rants’failure were owner-manager charac-
teristics, including attitudes, expectations,
control, knowledge, skills, and ambition.
Other top factors include the already men-
tioned demand of labor and time; poor
food-quality controls or low perceived
value; being undercapitalized or having
poor financial management; and the qual-
ity of employees and service, including
the amount of turnover. Having an ill-
defined concept was also listed as a large
contributor to restaurant failure.
Interestingly, 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 their
food product. They would state that their
concept was “vegetarian food,” or “Alas-
kan seafood.” They all offered high-quality
foods, but that did not make them success-
ful. Although food quality was discussed
as being critical to restaurant success, it is
obvious from the interviews that food
quality does not guarantee success; the
concept must be defined beyond the type
of food served.
We found no example in our sample of
a restaurant closing due to external forces.
In contrast to earlier research, we do not
conclude that external forces necessarily
predict success or failure. It appears that
external factors may not automatically
lead to failure if they are properly man-
aged. One could argue that external forces
generally affect all restaurants similarly,
somewhat like the weather in a given geo-
AUGUST 2005 Cornell Hotel and Restaurant Administration Quarterly 315
WHY RESTAURANTS FAIL MANAGEMENT
graphic area. It is the individual’s prepara-
tion or lack thereof that makes the differ-
ence in the severity of the impact .
Similarly, it is the restaurateur’s responsi-
bility to prepare for impending external
“weather” conditions.
This study also called into question the
commonly held belief that restaurant via-
bility is determined by the amount of capi-
tal investment. Although sufficient financ-
ing was cited as critical to restaurant
success by most of the participants inter-
viewed, some of the most successful res-
taurant owners started their operations
with less than $100,000 in capital. This
indicates that ongoing financial manage-
ment may be a better predictor of restau-
rant viability than capital investment. To
underscore these findings, the internal
environment was determined to be the
most critical factor contributing to restau-
rant viability, with the owner’s character-
istics and goals serving as the guiding
force.
Implications for Restaurant Owners
Regardless of the size or organization
of a restaurant operation, the following
implications seem clear from our inter-
views. We have summarized the many
forces that bear on restaurant success or
failure in the model in Exhibit 7, and we
discuss those factors in Sidebar 3.
1. A well-defined business concept is essential
to s ucc ess . Suc ces sfu l ow ner s could
describe their concept during our inter-
views, whereas failed owners could only
describe the food and could not expand their
description of concept beyond food produc-
tion: “I suffered from mission drift. When
things didn’t work, I would try something
else, and eventually there was no ‘concept’
anymore.” “A restaurant can close if it loses
its focus and if it tries to be too many things
to too many people by offering more than it
can successfully implement.”
2. The organizational life cycle depends on the
family life cycle. Most owners mentioned
how their family situation drove their deci-
sion to grow, change, or leave the business:
“Family and spousal support is essential for
the success of a restaurant.” Family support
goes beyond that of the owner. It means rec-
ognizing that your employees have families
also. On New Year’s Eve 1999, when most
restaurants stayed open past midnight tak-
ing advantage of the millennium celebra-
tions, one restaurateur whom we inter-
viewed closed the doors at 5:00 p.m. so that
the employees could go home and spend
time with their families.
3. It is no surprise to find that location is
important to restaurant success, but only
one (failed) owner mentioned location as
being a contributor to his restaurant’s fail-
ure. This particular restaurant was located
upstairs on a busy street near a hospital.
There was no parking nearby, and so cus-
tomers had to walk from the hospital.
Though the restaurant was initially success-
ful, it attracted only walk-in customers.
That example notwithstanding, the consen-
sus was that a poor location can be over-
come by a great product and operation, but a
good location cannot overcome bad product
or operation.
4. Growth requires extensive prior planning.
One of the failed restaurateurs expanded his
unit ’s ope ratio ns unti l the r estau rant
became unmanageable.
5. Although they were not mentioned specifi-
cally as contributing to failure, family pres-
sures and sacrifices, as well as the sacrifices
made by family members for the owners to
have their restaurants, were often men-
tioned by both failed and successful owners.
Th e s ucce s sful o wner s w ere si n gle,
divorced, or good at balancing their family
and work lives. The failed owners were no
longer willing to make those family sacri-
fices. To reiterate our point above, the
immense time commitment required was
mentioned by all of the failed restaurant
owners. One of the failed owners felt the
guilt of being unable to be with her children
while they were growing up. So she sold the
operation.
6. Although a clear concept is essential, hav-
ing a well-defined strategy was not found to
be critical to a restaurant’s success. Some of
the restaurant owners who had been extraor-
dinarily successful were “going with the
flow,” while some owners failed despite
well-defined strategies. The lesson in this
316 Cornell Hotel and Restaurant Administration Quarterly AUGUST 2005
MANAGEMENT WHY RESTAURANTS FAIL
AUGUST 2005 Cornell Hotel and Restaurant Administration Quarterly 317
WHY RESTAURANTS FAIL MANAGEMENT
Elements of Restaurant Success and Failure
Elements of Success:
1. Have a distinctive concept that has been well researched.
2. Ensure that all decisions make long-term economic sense.
3. Adapt desirable technologies, especially for record keeping and tracking customers.
4. Educate managers through continuing education at trade shows and workshops. An environment that
fosters professional growth has better productivity.
5. Effectively and regularly communicate values and objectives to employees. In one instance, new own-
ers credited communication of their values and objectives to their employees as a major element in the
successful repositioning of their restaurant to better meet the needs of the growing neighborhood busi-
nesses by adding lunch to their dinner-only concept.
6. Maintain a clear vision, mission, and operation strategies, but be willing to amend strategies as the sit-
uation changes.
7. Create a cost-conscious culture, which includes stringent record keeping.
8. Focus on one concentrated theme and develop it well.
9. Be willing to make a substantial time commitment both to the restaurant and to family.One successful
owner refused to expand his business into lunch periods because he believed that his full-service din-
ner house was demanding enough from his family.
10. Create and build a positive organization culture through consistent management.
11. Maintain managerial flexibility.
12. Choose the location carefully, although having a good location seems to be more a moderating vari-
able than a mediating (causal) variable in restaurant viability.
Elements of Failure:
1. Lack of documented strategy; only informal or oral communication of mission and vision; lack of
organizational culture fostering success characteristics.
2. Inability or unwillingness to establish and formalize operational standards; seat-of-the-pants
management.
3. Frequent critical incidents; managing operations by “putting out fires” appears to be a common
practice.
4. Focusing on one aspect of the business at the expense of the others.
5. Poor choice of location.
6. Lack of match between restaurant concept and location. A night club failed, for instance, because it
opened across the street from a police station. The owners thought that the police station would be a
deterrent for potential criminal elements and bar fights, but unfortunately it was also a deterrent for
customers, who were afraid of police scrutiny and potential DUI tickets. The club was closed within
eighteen months.
7. Lack of sufficient start-up capital or operational capital.
8. Lack of business experience or knowledge of restaurant operations. The owners of a successful night
club expanded their business by investing more than $1.5 million in renovating an old bank building
for a fine-dining restaurant. With no knowledge of restaurant operations, they opened the restaurant
with zero marketing budget as they relied primarily on free publicity and word of mouth. In less than
one year, the restaurant was closed, with more than $5 million in debt. The owners tried to salvage the
business by converting it into a night club, but with no success.
9. Poor communication with consumers. One restaurant failed to take off after a major renovation
because the owners did not communicate to their clientele their reason for closing or their timetable
for reopening. Their customers were long gone by the time they reopened.
10. Negative consumer perception of value; price and product must match.
11. Inability to maintain operational standards, leading to too many service gaps. Poor sanitary standards
are almost guaranteed to kill a restaurant. One operation was exposed by a local television station for
poor sanitary practices. Though the sanitary conditions subsequently improved—as reported by the
finding is that restaurateurs must not be so
rigid in their strategy that they fail to see
opportunities as they appear. As an exam-
ple, one of the successful restaurateurs con-
tinued to adjust his operations as the neigh-
borhood evolved, and his place became a
popular hangout for college students. He
gradually changed the menu to add value
offerings and to remove the expensive items
that his new customers could not or would
not order. Thus, the restaurant, which began
as a small, family-style restaurant, became a
large, value-centered, full-service, coffee-
shop-style restaurant for college students.
7. Awareness of specific competitors did not
seem to be critical to restaurant success.
Most of the owners defined their competi-
tion as any dining establishment; one even
went so far as to define the competition for
dining dollars as “any entertainment during
the dinner hours.” Competition was viewed
by most of the owners to be a tool for self-
measurement but not necessarily something
to use to develop strategic defenses.
8. Having a definedtarget market was not criti-
cal to success. Not only was a defined target
market not mentioned by any of the owners
as a critical factor, but it was not obvious
from the interviews that successful owners
could define their target market. We found
successful owners who could not determine
a demographic or psychographic segment
that they appeal to, and, more to the point,
some failed owners could demographically
pinpoint the target market that they had
missed.
9. Likewise, marketing strategy did not seem
to be critical to a restaurant’s success. The
owners whom we interviewed rarely used
advertising or promotions. One owner men-
tioned marketing as a critical factor but went
on to discuss the target-market awareness, at
the same time stating specifically that
advertising is not necessary. On the other
hand, public relations, community involve-
ment, and customer relations were all con-
sidered important to their business opera-
tions. The successful owners, when asked
about marketing, all discussed these types
of relationships in the community over
advertising or promotions. In fact, the most
successful owners all stated a strong belief
in not advertising and not using promotions.
In that regard, one owner stated, “If you
have to give something away then you
shouldn’t be in business.
10. The owner’s skills and knowledge are criti-
cal factors. “One should not rely on others,
but should be knowledgeable in all areas of
the business.
Conclusions
Combining our quantitative (longitudi-
nal) and qualitative data, we present (in
318 Cornell Hotel and Restaurant Administration Quarterly AUGUST 2005
MANAGEMENT WHY RESTAURANTS FAIL
same television station—the damage was done and the restaurant was closed. It later reopened as a
successful full-service restaurant.
12. For ethnic restaurants, loss of authenticity; for all restaurants, loss of conceptual integrity.
13. Becoming everything to everyone; failure of differentiation or distinctiveness.
14. Underestimating the competition. A contemporary restaurant located near an established restaurant
adjacent to a golf club failed when it could not draw the golfers from their traditional haunts. Owners
thought that their new restaurant would have no problem attracting the golfers.
15. Lack of owner commitment due to family demands, such as illness or emotional problems. In an
extreme example, a child with a long-term illness prevented an owner from devoting necessary time to
the restaurant, which soon closed.
16. Lack of operational performance evaluation systems. In one instance, new owners did not know how
to calculate food cost and relied on employees to maintain proper inventory controls.
17. Frequent changes in management and diverse views of the mission, vision, and objectives. In an exam-
ple that is common in partnerships, the owners of a failed restaurant could not agree on its direction
after just one year of operation.
18. Tardy establishment of vision and mission statements of the business; failure to integrate vision and
mission into the operation; lack of commitment in management or employee ranks.
19. Failure to maintain management flexibility and innovation.
20. Noncontrollable, external factors, such as fires, changing demographic trends, legislation, economy,
and social and cultural changes.
21. Entrepreneurial incompetence; inability to operate as or recruit professional managers.
Exhibit 7) a model for future research. Our
study indicates that the restaurant failure
rate is affected more by internal factors
than by external factors, although both
apply. Such attributes as restaurant den-
sity, firm size, and managerial characteris-
tics are important to success. In particular,
the manager’s ability to balance family
matters with the development of the orga-
nization is critical. Along with that balance,
it is important for the owner-manager to
have the requisite skills to run a restaurant.
While the restaurateur should plan care-
fully in growing the business, she or he
should be ready at any time to alter plans
in response to changes in external factors.
Finally, while formal marketing and
advertising seem not to be important to the
success of an independent restaurateur,
the restaurant must pay attention to com-
munity and customer relations so that it is
perceived to be a part of its community.
Further research should focus on those
factors that have been found to be the most
critical to restaurant survival. Although it
is comforting to work with numbers and to
look at external forces and failure rates, it
is more important to get to the core inter-
nal issues underlying restaurant viability.
Future research on successful ownership
AUGUST 2005 Cornell Hotel and Restaurant Administration Quarterly 319
WHY RESTAURANTS FAIL MANAGEMENT
RES TAURANT
VIABI LIT Y
Family Life Cycle
Youth/Early Childhood
Marriage/ Family
Maturity
Empty Nest
Retirement
External
Environment
General
Legal & Political
Economic
Demographic
Technological
Social & Cultural
Specific
Competitive Forces
Suppliers
Customers
Regulatory Agencies
Internal
Environment
Operational Factors
Strategy
Product
Management
Financial
Marketing
Type of Ownership
Culture
Personal Factors
Leadership
Demographics
Personal / Family
Goals
Organizational Life Cycle
Introductory Stage
Growth Stage
Maturity Stage
Decline / Reemergence
Exhibit 7:
Impact of Various Factors on Restaurant Viability
characteristics and managerial factors can
be useful to aspiring restaurant owners.
Also, the complex roles of family and
organizational life cycles in restaurant
viability warrant further investigation.
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Organizations and Their Environments,
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agement 3, no. 3 (1984): 55-61.
AUGUST 2005 Cornell Hotel and Restaurant Administration Quarterly 321
WHY RESTAURANTS FAIL MANAGEMENT
38. Richard Ghiselli, Joseph La Lopa, and Billy
Bai, Job Satisfaction, Life Satisfaction &
Turnover Intent of FoodService Managers,
Cornell Hotel and Restaurant Administra-
tion Quarterly 42, no. 2 (April 2001): 28-37;
and Self, An Analysis of Restaurant Fail-
ure Rates.
322 Cornell Hotel and Restaurant Administration Quarterly AUGUST 2005
MANAGEMENT WHY RESTAURANTS FAIL
H. G. Parsa, Ph.D., is an associate professor
at The Ohi o State Univer sity (par sa.1@
osu.edu). John T. Self, Ph.D., is an instructor
at the Collins School of Hospitality Manage-
ment at California State Polytechnic Univer-
si ty, Po mon a (jt sel f@c sup omo n a. e du) .
David Njite, MS, is a doctoral student and
Tiffany King is a graduate of The Ohio State
University. The authors would like to thank
Bob Harrington for helpful comments on ear-
lier drafts; Eun-Jung Kim for her assistance in
data analysis; the Columbus Health Depart-
ment, Columbus, Ohio, for generously shar-
ing the health-permits data; and Mary Kuhner
for editorial assistance.
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