Beyond the balance sheet

10 Errors found in most restaurant bankruptcies

Dan Einzig 11/4/2018 8 minute read

Dan Einzig, CEO of brand design agency, Mystery explores the common restaurant mistakes that can prove fatal.

Want to avoid making blunders and seeing your hospitality dream turn to disaster? Having worked with hospitality brands for twenty years or more, the team at Mystery has witnessed a lot of success stories and also a number of failures.

We've helped create nearly 70 Food & Beverage brands over the years and worked with a huge variety of operators from first time start-ups to multi-brand, multi-site international operators. We’ve even co-ventured a portfolio of F&B concepts, including our own restaurant.

With an archive of experience we have a good feel for what has worked and, what hasn't. Here are our 10 common reasons for restaurant bankruptcies, what you need to action and what to avoid.

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1. The Domino effect

If you want to know the truth about why bars and restaurants fall over, speak to dozens of operators. You'll soon see how one element of your business tipping over will affect another, or several others; in what pattern and in what priority.

Top tip: For a better feeling of this effect, keep reading...

2. The wrong location

All too often, we've seen people convinced by the stats that a location with high footfall is all they need for a thriving bar or restaurant.

However, the key to footfall is understanding exactly who those feet belong to and what they are up to. Are they busy feet going to a meeting or catching a train, or are they meandering feet looking to stumble into a comfortable chair away from the throngs?

Well run and established brands fail in seemingly great locations (Giraffe on Greek Street in Soho); new concepts crush it with lines out of the door in traditionally poor locations (Meat Liquor off the beaten track on Welbeck Street, below a multi-storey carpark). The adage "location, location, location" is not the full story.

Find the right location for your restaurant

The right location isn't just about footfall, or visibility. It's more about knowing your customers, understanding their lifestyle and how your concept fits in to it. What sort of occasion? What type of person? Is your concept the right fit for the kind of people that love to discover places off the main street? Or is it better suited to office workers looking to grab a quick, healthy bite?

Is your concept perfect for families looking for something fun, easy and local and who are prepared to pay a premium price for it; or for twenty-somethings with a different appetite for fun, who don't have much money to spend, but don't mind lining up for 30 minutes to sit at a plastic table and eat out of a tray?

Top chefs have even told me that their approach is to flip the process around: Find a location and then figure out what is the right concept to work there. This works for new concepts, but won't work for existing brands looking to expand in to new locations, their job is about trying to find locations that replicate their existing customer base.

Top top: Knowing and understanding your customers is key to finding the right location. 

3. Lack of funding

So much time, energy and money goes in to launching a new concept that many people run out of all three just as they finally get the doors open.

We've had the good fortune to meet some amazing entrepreneurs and review their business plans. It's all too common that people are very optimistic about the maturity curve of their sales. They start off cautious with conservative sales forecasts in the first days and weeks after opening.

Then they believe the operation will grow rapidly into the sort of business that does the same amount of sales as established competitors in the area. This can happen and these places do exist. However, in the main the problem is that many people hope their concept will hit a home run from the get-go. The reality is 99% of places have to work at it for a lot longer. 

Top tip: It always takes longer to get established than expected, set aside sufficient resources to maintain the business during that time.

4. Poor timing

Being in the right place at the right time is quite simply the one thing that every single success story has in common. The catch is that it's only in retrospect that it becomes obvious that it was the right time. Right here, right now - it's far less obvious. It's all too easy to get the timing wrong.

So many businesses aim to be innovative, to do something new and exciting, to grab the headlines, to drive awareness through their extraordinary offer. In doing so they risk developing a product or an experience that people don't know they want yet. They risk being ahead of their time and not having the funding to hang in there until the market shows sufficient demand.

Timing is important to opening a new restaurant or bar

Back in the late nineties we worked with an innovative artisan coffee company with it's own in-house roaster and an incredible curated selection of 'single varietal' beans from all over the world. It sounds like the sort of place that would work well today. Back then coffee in London hadn't become the go-to phenomenon yet. Starbucks entered the market around that time with a far more accessible format introducing people to the category with their milky lattes and the rest is history.

It's also dangerous to wait too long; to follow a trend just after it has peaked. Once the market has category leaders and they have loyal customer bases, it becomes established and begins to consolidate, the smaller players tend to disappear.

Top tip: Flip your thinking, is it the right time, right here, in this market? What is there a growing demand for?

5. Insufficient marketing

All too often operators open the doors to their new bar or restaurant concept and expect people to start flooding in. They believe that by delivering a first class service with an amazing menu in a gorgeous environment then they will make it. More often than not - that's not enough.

We've come to know that people (especially in the UK and US) are creatures of habit. They have their places they go to. Getting them to change direction and step in to your place means disrupting their habits.

Firstly, you need to make them aware of your place. Secondly you need to make them aware of your place. And thirdly, you get the point. It usually takes several attempts before people actually change their behaviour.

Top tip: Almost all the places we've known to fail didn't have a marketing plan, didn't have the right marketing plan for their customers, or weren't implementing it effectively.

6. Lack of financial control

Financial management is vital to any business and we've seen what happens to restaurants and bars that do not master it. Think: Busy Fools - turning tables, but not making any bottom line; Food Wasters - not managing their inventory; Margin Cutters - eroding their gross profit to stay competitive instead of changing the menu or staffing model; Cash Flow Bozos - doing what it says on the tin.

Top tip: The most successful hospitality businesses have an iron grip of their finances. If not you then find someone to take care of and run this vital function in your business. 

7. Unwillingness to change

Nothing stays the same. That's one of the philosophies behind several of the successful operators I've been fortunate enough to work with. Conversely, I believe there's a strong resistance to change inherent in most people. We've found the more effort people put in to building something like a bar or a restaurant, or a piece of design or a menu for that matter, the more they are emotionally invested.

This investment breeds protectionism. Almost as if the menu created is akin to a baby that must be protected at all costs. Walls are built around it to keep it safe in the form of argument. The more owners invest, the taller and wider the walls are.

Top tip: Protect your investment by being willing to change it. Evolve it. Amend it. Tweak it. Just do anything except keep it locked up behind a big, safe wall.

8. Lack of scale

The obvious point to make about scaling up is the danger of growing too fast, or losing the essence of what makes the concept or the brand special in the first place. Consider Giraffe, after being acquired by Tesco it lost its original independent spirit, which was core to their explorer brand identity – an identity that thousands of customers had genuine affection for.

Scalability comes with risks

That's a good lesson for anyone building a scalable business, and it's a huge challenge to retain that special magic during the different stages of the business lifecycle. Knowing it, recognising it and preparing for it are the key steps to take. Unfortunately during the growth phase there are so many other challenges to face and targets to hit, it's often these 'softer' brand issues that slip down the priority list.

A strong brand that everyone in the organisation understands and that the customers relate to emotively can save a lot of energy. Without a clearly defined brand the goal of scaling a business is, at best, delayed and at worst, dangerous.

Top tip: Brand is core to the success of a scalable restaurant and bar business. It keeps all the oars of the business - like operations, product development, training and culture, property, design, marketing and research - pulling in the same direction.

9. Underestimating competition

We now live in a world where customers have a significant voice and we operate in a field where every voice has an opinion. It's also a world where people love to eat and drink and to talk and advocate places and brands that they feel deserve it. The problem is that everyone's expectations have become so high.

We've observed that restaurants and bars that have been around for a while, places that are well established and that periodically update and evolve, places that have become institutions full of loyal fans and regular advocates seem to be more able to operate in ways, which any new entrant to the market would not survive if they operated in the same way.

People are way more forgiving of established concepts than they are of new ones. With that in mind, it's important not to under-estimate your competition. Just because your food, your drinks, your service, your environment and your prices are better, does not mean people will switch.

Likewise, it's become a 'given' that a new restaurant or bar will have great food, drinks and service. It simply cannot survive if it doesn't. Competition is coming from so many different places now. Grocerants, Food Trucks, Farmers Markets, Food Halls, Pop-ups, Uber Eats, Just Eat... competition where you'd least expect it.

Top tip: Making sure your brand connects with customers in a meaningful way and builds loyalty and rapport is an important step towards protecting yourself from competitors.

10. The wrong people

What is the "mystery" ingredient that creates a compelling restaurant or bar? It's the exact same ingredient that can kill a place if it's missing. Soul! Soul, or the customer experience, comes from the people in the business. You have the right people in the organisation and most of the other challenges can be faced and overcome.

You have the wrong people and the culture becomes undermined, the soul or the magic that makes it special disappears and the customers go with it. How do you find and keep the right people? There are plenty of text books about that, but experience suggests that there is no single rule.

Top tip: Know and understand your brand; the values that you aspire to; the vision to achieve your mission with a genuine purpose that lives beyond financial targets; and being able to communicate it succinctly and authentically to potential recruits and partners. This will help find the best candidates, but will also filter out the wrong ones.

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The content of this post is up to date and relevant as at 09/04/2018.

Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.


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