restaurants fail

8/6/2019 Restaurants Fail

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10.1177/0010880405275598

Why Restaurants Failby H. G. PARSA, JOHN T. SELF, DAVID NJITE, and TIFFANY KING

Past research on restaurant failures has focusedmostly on quantitative factors and bankruptcy rates.This study explored restaurant ownership turnoverrates using qualitative data, longitudinal data (1996-1999), and data from Dun and Bradstreet reports. Incontrast to frequently repeated statistics, a relativelymodest 26.16 percent of independent restaurantsfailed during the first year of operation. Results fromthis study indicated marginal differences in restaurantfailures between franchise chains (57.2 percent) andindependent operators (61.4 percent). Restaurantdensity and ownership turnover were strongly corre-lated (.9919). A qualitative analysis indicated thateffective management of family life cycle and quality-of-life issues is more important than previouslybelieved in the growth and development of arestaurant.

Keywords: restaurant failure; dinner-house opera-tion; entrepreneurship; restaurantbankruptcy

I suffered from mission drift. When things didnt work, Iwould trysomething else, andeventuallytherewas no con-

cept anymore. A failed restaurateur

The restaurant industry and its analysts have longpondered the enigmatic question of why restaurantsfail. Restaurant failures have been attributed to eco-

nomic and social factors, to competition and legalrestrictions, and even to government intervention. Inthe current complex environment of the restaurantbusiness, we believe that it is imperative that prospec-tive and current owners understand why restaurantsfail (see Sidebar 1).

Most hospitality research has focused on the rela-tive financial performance of existing restaurantsinstead of examining thebasicnatureof restaurant fail-ures, and most of these studies considered only bank-ruptcy reports. 1 Most bankruptcy studies are limited in

their scope, however, because many restaurant clo-sures result from change-of-ownership actions, ratherthan bankruptcies. These change-of-ownership trans-actions are treated as legal matters instead of actualbankruptcy procedures and may not be included inpublic records. Furthermore, because the focus of aca-demic research has remained primarily on bankruptcystudies, the qualitative aspects of business failureshave received little attention. In writing this article, wehope to determine the underlying factors thatdetermine the viability of a restaurant.

Types of Restaurant FailuresRestaurant failures can be studied from economic,

marketing, and managerial perspectives. Of these threeperspectives, we observe that restaurant failures havebeenstudied primarily fromtheeconomic perspective. 2

304 Cornell Hotel and Restaurant Administration Quarterly AUGUST 2005

2005 CORNELL UNIVERSITYDOI: 10.1177/0010880405275598Volume 46, Number 3 304-322


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Economic perspective . This categoryincludes restaurants that failed for eco-nomic reasons such as decreased profitsfrom diminished revenues; depressedprofits resulting from poor controls; andvoluntary and involuntary bankruptcies,involving foreclosures, takeover by credi-tors, receiverships, or frozen assets fornonpayment of receipts. 3

Marketing perspective . This categoryconsists of restaurants that cease to operateat a specified location for marketing rea-sons, such as a deliberate strategic choiceof repositioning, adapting to changingdemographics, accommodating the unre-alized demand for new services and prod-ucts, market consolidation to gain marketshare in selected regions, and realignmentof the product portfolio that requiresselected unit closures. 4

Managerial perspective . This categoryconsists of restaurant failures that are theresult of managerial limitations andincompetence. Examples of this groupinclude loss of motivation by owners;

management or owner burnout as a resultof stress arising from operational prob-lems; issues and concerns of humanresources; changes in the personal life of the manager or owner; changes in thestages of the manager or owners personallife cycle; and legal, technological, andenvironmental changes that demand oper-ational modifications. 5

Definitions of Restaurant Failure

Complicating the analysis, we couldfind no universal definition of restaurantfailure, despite the fact that the way a busi-nesss failure is defined can greatly alterthe failure rate. Studies that use a narrowdefinition 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 Expressclaimed, 90 percent of restaurants fail during the first year ofoperation. To verify thepossibilityof 90 percent first-year fail-ure, we conducted several spreadsheet simulations. The sim-ulations were based on assumptions that roughly parallel thestudy in the accompanying article: fifteen hundred restau-rants in the market; new-business failures during the firstyear, 90 percent (the American Express figure); average indus-try turnover of 10 percent per year (similar to our studys 1999finding); 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 RestaurantAssociation). In the second series of simulations, we replacedthe 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 failedduring their first year of operation, we would seefewer restau-rants at the end of each year, a finding that is contrary to theobserved reality in the restaurant industry. In addition, when90 percent failure was inserted in the equation, simulationsindicated that, in twenty years, the market would shrink from

1,500 units to 254 units, or a loss of 84 percent of the existingrestaurants. 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-tions observed 3 to 4 percent growth rate (www.restaurant.org).

On the other hand, the 30 percent failure rate resulted in themarkets 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 arestrongly supportedby theoutcomes of economic data simula-tions reported by the Sydney and many other academicresearch studies showing that restaurant failure during thefirst year of operations is about 30.0 percent. Indeed, whenAmerican Express was asked for its data, it stated in writingthat it could not providedata supporting the 90 percent failureassertion it made. H.G.P. and J.T.S.


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while studies that use a broad definition,such as change of ownership, show thehighest failure rates. The definition cho-

sen is usually dictated by the data that theresearcher has available, with each defini-tion subject to itsown inherent advantagesand disadvantages.

Because no reports are required when abusiness closes, gathering such datainvolves subjective approaches. Anadvantage of bankruptcy as the definitionof failure, for instance, is the relative easeof obtaining data. The disadvantage of bankruptcy data, however, is its narrownature. Restaurants that close forany otherreason would simply not be includedeven for a financial reason, such as failingto achieve a reasonable income for itsowners or investors. 6 On the other end of the spectrum, the change-of-ownershipdefinition or turnover rate includes all

types of business closures. Consequently,turnover rates are much higher than bank-ruptcy failure rates, regardless of whetherthe turnover was due to the owners retire-ment or due to a change of ownership,such as when a sole proprietorship adds apartner.

Organizational Life CycleAs with all business organizations, res-

taurants follow certain stages in a lifecycle. 7 At any point along these life-cyclestages, a businesscansuffer setbacks cata-strophic enough to lead to failure.Throughout the life cycle, the first stagesare the most vulnerable, which is why thehighest proportionof businesses thatcloseare relatively new. 8 This liability of new-ness has linked organizational adoles-cence to increased organizational mortal-ity rates. 9 One reason for early failure isthat new businesses typically have limitedresources that would allow them to beflexibleor adaptto changingconditions. 10

Following that logic, it is believed thatthe longer a company is in business, theless 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 bythe fourth, fifth, and sixth years, only amodest, 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 thecom-

petitive environment that can influence arestaurants failure are the businesssphysical location, its speed of growth, andhow it differentiates itself from other res-taurants in the market. In addition to theproblem of having less cash to handle


MANAGEMENT WHY RESTAURANTS FAIL

Comparison of First Year Restaurant Failures:Myth (90%) Vs Reality (30%)Num

3500

3000

ber

2500

2000

1500ofUnits

1000

500

01 2 3 4 5 6 7 8 9 1011121314151617181920

Number of Years30% First Year Restaurant Failure Rate90% First Year Restaurant Failure Rate

DEBAR 1 EXHIBITestaurant Failure Simulation: 90 Percent versus 30 Percent

te: The figure shows thenumber ofrestaurantsin a hypothetical market underthe assumptionthat 90per-nt fail in the first year (bottom line) or that 30 percent fail in the first year (top line). Other assumptionsflect national averages and findingsof the accompanying study, as follows: average annual industry turn-er, 10 percent per year; number of new restaurants opening, 15 percent per year; and average marketowth rate, 3 to 4 percent per year.


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immediate situations, operators of newrestaurants are often unable to managerapid growth or changes, lack experiencein adapting to environmental turbulence,and usually show inadequate planning. 12An additional failure factor for independ-ent restaurateurs is the ability of chain res-taurants, with their economies of scale, tooutspend the independents to gain greatermarket share.

Firm Size

In addition to the age of the firm,research has found a correlation betweensize and survival. In this regard, the largerfirmsaremore likely to remainin businessthan small operations. 13 Richardson statedthat both suppliers andbankers are preju-diced against smaller firms. They tend totakelonger toact against a slow-paying . . .large enterprise than they do against asmaller firm, because they equate bignesswith safety and security. 14 That said,small firms tend to be positioned forgrowth, but if that growth occurs too rap-idly, a restaurants propensity to fail actu-ally increases because of the ensuingfinancial stresses. 15 These financialstresses include a high cost of goods sold,debt, and relatively small profit margins. 16

Blue, Cheatham, and Rushing discussedhow, at each stage of expansion, there isincreased financial risk for a small opera-tion, which increases the likelihood of failure. 17

Restaurant Density

A restaurants location in itsmarket andits ability to differentiate itself from itscompetition also help determine whetherit will survive. 18 While a restaurant canbenefit from close proximity to competi-tion and restaurants are often located inclusters to attract more traffic, as in a res-

taurant row, an operation could find itself in a cluster of restaurants within which itcannot compete effectively. In that regard,a restaurants inability to differentiateitself from its competition can be fatal.The restaurants reaction to competitivepressures from excess density depends inpart on the nature of its ownership.

External Factors

External environments can change rap-idly and companies may not be able tochange accordingly. 19 Knowing the natureof ones market is of primary importanceto success. Many restaurants fail each yearfrom an inability to understand, adapt to,or anticipate market trends, especiallygiven that some market trends are moredifficult to foresee than others. Forinstance, many restaurateurs must havebeen shocked by thewild popularity of theAtkins-inspired low-carbohydrate diet,followed almost as suddenly by its appar-ent abandonment by many customers. Toprovide the products desired as marketpreferences shift, operations must trustand have working relationships with theirsuppliers. Because the resources neces-sary for business survival come from theexternal environment, this relationship isimportant in explaining restaurant failure.ONeill and Duker found that government-related policies affect business failures. 20

Along that line, Edmunds pointed to theheavy burden of taxation andregulation ascontributing to increased business-failurerates. 21

Jogaratnam, Tse, and Olsen suggested

that successful independent restaurantowners must develop strategies thatenable them to continuously adapt to thechanging environment and find ways tolink with, respond to, integrate with, orexploit environmental opportunit ies. 22

Typically, external environmental factors




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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 highprices for beef hurt hamburger and steak-house segments. Consequently, the rate of restaurant ownership turnover may differacross different restaurant segments.

Internal Factors

Management capabilities are of pri-mary concern in preventing restaurantfailure. Haswell and Holmes reportedmanagerial inadequacy, incompetence,inefficiency, and inexperience to be aconsistent theme [in] explaining small-businessfailures. 23 Poor management canbe connected to poor financial condi-tions, inadequate accounting records, lim-ited access to necessary information, andlack of good managerial advice. 24 Otherinternal factors affecting failure rates of restaurants include poor product, internalrelationships, financial volatility, organi-zational culture, internal and externalmarketing, and the physical structure andorganization of the business. Managersinability to manage rapid growth andchange can lead to business failure, con-cluded Hambrick and Crozier. 25 Sharlitwrote, The root causes of many businessproblems andfailures lie in theexecutivesown personality traits, 26 while Sull com-mented that managers may suffer fromactive inertia. 27

Makridakis believes that corporationsfail due to organizational arteriosclero-sis, overutilization or underutilization of

new technology, poor judgment in risk taking, overextending resources and capa-bilities, being overly optimistic, ignoringor underestimating competition, beingpreoccupied with theshort term, believingin quick fixes, relying on barriers to entry,

and overreacting to problems. 28 West andOlsen determined five strategic factorsused to determine the grand strategy of afirm. The management or owners strate-gic positioning has a strong influence on abusinesss success. 29 In agreement, Leestated, The most important criterion forsuccess . . . is management. Managers . . .direct the marketing, oversee productquality and standardization, and decidewhen and how to adapt. 30

Studying FailureWe investigated restaurantfailure using

qualitative and quantitative methods intwo independent steps. Step I consists of findings from quantitative assessment of restaurant failures using longitudinaldata from 1996 to 1999; step II revealsfindings from qualitative investigation of managerial perceptions and views of restaurateurs.

Step I: QuantitativeInvestigationA Success-Filled Industry

Step I of ourstudy involved theanalysis

of restaurant ownership turnover datafrom 1996 through 1999. The data werecollected with the help of the healthdepartment of Columbus, Ohio, a majormetropolitan area in the MidwesternUnited States.

Most of the earlier studies assessing res -taurant failure have used either telephone-directory business listings or bankruptcydata. To overcome the incomplete natureof data from bankruptcy filings and tele-phone directories, our study used data on

2,439 operating-license permits from theColumbus health department. (Weremoved from the data set the licenses forother food-service facilities, such asdaycare centers, hospitals, and grocerystores, to achieve our total N of 2,439.)




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Not only must every restaurateur renewthe healthpermit annually, but any changein the restaurants legal ownership

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 inownership. Similarly, each restaurantowner has a specific identification num-ber. A comparison of the ownership andlocation ID numbers revealsany changeinrestaurant ownership, as well as providinginformation regarding multiple locationsoperated by the same owner.

Diminishing Failure Levels

Restaurantownership turnoverratewascalculated for one-, two- and three-yearperiods from 1996 through 1999. Failure

rates declined for each year,with thehigh-est failure rate noted during the first year(26.16 percent) followed by the second

(19.23 percent) and the third year (14.35percent) (see Exhibits 1 and 2). Likewise,the highest restaurant ownership turnoveroccurred during the first year. Theseresults are consistent with several otherstudies. 31 In his 2004 study of 24,000 res-taurants in the Los Angeles area, forinstance, John Self reported a first-yearfailure rate of 24.3 percent and a three-year cumulative rate of 50.9 percent for1999 through 2002. 32

The three-year cumulative restaurant-failure rate for franchised chains was57.22 percent, while it was 61.36 percentfor independent restaurants (Exhibit 3).This difference is statistically significant( p < .05). The failure rate is slightly higherfor independent restaurants (4.14 percent-



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 100Cumulative percentage 26.16 45.39 59.74

Number of independentrestaurants failed 408 699 910 573 1,483ROT percentage 27.51 19.62 14.23 38.64 100Cumulative percentage 27.51 47.13 61.36

Number of chain restaurantsfailed 230 408 547 409 956

ROT percentage 24.06 18.62 14.54 42.78 100Cumulative percentage 24.06 42.68 57.22

Ratio of independent to chainrestaurants 1.77 1.71 2.22 1.40 1.55


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age points) than for chains. Again theseresults are consistent with earlier studies.

The descriptive statistics indicated thatmost independent restaurateurs ownedtwo 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 ownershipmeasured in number of units . The



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 3Years

Exhibit 3:Cumulative Percentage of Restaurant Business Failures, 1996-1999


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obtained higher restaurant ownershipturnover rate (61.4 percent) among theindependent restaurants as compared tothe franchises (57.2 percent) indicatedthat small firms had higher ownershipturnover rates than did the large firms.

The density of restaurants was mea-sured using U.S. Postal Service ZIP codedata. ZIP codes in the metropolitan areawere ranked according to restaurant con-centration per ZIP code, which closelyreflects population density. The data werethen compared with the restaurant owner-ship turnover rate in the correspondingZIP codes. Results indicated that the res-taurant failure rate is highest in the ZIPcode areas where restaurant concentrationis also the highest (see Exhibit 4).

In addition, the restaurant ownershipturnover rate was also calculated acrossvarious segments of the restaurant indus -try by the type of food served. For thethree years of our study, Mexican restau-rants reported the highest three-yearcumulative ownership turnover rate (86.8percent), followed by sub shops and bak-

eries, coffee shops, and pizza restaurants.Cafeterias and seafood restaurants had thelowest cumulative ownership turnover ratefor 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 percentand the cumulative failure rate neverexceeded 60 percent in the three years westudied.

2. Failure rates were notably higher for small,independent operations than they were forrelatively large, franchised restaurants.Thus, we suggest that the financial commu-nity make itself aware that the restaurantindustry comprises different segments withvarying levels of failure rates and, thus, dif-

ferent levels of risk.3. In that regard, the banking communitycould consider lower interest rates for allrestaurants and particularly for those ven-tures that arestatistically more likelyto suc-ceed. Purported high business failures haveoften resulted in high interest rates for res-taurateurs. In addition to gaining more



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 23.0343229 241 17.36 146 17.4243201 181 13.04 103 12.2943232 108 7.78 63 7.5243235 111 7.99 59 7.0443228 87 6.27 57 6.8043204 87 6.27 56 6.6843214 85 6.12 54 6.4443207 98 7.06 54 6.44

43219 75 5.40 53 6.32a. Total number of restaurants per ZIP code.


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favorable terms from the banking commu-nity, restaurateurs should also be able togain better rates when borrowing from thefederal agencies such as the Small BusinessAdministration and state and local eco-nomicagencies. Moreover, although restau-rants (i.e., eating and drinking places)topped the list of failed businesses in the1996 records from Dun and BradstreetBankruptcy Reports, several other busi-nesses were much higher when one consid-ers the loss per failed unit, as shown inExhibit 6.

This study may also help spread a morepositive image of the restaurant industryin the financial community, thus encour-aging more capital investments in restau-rants and casting the restaurant industry ina 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 anoptimum point for restaurant saturation.

5. These findings clearly demonstrate thateven though restaurant failures may be highin 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 toconsider these positive aspects while evalu-ating local grants, tax rebates, and zoningrestrictions.

Step II: QualitativeInvestigationIt became increasingly difficult to balancethe demands of operating the business withthe needs of the family. I decided it was bestto move on.

Don Braddy , Fort Collins, Colorado 33

We supplemented our quantitativeanalysis with qualitative study to allow usto analyze relationships between eventsand external factors more effectively thanquantitative procedures (see the illustra-

tion in Sidebar 2).34

Qualitative data wereobtained by interviewing twenty success-ful full-service restaurant operators whohad been in business for at least five yearsand twenty failed restaurant operatorswho once ran a full-service restaurant andare no longer in business. Five years of



Exhibit 5:Cumulative Restaurant Ownership Turnover Percentage by Restaurant Segment,1996-1999

Restaurant Segment Cumulative Three-Year Turnover Percentage Mexican 86.81Subs and bakeries 76.69Coffee and snacks 70.00Pizza 61.25Chicken 57.88Casual dining 53.13Asian 51.43Family dining 45.00Steak 42.86Buffets and cafeterias 38.46Italian 35.29

Burgers 33.70Seafood 33.33


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continuous operations was suggested bythe local restaurant association as a mea-sure of success in the restaurant business.Restaurant owners whom we interviewedwere screened to be independent opera-tors (not franchisees). This is a conve-nience sample, composed using contactsand local business people. While this isnot a random sample, the purpose of ourinterviews was to elicit and explain diffi-cult to assessideasandphenomenaassoci-ated with restaurant success and failure. 35

A tested questionnaire was used for all theinterviews. The obtained qualitative datawere reviewed and coded by twoindependent researchers.

The qualitative study proceeded in twophases. First, as part of masters project, agraduate student interviewed five success-ful and five failed restaurant owners. Inthis phase, interview participants werelimited to those from full-service restau-rants in the casual- and fine-dining seg-ment to reduce group variation. It isbelieved that different factors may affectdifferent segments of the restaurant busi-nesses; therefore, for the purposes of this

initial study, it was important to look atonly 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 thequestionnaire.

Subsequently, we interviewed fifteenmore currently operating restaurateursand fifteen more restaurateurs who are nolonger in the restaurant business. Theinterviewees who no longer own restau-rants were restaurant managers who are

working for other companies after closingtheir restaurant businesses and ex-restau-rateurs who are no longer in the food-ser-vice business. Selected students from anundergraduate hospitality marketing classtook part in this data collection duringJan-

uary, February, and March 2004, typicallya slow time for restaurants. Each researchteam, consisting of two students, inter-viewed one successful owner and onefailed owner in interviews that lasted fromsixty to ninety minutes. As one studentasked 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 bytelephone, as the owners had moved out of state.

We surveyed independent restaurantowners because their success or failurerests more directly on their own decisionmaking(ascompared to franchiseowners)and because of independent restaurantsrelatively high failure rates. 36 Franchise-restaurant failure may have causes that arespecific to the franchise system and may



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 boyasked for a chocolate shake, the waiter replied that the restau-rant could not make milkshakes. As an experienced operatorand a graduate of the Culinary Institute of America, Mitchellbecame furious. Do you have milk? Do you have chocolate icecream? Do you have a blender?, he asked. Well, you canmake a chocolate milkshake. The server went back to thekitchen and talked to the manager, but the answer was thesame: no milkshake. Abouta week later, one of the people whohad heard Mitchell tell this story told him that the exact samething had happened to himat one of Mitchells own restau-

rants. Since then, Mitchell has made sure that every newemployee gets a milkshake and hears that story on his or herfirst day of training. We want our people to have the attitude,The answer is yes. Whats the question? he says.

Source: Barnet D. Wolf, Cameron: Now, Most Likely to Succeed, Columbus Dispatch ,October 26, 2003; and www.cameronmitchell.com.


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not be in the control of the local operator.The questionnaire that the students usedconsisted of various topics, includingoperations, leadership, and marketing.The investigation also included explora-

tion of quality-of-life issues and theirimpact on the restaurateurs businessdecisions.

We decided to interview theowners andformer owners so that we could obtaindetails about the beginning of the opera -tion, including choiceof location, conceptdevelopment, and culture, which manag-ers might not know. We also hoped to findfactors in owners family life cycles, theirpersonal value systems, and their percep -tions of the industry and the environmentthat determined their business decisionsand, ultimately, their survival or failure.By comparing the views of current opera-tors with those of failed operators, wehoped to establish the factors contributingto restaurant failure and success. 37

Concept over Strategy

Perhaps the key finding was that a suc-cessful restaurant requires focus on a clearconcept that drives all activities. In this

finding, concept is distinct from strategy.A remarkable outcome of the interviews isthat we found few differences in having awell-defined strategy between successfuland failed restaurant owners but consider-able differences in clarity of concept. Infact, some of the most successful manag-ers did not have a well-defined strategy(they adapted andchanged along thewayas needed)and some of the failed res-taurateurs had elaborate strategic plans.Beyond muddled concepts, fai lure

seemed to stem in large part from aninability or unwillingness to give the busi-ness sufficient attention, whether due to alack of time, passion, or knowledge. Suc-cessful restaurateurs attributed their suc-cess to their ability to concurrently man-



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 11Furniture and home furnishings 1,437 2 $1,464,289,154 1 $1,018,990 1Food stores 1,210 3 $415,586,659 4 $343,460 7Apparel and accessory stores 1,194 4 $1,197,880,414 2 $1,003,250 2Other retail stores 1,164 5 $120,880,116 10 $103,849 12Automotive dealers and

service stations 1,061 6 $172,979,289 7 $163,034 10Nonstore retailers 604 7 $130,446,603 9 $215,971 8Gift, novelty, and souvenir shops 547 8 $91,898,049 12 $168,004 9Building 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 6Jewelry stores 193 11 $110,197,501 11 $570,972 5General merchandise stores 190 12 $189,509,276 6 $997,417 3Total retail trade 13,476 $5,060,452,369 $375,516

Source: Dun and Bradstreet Bankruptcy Reports. See http://www.dnb.com/us/.


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age the family life cycle and the businesscycle. In contrast, most of the failed res-taurateurs attributed their failure partly tofamily demands (e.g., divorce, ill health,retirement). Family sacrifice was men-tioned by both successful and failed own-ers, but the successful owners were eithergood at balancing their family and work lives or they were not married. On theother hand, five of the failed owners saidthat they closed when they were no longerwilling to make those family sacrifices.This outcome is consistent with the resultsreported by Ghiselli, La Lopa, and Bai intheir study on quality of life issues withrestaurant managers. 38

Most successful owners attributed theirsuccess to their marketing savvy (espe-cially relationship marketing), whereasthe failed owners often blamed their fail-ure on competitors intensive marketingactivities. Thus, it is clear that knowledgeof marketingfunctionsis essential for suc-cessful operation of restaurants.

Successful owners had a passion forbusiness and high energy levels, whereasthe failed restaurateurs lacked the high

energy levels necessary to motivate them-selves and their employeessymptom -atic of the burnout stage of ones career.At some point during the interview, eachof the failed restaurant owners mentionedthe burden of the immense time commit-ment required for a restaurant.

Critical factors contributing to a restau-rants success were food quality and thecharacteristics of the owner-manager,including knowledge, drive, skills, deter-mination, and passion. Another critical

factor discussed was the staff, includingemployees training, personality, anddiversity. Capital and financial manage-ment were important, as were location anda well-defined concept. These factorsmostlystem from theowners own person-

ality traits, relationships with customersand staff, and dedication to providing aquality product.

The critical factors cited by failed res -taurateurs as contributing to their restau-rantsfailure wereowner-managercharac-teristics, includingattitudes, expectations,control, knowledge, skills, and ambition.Other top factors include the already men-tioned demand of labor and time; poorfood-quality controls or low perceivedvalue; being undercapitalized or havingpoor financial management; and the qual-ity of employees and service, includingthe amount of turnover. Having an ill-defined concept was also listed as a largecontributor to restaurant failure.

Interestingly, successful restaurantowners all had a well-defined concept thatnot only provided a food product but alsoincluded an operating philosophy, whichencompassed business operations as wellas employee and customer relations.Failed restaurant owners, when askedabout their concept, discussed only theirfood product. They would state that theirconcept was vegetarian food, or Alas-

kanseafood. They all offered high-qualityfoods, but that did not make them success-ful. Although food quality was discussedas being critical to restaurant success, it isobvious from the interviews that foodquality does not guarantee success; theconcept must be defined beyond the typeof food served.

We found no example in our sample of a restaurant closing due to external forces.In contrast to earlier research, we do notconclude that external forces necessarily

predict success or failure. It appears thatexternal factors may not automaticallylead to failure if they are properly man-aged. One could argue that external forcesgenerally affect all restaurants similarly,somewhat like the weather in a given geo-




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graphic area. It is the individuals prepara-tion or lack thereof that makes the differ-ence in the severity of the impact.Similarly, it is the restaurateurs responsi-bility to prepare for impending externalweather conditions.

This study also called into question thecommonly held belief that restaurant via-bility is determined by theamountof capi-tal investment. Althoughsufficient financ-ing was cited as critical to restaurantsuccess by most of the participants inter-viewed, some of the most successful res-taurant owners started their operationswith less than $100,000 in capital. Thisindicates that ongoing financial manage-ment may be a better predictor of restau-rant viability than capital investment. Tounderscore these findings, the internalenvironment was determined to be themostcritical factor contributing to restau-rant viability, with the owners character-istics and goals serving as the guidingforce.

Implications for Restaurant Owners

Regardless of the size or organizationof a restaurant operation, the followingimplications seem clear from our inter-views. We have summarized the manyforces that bear on restaurant success orfailure in the model in Exhibit 7, and wediscuss those factors in Sidebar 3.

1. A well-defined business concept is essentialto success. Successful owners coulddescribe their concept during our inter-views, whereas failed owners could onlydescribe thefood andcouldnot expandtheirdescription of concept beyond food produc-tion: I suffered from mission drift. Whenthings didnt work, I would try somethingelse, and eventually there was no conceptanymore. A restaurant can close if it losesits focus and if it tries to be too many thingsto too many people by offering more than itcan successfully implement.

2. Theorganizationallife cycle depends on thefamily life cycle. Most owners mentionedhow 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 supportgoes beyond thatof the owner. It means rec-ognizing that your employees have familiesalso. On New Years Eve 1999, when mostrestaurants 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 thatthe employees could go home and spendtime with their families.

3. It is no surprise to find that location isimportant to restaurant success, but onlyone (failed) owner mentioned location asbeing a contributor to his restaurants 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 productand operation, butagoodlocation cannot overcome badproductor operation.

4. Growth requires extensive prior planning.One of thefailed restaurateurs expanded hisunits operations until the restaurantbecame unmanageable.

5. Although they were not mentioned specifi-cally as contributing to failure, family pres-sures and sacrifices, as well as the sacrificesmade by family members for the owners tohave their restaurants, were often men-tionedby both failed andsuccessful owners.The successful owners were single,divorced, or good at balancing their familyand work lives. The failed owners were nolonger willing to make those family sacri-fices. To reiterate our point above, theimmense time commitment required wasmentioned by all of the failed restaurantowners. One of the failed owners felt theguilt of being unable to be with her childrenwhile they were growing up. So she sold theoperation.

6. Although a clear concept is essential, hav-ing a well-defined strategy was not found tobe critical to a restaurants success. Some of therestaurant owners whohad been extraor-dinarily successful were going with theflow, while some owners failed despitewell-defined strategies. The lesson in this




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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. Effectivelyand regularlycommunicate values and objectives to employees. In one instance,new own-

erscreditedcommunication of their values andobjectivesto their employeesas a major element in thesuccessful repositioning of their restaurant to bettermeet theneedsof thegrowingneighborhoodbusi-nesses by adding lunch to their dinner-only concept.

6. Maintain a clear vision, mission, and operation strategies, butbe willing to amend strategies as thesit-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 therestaurant andto family. Onesuccessfulowner 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-pantsmanagement.

3. Frequent critical incidents; managing operations by putting out fires appears to be a commonpractice.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 adeterrent for potential criminal elements and bar fights, but unfortunately it was also a deterrent forcustomers, who were afraid of police scrutiny and potential DUI tickets. The club was closed withineighteen 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 buildingfor a fine-dining restaurant. With no knowledge of restaurant operations, they opened the restaurantwith zero marketing budget as they relied primarily on free publicity and word of mouth. In less thanone year,the restaurant wasclosed, with more than $5 million in debt. The owners tried to salvage thebusiness 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 renovationbecause the owners did not communicate to their clientele their reason for closing or their timetablefor 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 forpoor sanitary practices. Though the sanitary conditions subsequently improvedas reported by the


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finding is that restaurateurs must not be sorigid in their strategy that they fail to seeopportunities 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 apopular hangout for college students. Hegradually changed the menu to add valueofferings andto removethe expensive items

that his new customers could not or wouldnot order.Thus, the restaurant, which beganas a small, family-style restaurant, became alarge, value-centered, full-service, coffee-shop-style restaurant for college students.

7. Awareness of specific competitors did notseem to be critical to restaurant success.Most of the owners defined their competi-tion as any dining establishment; one evenwent so far as to define the competition fordining dollars as any entertainment duringthe dinner hours. Competition was viewedby most of the owners to be a tool for self-measurement but not necessarily somethingto use to develop strategic defenses.

8. Having a defined targetmarket was notcriti-calto success. Not only wasa defined targetmarket not mentioned by any of the ownersas a critical factor, but it was not obviousfrom the interviews that successful ownerscould define their target market. We foundsuccessful owners who could not determinea demographic or psychographic segmentthat they appeal to, and, more to the point,

some failed owners could demographicallypinpoint the target market that they hadmissed.

9. Likewise, marketing strategy did not seemto be critical to a restaurants success. Theowners whom we interviewed rarely usedadvertising or promotions. One owner men-tionedmarketing as a critical factor butwenton to discuss the target-marketawareness,at

the same time stating specifically thatadvertising is not necessary. On the otherhand, public relations, community involve-ment, and customer relations were all con-sidered important to their business opera-tions. The successful owners, when askedabout marketing, all discussed these typesof relationships in the community overadvertising or promotions. In fact, the mostsuccessful owners all stated a strong belief in not advertising and not usingpromotions.In that regard, one owner stated, If youhave to give something away then youshouldnt be in business.

10. The owners skills and knowledge are criti-

cal factors. One should not rely on others,but should be knowledgeable in all areas of the business.

ConclusionsCombining our quantitative (longitudi -

nal) and qualitative data, we present (in



same television stationthe damage was done and the restaurant was closed. It later reopened as asuccessful 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. Ownersthought 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 anextreme example, a child with a long-termillness preventedan ownerfrom devotingnecessary time tothe restaurant, which soon closed.

16. Lack of operational performance evaluation systems. In one instance, new owners did not know howto calculate food cost and relied on employees to maintain proper inventory controls.

17. Frequent changes in management anddiverseviews of themission, vision, andobjectives. In an exam -ple that is common in partnerships, the owners of a failed restaurant could not agree on its directionafter just one year of operation.

18. Tardy establishment of vision and mission statements of the business; failure to integrate vision andmission 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.


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Exhibit 7) a model for future research.Ourstudy indicates that the restaurant failurerate is affected more by internal factorsthan by external factors, although bothapply. Such attributes as restaurant den-sity, firmsize,and managerialcharacteris-tics are important to success. In particular,the managers ability to balance familymatters with the development of the orga-

nization iscritical. Along with that balance,it is important for the owner-manager tohave the requisiteskills to runa restaurant.While the restaurateur should plan care-fully in growing the business, she or heshould be ready at any time to alter plans

in response to changes in external factors.Finally, while formal marketing andadvertising seem not to be important to thesuccess of an independent restaurateur,the restaurant must pay attention to com-munity and customer relations so that it isperceived to be a part of its community.

Further research should focus on thosefactors that havebeen found to be the most

critical to restaurant survival. Although itis comforting to work with numbers and tolook at external forces and failure rates, itis more important to get to the core inter-nal issues underlying restaurant viability.Future research on successful ownership



RESTAURANTVIABILITY

Family Life CycleYouth/Early ChildhoodMarriage/ Family

MaturityEmpty NestRetirement

ExternalEnvironment

General

Legal & PoliticalEconomicDemographicTechnologicalSocial & Cultural

Specific

Competitive ForcesSuppliersCustomersRegulatory Agencies

InternalEnvironment

Operational FactorsStrategyProductManagementFinancialMarketingType of OwnershipCulture

Personal FactorsLeadershipDemographicsPersonal / Family

GoalsOrganizational Life Cycle

Introductory StageGrowth StageMaturity StageDecline / Reemergence

Exhibit 7:Impact of Various Factors on Restaurant Viability


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characteristics and managerial factors canbe useful to aspiring restaurant owners.Also, the complex roles of family andorganizational life cycles in restaurantviability warrant further investigation.

Endnotes

1. Francis Kwansa and M. Cho, BankruptcyCost and Capital Structure: The Signifi-cance of Indirect Cost, International Jour-nal of Hospitality Management 14, no. 3(1995): 339-50.

2. Zheng Gu, Analyzing Bankruptcy in theR e st a ur a n t I n d us t r y: A M u lt i pl eDiscriminant Model, International Jour-nal of Hospitality Management 21, no. 1(2002): 25-42; Zheng Gu and L. Gao, AMultivariate Model for Predicting BusinessFailures of Hospitality Firms, Tourism and

Hospitality Research: The Surrey Quarterly Review 2, no. 1 (2000): 37-50; FrancisKwansa and H. G. Parsa, Business FailureAnalysis: An Events Approach (Councilon Hotel, Restaurant and Institutional Edu-cation annual conference proceedings,1990, Las Vegas, NV); and S. Morse, AnExamination of Restaurant Failure Rates inthe United States, (Association of Hospi-tality Financial Educators Conference,New York, 1999).

3. Edward Altman, Financial Ratios, Dis-

criminate Analysis and the Prediction of Corporate Bankruptcy, Journal of Finance23, no. 4 (1968): 589-607; William Beaver,Financial Ratios as Predictors of Failure, in Empirical Research in Accounting:Selected Studies (Chicago: University of ChicagoPress, 1968); andRonaldClute andGeorge Garman, The Effect of U.S. Eco-nomic Policies on the Rate of SmallBusiness Failure, American Journal of Small Business Management 5 (Summer1980): 6-12.

4. Robert Dodge and John Robbins, AnEmpirical Investigation of the Organiza-tional Life Cycle Model for Small Business

Development and Survival, Journal of SmallBusinessManagement , January1992;Robert Justis and Richard Judd, Franchis-ing (Cincinnati, OH: South-Western Pub-lishing, 1989); and Mahmood Khan, R estaurant Franchising (New York: VanNostrand, 1990).

5. Dun and Bradstreet Reports, Business Fail-ureRecord (New York:Dun and Bradstreet,1996); Zheng Gu, Analyzing Bankruptcyin the Restaurant Industry: A MultipleDiscriminant Model, International Jour-

nal of Hospitality Management 21, no. 1(2002): 25-42; Zheng Gu and L. Gao, AMultivariate Model for Predicting BusinessFailures of Hospitality Firms, Tourism and

Hospitality Research: The Surrey Quarterly Review 2, no. 1 (2000): 37-50; and MichaelPorter, Competitive Strategy: Techniques

for Analyzing Industries and Competitors(New York: Free Press, 1980).

6. John Watson and Jim Everett, Do SmallBusinesses Have High Failure Rates?

Journal of Small Business Management 34(October 1996): 45-63.

7. Dodge and Robbins, An Empirical Investi-gation of the Organizational Life Cycle

Model ; Christopher Hart, Greg Casserly,and Mark Lawless, The Product LifeCycle: How Useful? Cornell Hotel and

Restaurant Administration Quarterly 25,no.3 (November 1984): 58-63; and T. Levitt,Exploit the Product Life Cycle, Harvard

Business Review , November-December1981.

8. A. L. Stinchcombe, Social Structure andOrganizations, in Handbook of Organiza-tions (Chicago: Rand McNally, March1965), 142-93.

9. Josef Bruderl and Rudolf Schussler, Orga-nizational Mortality: The Liabilities of Newness and Adolescence, AdministrativeScience Quarterly 35 (1990): 530-47.

10. Elaine Romanelli, Environments andStrategies of Organization Start-Up:Effectson Early Survival, Administrative ScienceQuarterly 34 (1989): 369-87.

11. L. Richardson, The Mechanics of Failure, Asian Business , November 1991, p. 85.

12. S. Venkataraman, Andrew Van de Ven,Jeanne Buckeye, andRoger Hudson, Start-ing Up in a Turbulent Environment: A Pro-cess Model of Failure Among Firms withHigh Customer Dependence, Journal of

Business Venturing 5 (1990): 277-95.13. Timothy Bates andAlfred Nucci, An Anal-

ysis of Small Business Size andRateof Dis-continuance, Journal of Small Business

Management , October 1989, pp. 1-7.14. Richardson, The Mechanics of Failure,

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Ratliff, Small Business GrowthCharacter-istics, American Journal of Small Business5 (Winter 1981): 33-42.




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16. Luann Gaskill, Howard Van Auken, andRonald Manning, A Factor Analytic Studyof the Perceived Causes of Small BusinessFailure, Journal of Small Business Man-agement , October 1993, pp. 18-31.

17. T. Blue, Carole Cheatham, and B. Rushing,DecisionThresholds and theDevelopmen-talStages in theExpanding Business, Jour-nal of Business and Entrepreneurship 1(March 1989): 20-28.

18. P. Kottler, J. Bowen,and J. Makens, Market-ing for Hospitality & Tourism (Upper Sad-dleRiver, NJ:Prentice Hall, 1996), 255-56.

19. Andrew Zacharakis, Dale Meyer, and JulioDeCastro, Differing Perceptions of NewVenture Failure: A Matched ExploratoryStudy of Venture Capitalists and Entrepre-neurs, Journal of Small Business Manage-ment , July 1999, pp. 1-14.

20. Hugh O Neill and Jacob Duker, Survival

and Failure in Small Business, Journal of Small Business Management 24 (January1986): 30-37.

21. Stahrl Edmunds, Differing Perceptions of Small Business Problems, American Jour-nal of Small Business 3 (April 1979): 1-14.

22. Giri Jogaratnam, Eliza Tse, and MichaelOlsen, Strategic Posture, EnvironmentalMunificence, and Performance: An Empiri-cal Study of Independent Restaurants,

Journal of Hospitality & Tourism Research23, no. 2 (May 1999): 118-38.

23. Stephen Haswell and Scott Holmes, Esti-mating the Small Business Failure Rate: AReappraisal, Journal of Small Business

Management 27 (July 1989): 68-74.24. Gaskill, Van Auken, and Manning, A Fac-

tor Analytic Study of the Perceived Causesof Small Business Failure, 18-31.

25. Donald Hambrick and Lynn Crozier,Stumblers and Stars in the Management of Rapid Growth, Journal of BusinessVentur-ing 1, no. 1 (1985): 31-45.

26. I. Sharlit, SixEarlyWarningSigns of Busi-nessFailure, Executive Psychology , March1990, pp. 26-30.

27. Donald Sull, Why Good Companies GoBad! Harvard Business Review , July-August 1999, pp. 42-52.

28. Spyros Makridakis, What We Can LearnFrom Corporate Failure? Long RangePlanning 24 (August 1991): 115-26.

29. Joseph West and Michael Olsen, GrandStrategy: Making Your Restaurant a Win-ner, Cornell Hotel and Restaurant Admin-istrationQuarterly 31, no. 2 (August 1990):72-77.

30. D. R. Lee, Factors of Restaurant Success:Why Some Succeed Where Others Fail, Cornell Hotel and Restaurant Administra -

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restaurantowner.com; Wilke English, JoWillems, D. Purdy, and J. Stanworth, Year10of theEl PasoRestaurantAttritionStudy:News Flash: Tenure Does Correlate withInvestment! International Society of Franchising 17 (February 2000); MichaelHannan and John Freeman, Organizational

Ecology (Cambridge, MA:Harvard Univer-sity Press, 1989), 341-35; S. Morse, AnExamination of Restaurant Failure Rates intheUnitedStates (Association of Hospital-ityFinancial Educators Conference, 1999);and C. Muller and R. Woods, The RealFailure Rate of Restaurants, FIU Hospital-ity Review 2 (1991): 60-65.

32. John T. Self, An Analysis of RestaurantFailure Rates: A Longitudinal Study (CHRIE Conference Poster Presentation,Philadelphia, 2004).

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International Journal of Hospitality Man-agement 3, no. 3 (1984): 55-61.




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38. Richard Ghiselli, Joseph La Lopa, and BillyBai, Job Satisfaction, Life Satisfaction &TurnoverIntent 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.


H. G. Parsa , Ph.D., is an associate professorat The Ohio State University ([email protected]). John T. Self , Ph.D., is an instructorat the Collins School of Hospitality Manage-ment at California State Polytechnic Univer-sity, Pomona ([email protected]).

David Njite , MS, is a doctoral student andTiffany King is a graduate of The Ohio StateUniversity. The authors would like to thankBob Harrington for helpful comments on ear-lier drafts; Eun-Jung Kim for her assistance indata analysis; the Columbus Health Depart-ment, Columbus, Ohio, for generously shar-ing the health-permits data; and Mary Kuhnerfor editorial assistance.

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