The restaurant business is one of the most important in the country, employing 10% of the labor force. The restaurant industry is also one of the most fiercely competitive industries in the world, with 60% of restaurants failing in their first year and 80% by the fifth. Success is a rare bird in the industry. If you want to succeed in the restaurant business, here’s what you need to do.
Understand Why Other Restaurants Fail
To succeed, you must first tackle why other restaurants fail. This is the first thing you have to do, so that you design your business in a way that maximizes your chances of survival and profit.
One of the biggest reasons that restaurants fail is location. Pricing power drives your ability to earn a profit. Amazon can raise prices of Prime, for instance, because there is no alternative that matches what Amazon can do. You don’t want competition; competition, as Peter Thiel says, is for losers. Ask yourself this: Would you still go to that restaurant if a restaurant raised prices and other restaurants did not?
Here’s the thing, no matter how great a chef you are, your cuisine will likely not be enough to give you pricing power. What drives pricing power in restaurants is location. You want a location where you are either the only option or, where there’s so much traffic you will capture some of the traffic. So that’s two kinds of locations: isolated communities, where you have no competition, or very busy areas, where you expect some spillover traffic.
Now, the trouble with a location in a busy area is that rent is likely to be very high, because there’s so much competition for space, and that will eat into your profits. So realistically, you are more likely to be profitable in small, underserved or niche communities with low rent. Some of the best, most successful steak restaurants I have been to, are located in such niche areas.
Other reasons why restaurants fail are lack of experience on the part of management, inflated costs, mispriced menu items, poor marketing, and disorganization. These are crucial aspects that you have to think through.
Plan for Success
Once you have figured out why other restaurants fail, you have to think about how you will work around those weaknesses. Don’t be afraid to do something novel. For instance, Dollar General has built an empire by serving underserved communities in rural America.
They go where nobody is interested in going. Or perhaps you can start a restaurant in a resort somewhere where there isn’t a good restaurant already. The key thing is to avoid competition for rental space and for customers. That’s the secret to pricing power.
So the next steps are pretty generic, but the base is unique to the restaurant business: understand the reasons for failure. Then you can build your business model and business plan, and register your business, knowing that you have set yourself up to be more likely than not to succeed.
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