Why do Restaurants Fail: 5 Mistakes that Make You Vulnerable to the Crisis

According to pre-pandemic studies, approximately 60% of restaurants would lose their activity in the first year and 80% would shut down in the first 5 years. The COVID-19 crisis cancelled any attempt of predicting market evolution, and restaurants are closing at great speed.  

The whole industry is going through a terrible period and only the strong ones will make it through. When we say “strong” we don’t point only to those with extra capital these days. I also mean those with the lucidity to learn from their own mistakes, the power to reinvent and the intelligence to manage their resources, be they human, material or financial ones. All the resources available. 

Today we will talk about 5 mistakes that make you vulnerable in crisis situations and how to avoid or overcome them.

1.    You didn’t know to make your staff loyal

Not only do the customers have to become loyal, but also the team working for you. How to do this?

Efficiently distribute work tasks and make sure everyone is doing what they know best, in a fair number of hours. For this, it is essential to know the competencies, talents and skills of each person on your staff when you assign tasks and responsibilities. And this thing will happen only if you are present among them and know how to communicate. 

Provide a decent income for them, fair when the business is doing well. It is an illusion to think you will keep around good people with a bad paycheck. Maybe they will stay until a better job comes around or until you will tell them this month they will get less money. 

If you pay your people proportionally with the job they’re doing and your expectations, they will understand when you won’t be able to pay them as much. And if you managed to have an up and running delivery service and your business picks up again, give them a stimulant, a bonus. This way they will know they matter to you. 

You can’t get respect and loyalty, but you can earn them. Understand your people’s needs, at a professional level and show them you care, if you want them to care as well when your business is going through tough moments.  

Show constant appreciation every time things are looking good and make sure you offer constructive feedback when there are mistakes. 

2.    You don’t have a financial plan

You are enjoying fame, your restaurant just got an award at a hospitality industry competition and you have lots of hearts on your Instagram account. But fame is not paying the bills, rent or salaries.

If you see your restaurant only as a place with good food and ignore the financial needs or you don’t manage them well enough…the failure will come sooner or later. And this is the main reason restaurants close, some of them in less than 6 weeks since launching. Because they run out of money.

Financial planning is like a foundation, with the purpose of sustaining the whole development structure of the company. This has as a base layer a budget which organises the company’s finances, but also a future perspective over the incomes and spendings of it. 

Without financial planning, when sales rise and cash flow is excellent, we have the tendency to believe everything is alright. Then comes a time with modest incomes, like the one we’re facing right now, and you panic. Because ignorance is not bliss. It’s just ignorance.

  • For example, the rent of the restaurant should never exceed 30% of the fixed costs. 
  • When you open, you must make sure you can cover costs for at least six months. 

Solution: take over your business digging deeply into the numbers. If you feel you’re not quite good at it, hire someone to do it for you.

3.    You lie to yourself and you lie your customers too

Denial is a strong emotional drug that keeps us from evolving and easily leads us to failure. Denial keeps you in a comfort zone and doesn’t let you analyse where you stand and what you need to do.

Nothing will be the same as before and “old ways won’t open new doors”. Stop ignoring proof and don’t be passive, expecting it to pass! If you want to continue in this industry, pay attention to all changes, adapt to the given context, and be connected with the market. And if this means changing your business from scratch, so be it, it beats losing even more money.

Not all clients which leave negative reviews are friends with the competitors or with other people with bad intentions. Not all of them are coming with made-up stories. Most of them are actual clients and really want to help you. Stop ignoring reviews!

Because we spoke earlier about cost optimisation, many restaurant owners in Bucharest chose to optimise their spendings by giving up quality. And this is just wrong.

Clients are paying more and more attention to what they spend their money on. And if up until recently they could have overseen a dish not quite fresh or mozzarella that isn’t ”bufala” although they ordered Pizza Bufala, now they will not be lied to anymore. 

Restaurants prioritising quality will make it through. Even if quality keeping is an enormous effort right now, they will collect their earnings when those who didn’t understand that they can’t lie to their customers will disappear.

4.    Victim mentality

People with a victim mentality should never become entrepreneurs. We all know that beginning and running a business is unpredictable and has high failure risks. 

The mindset is more important than strategy when it comes to success as an entrepreneur. Once we make a mentality shift and we stop looking for excuses, we win over the pandemic battle! Strategy, tactics, action or method will come also after we turn off the victimising mood that holds us from the truth. 

Stop waiting for government aid! Regardless if it comes or it doesn’t, the change ball is in your court!

5.  You didn’t invest in marketing

Many entrepreneurs have the tendency to focus only on creating the location and the menu, maybe on finding a talented Chef too and to not make marketing a priority. In reality, without advertisement, few people will have the chance to step over their threshold. In a crisis period, the lack of promotion or marketing made on the run, with unprepared people can be felt even more.

How much to set aside for promoting your restaurant? Minimum 3%-5% from your business figures. In every spending budget, we look at the business numbers, and not at the profit. 

If you are just starting, you don’t refer to the budget, you must consider promotion as an initial investment in the first 6-12 months, with a recovery in 12-36 months or more. 

For launching, the promotion budget has to be invested in the creation of the brand, the menu and a multi-channel communication campaign. In the end, the initial investment has to be sustained with a constant and coherent presence on all social media channels, be it yours or those of relevant influencers, through Google Ads campaigns and with the constant development of website content. 

One more thing: Traditionally (but wrong) in a time of crisis, most managers, scared of losing money, diminish or cut all the marketing budget. Basically, for you, it is an opportunity to take your offer into the world and consolidate your brand in a good moment for visibility. So, it is never too late to start communicating.