Is It True that 90% of Restaurants Fail in Their First Year?
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Posted on 03 Sep 2017 21:04

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Most restaurants fail. You will hear this claim on restaurant makeover shows and read it in various articles concerning the restaurant business. How many are most? Well, an article on CNBC in March of 2016 which claimed that "most restaurants fail" seemed to settle at around sixty percent. 1 Most estimates are even higher, and the most common claim is 90%. That is nine out of ten restaurants, folks.

Do almost all restaurants fail in their first year?

The claim that most restaurants fail in their first year, up to 90%, is false. And, once a restaurant gets past its first year in business, its chances of failure drops. The failure rate for restaurants, of course, depends on whose statistics you are looking at.

For example, according to a 2005 study published by H.G. Parsa, et al. in the Cornell Hotel and Restaurant Administration Quarterly, a "relatively modest" 26.15 percent of independent restaurants fail within the first year during the period covered by the study. Furthermore, the study found little difference in failure rate between franchised and independent operations. The authors, when taking into consideration the number of restaurants in the market, a turnover-rate of 10% per year, the number of new restaurants opening each year, and the average market growth, concluded that if 90 percent of new restaurants failed within the first year, we would see fewer restaurants every year. In other words, as each year passed, the total number of existing restaurants would drop. In a couple of decades, the number of restaurants would drop by over 80 percent. The National Restaurant Association reports a 3 to 4 percent growth rate. A failure rate of 90% just cannot be possible.

Moreover, the parsa study found that the second year failure rate was 19%, and the third year failure rate was 14%. 2

Another study, published in 2014 came up with an even lower failure rate. Using data from the U.S. Bureau of Labor Statistics, and tracking restaurants from 1992 to 2011, they found that only 17% of the 81,000 independently owned restaurants failed in the first year. This was even lower than other service-oriented businesses, which had a failure-rate of 10%. However, according to the study "The median lifespan of a restaurant startup with 5 or fewer employees is 3.75 years, slightly shorter than that of other service businesses of the same startup size (4.0 years)." 3

In simple terms, we can surmise that the failure-rate of restaurants is not very different from other startups in other industries. The restaurant business is, in fact, a prosperous one. However, as Forbes points out, smaller restaurants with fewer employees tend to have a higher failure-rate than larger ones. 4

What is Restaurant Failure?

It is actually difficult to define restaurant failure and there is no universal definition. Statistics that rely on bankruptcies will result in a higher failure rate. This is too narrow a definition.

As well, it is a mistake to think that restaurant failure is the same as restaurant closure. And restaurant turn-over is not the same as closure. Statistics relying on too broad a definition or restaurant failure tend to result in higher failure rates. 2

Restaurants can fail due to economic reasons, such as poor controls and failure to make a profit. However, other circumstances may occur, such as a fire or personal problems that force a restaurant into bankruptcy. As well, some restaurants are closed for marketing reasons. An owner might decide to close the doors of a restaurant, for example, because he wants to relocate to a better location. Change of ownership may occur for voluntary reasons. Chain restaurants often close for various reasons decided on at the corporate level, even though the location is not technically failing.

It is difficult, then, to ever have exact statistics of restaurant failure rates, but one thing is clear: The statement that 90% of restaurants fail in the first year is a myth, and it always has been. As well, with each year a restaurant survives, its chances of failure drops.

Sources
1. Bellini, Jarrett. “The No. 1 Thing to Consider before Opening a Restaurant.” CNBC, CNBC, 6 July 2016, www.cnbc.com/2016/01/20/heres-the-real-reason-why-most-restaurants-fail.html.
2. Parsa, H. G., et al. “Why Restaurants Fail.” Cornell Hotel and Restaurant Administration Quarterly, vol. 46, no. 3, 2005, pp. 304–322., doi:10.1177/0010880405275598.
3. Nagy, Brian, and Franz Lohrke. “Only the Good Die Young? A Review of Liability of Newness and Related New Venture Mortality Research.” Historical Foundations of Entrepreneurship Research, doi:10.4337/9781849806947.00019.
4. Ozimek, Adam. “No, Most Restaurants Don't Fail In The First Year.” Forbes, Forbes Magazine, 3 Feb. 2017, www.forbes.com/sites/modeledbehavior/2017/01/29/no-most-restaurants-dont-fail-in-the-first-year/#75eb36744fcc.
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