Hospitality

Myth Buster: 90% of new restaurants do NOT fail in first year

--Jessica Dunker  is president and CEO of the Iowa Restaurant Association.

Ninety percent of restaurants do not fail in their first year.

If you read no farther, please commit that fact to memory and repeat it often.

As best I can tell, the restaurant industry has been dogged by this myth for more than a decade, thanks to the opening credits of one of the first restaurant “reality” programs called "The Restaurant”.

The show followed the launch of a restaurant in Manhattan called Rocco's on 22nd and each week as part of the opening, viewers would hear the show’s main character Celebrity Chef Rocco DiSpirito proclaim that while "90 percent of new restaurants fail in their first year,” he would “beat those odds.” NBC cancelled the program after one season, but for some reason that opening statistic about restaurant failure rates has lived on in perpetuity.

Perhaps it was our natural inclination to “cheer for the underdog” that made us cling to the 90 percent failure rate figure as fact while we watched this restaurateur face “overwhelming” odds as he chased his dream to open his own restaurant. And while his dreams may have been real, that 90 percent failure rate figure carries about as much truth as the claim that those two dozen hunky men being dropped at the front door of a Hollywood mansion are just “looking for true love” on the show "The Bachelorette".

Anyone in the restaurant industry will be quick to tell you it is a slim-profit, high-risk, time-consuming business with higher than average staff turnover rates and a constantly changing competitive landscape. Still, I’m perplexed that anyone who has gone through eighth grade math would not question such an exaggerated statistic. In my head, this is an algebra test question waiting to be answered: “If 100 new restaurants open every year and 90 percent fail in the first year and 50 percent of those who make it to month 13 fail in the next three years, how long will it take until there are no restaurants at all?”

Given that even in the worst economic times we did not see mass restaurant closings, the numbers never added up. In fact today, Iowa’s restaurant industry, while not setting sales records, is expected to post a relatively healthy 4.2 percent growth in sales this year over last. Not a get-rich-quick scheme by any means — but certainly not a doomsday scenario either.

Exact figures focusing exclusively on new restaurant failures aren’t easy to come by, but the Small Business Administration’s Office of Advocacy has reported that the two-year failure rate for all small businesses is 31 percent.

Researchers at Cornell University and Michigan State University conducted a study of restaurants in three local markets and concluded that after the first year approximately 27 percent of new restaurants failed. An Ohio State University study also found there was no significant difference in the failure rate of restaurant startups and small business startups in general.

So given the evidence we have to work with, the best I can estimate is that about 70 percent of new restaurants will make it past the first year. Asserting that is not likely to land me a reality show of my own anytime soon.

However, the numbers do offer me and restaurant lovers throughout the metro and state some reassurance that our new-to-the-market favorite places are more likely than not going to be here next August.

It also shows that Iowa’s restaurant industry will continue to be an important part of the state’s economy. Given that Iowa's restaurant industry employs one in ten workers in the state and generates about $4.3 billion in sales each year—those are numbers I can live with.

A Brexit lesson on restaurant regulation

Jessica Dunker is president and CEO of the Iowa Restaurant Association

Restaurants in Britain may well have been on the forefront of the UK’s recent decision to leave the European Union (EU). Why? Regulatory overreach had reached the point of the absurd.

There was near restaurant revolt when the EU tried to force refillable olive oil bottles off restaurant tables across Europe. Even a protest of 100 top chefs in Britain couldn’t stop the mandate that “mustard” be noted along with 14 other allergens on menus—imagine the nightmare for small chef-driven restaurants that change their menus on a regular basis.

Sadly, we may be headed perilously close to an equally well-intentioned, but onerous regulatory environment on our “side of the pond.”

Not long ago the biggest challenge most restaurateurs faced was finding innovative ways to attract new customers and keep them coming back. They would test marketing tactics, improve ambiance, innovate with food and drink and move price points in an effort to capture that “magic mix” for a successful business.

It’s not that restaurant entrepreneurs no longer ask and seek answers to those business-building questions. They do. But the biggest worry consuming the minds (and energy) for today’s operators is government interference in their business.

In fact, regulatory overreach has displaced the economy, food costs, recruiting employees and even sales volume as the number one challenge cited by restaurant operators, according to an annual survey conducted by the National Restaurant Association.

Of course, there are “big headline” battles between the restaurant industry and all areas of government. New York City led an effort to prohibit the sale of “super-sized” soft drinks in restaurants (apparently the “bigger than my head” drinks offered by convenience stores didn’t hold the same health risks.)

Across the nation, restaurants and bars deal daily with compliance officers on alcohol, food safety, wage and labor, and more. And while wage battles make headlines, the more costly regulatory fights often don’t find their way into the news.

Case in point, grease traps (a plumbing device that’s part of a restaurant wastewater disposal system.) Twenty-years ago one independent restaurateur I know opened a place downtown with a 60 gallon grease trap. He’s never had a problem with it. This past year when he purchased and renovated an existing restaurant location, he was required to put in a 10,000 gallon grease trap—you read that right—a grease trap that was 166 times larger than the one used in his existing location.

Trust me when I say, his new restaurant does not produce 166 times more grease, solid waste, or anything else. Not only is a trap this large unnecessary, it doesn’t exist. He was forced to buy two 5,000 gallon tanks. And because the regulations say a tank cannot be more than 25 percent full before it is cleaned, one tank sits filled with 5,000 gallons of clean water 100 percent of the time.

I know that is a “down in the weeds” example that only those in the restaurant industry truly care about, but it is a $100,000 example—and it was a $100,000 expense that no restaurant patron will ever see the benefits from. It’s “overkill” in every regard.

The biggest worry about all of this is that the restaurant industry is one of the last bastions of entrepreneurialism left in the United States. People can still start as a dishwasher, busser, or server and end up an owner. However, if we continue down the path of EU-style regulatory overreach—we may well regulate future independent restaurateurs away from the American Dream, and out of the marketplace.

And that would be a shame—because a huge attraction to any city is the unique regional flavors delivered by “locally grown-and-owned” independent restaurants.

Is service at the tap of a finger going to rule the restaurant world?

Jessica Dunker is president and CEO of the Iowa Restaurant Association.

It’s a bird, it’s a plane, it’s my pizza?

A recent study from the National Restaurant Association revealed that more than a quarter of consumers would likely use a drone delivery service if their local restaurant offered the option. Forty percent of consumers ages 18 to 44 would be willing to try such “human-free” delivery while only 9 percent of those over age 65 were warm to the idea.

Seem like an absurd question to study in the first place? Not any more absurd than Uber testing “driverless” cars in Pittsburgh.

Consumer willingness to interact with technology, rather than people, for traditional customer service functions is increasing at a breakneck pace. Combine these changing attitudes with shortages in the labor pool, new wage and labor mandates, and razor thin restaurant industry margins, and suddenly investments in cutting edge tablet, kiosk, and even delivery technology don’t seem terribly far-fetched for many restaurant owners and operators.

As an example, tableside payment stations and devices, once novelties, have steadily gained consumer acceptance with 63 percent of those surveyed saying they would be willing to use such payment tools (up from 48 percent just last year). Similarly four in five consumers now say they would be willing to use self-service kiosks for ordering.

What is happening?

I would argue that as restaurant consumers we have already been “trained” to stand in line, place a food order, carry the meal to the table ourselves, fill and refill our drinks, and separate our trash from the dishes before clearing our places. It’s no great leap to think we’d be willing to key in our order and swipe a card for payment. In fact, a majority of consumers say that customer-facing technology increases convenience, speeds service and increases order accuracy. More than one-third of consumers go so far as to credit technology options as the reason they dine out, as well as order takeout and delivery more often than ever before.

I suddenly feel very old.

I will likely always fall on the side of wanting a real human being on the other side of the counter noting the fact that I "want my dressing on the side." And obviously, I believe strongly that there will always be a place for great full-service restaurants. But I think we all need to brace ourselves for fewer face-to-face, and more finger-to-screen, hospitality interactions than we ever imagined.

Brave new world of foodies

- Jessica Dunker is president/CEO of the Iowa Restaurant Association

The Food Network is fast approaching its 15th year of delivering food-focused television programming into homes across the country. The impact that 24-hour access to TV shows featuring chefs, culinary tourism, cooking, “rescues” and competitions has on every facet of the restaurant industry cannot be overstated.  

Suddenly everyone is, or wants to be, a foodie. Or at the very least a food enthusiast. Many appear to be succeeding in their quest to increase their cuisine savvy.

Research from the National Restaurant Association found that 9 out of 10 restaurant operators feel guests are more knowledgeable about food than they have been in the past. Eight in 10 say their customers are also paying more attention to food sourcing and production than they were two years ago. Just as many have seen a notable rise in how adventurous restaurant guests are willing to be with their food choices.

Consumer data confirms these operator observations. One study found 72 percent of people are in fact seeking restaurant food experiences that provide tastes and flavors they can’t duplicate at home. Roughly half of restaurant patrons actively seek establishments where they can try foods they haven’t tried before. This is true for both table service and limited service restaurants — further indicating that American palates are expanding and expectations are increasing regardless of price point.

So how are restaurants responding to this brave new world full of foodies?

In a recent food and menu trends survey, more than three quarters of operators said their restaurant is offering a wider variety of menu items now than they did even two years ago. Last year alone more than 80 percent of restaurants added a new entrée to their menu, of those, more than 90 percent plan to do it again in 2016.

As consumer expectations evolve, restaurant operators know they must do more than keep up— they need to be a step ahead. What might that look like? If the most recent chefs’ surveys are any indication restaurant patrons can expect to see the rise of vegetable-centric meals, ethnic meals, condiments and spices, and the harking back to traditional preparation methods (bring on the meatloaf).  

Ultimately though, restaurateurs will serve what people are willing to pay for. Meaning, menus will change and evolve, but there will always be a place for perennial favorites, no matter what goes on around them. Being in the restaurant business is after all being in business. Operators need to do things that keep customers coming back. 

So even if trendy new foods dominate conversations (as well as Instagram), there will always be a place on the menu for French Fries, burgers, and fried chicken. And thank goodness for that.

--Jessica Dunker

Chances low for “no tip” policy adoption at restaurants

Jessica Dunker is President/CEO of the Iowa Restaurant Association

To tip or not to tip? That is the question the U.S restaurant industry is wrestling with in a serious way — perhaps for the first time. The latest conversation has been spurred, in part, by high profile New York restaurateur Danny Meyer’s experiment with a no-tipping policy in one of his 13 fine dining restaurants, and his announcement that he intends to move the rest of his establishments in the same direction. 

A “no tip” hospitality culture has long been the norm in most of Europe—but are Americans ready for this shift? Research firm Technomic recently asked U.S. fine dining customers how they would feel about a “no tipping” restaurant experience – and the results were strangely ambivalent. In fact, 47 percent of the consumers surveyed said they would feel indifferent if their favorite full service restaurant did away with tipping.

Digging a little deeper, the study revealed that those who said they liked the idea of a no tip policy were motivated by a perplexing mix of seemingly generous and self-serving reasons. While 49 percent said they liked no tipping policies because they thought servers would get a better deal, one-third said they liked the idea of not tipping because they would no longer have to do the math to determine what the tip should be, 29 percent said they’d feel less pressure when paying, and 26 percent liked the idea that they might actually end up paying less with a no tip policy.

Those who said they didn’t like the idea of a no tip policy were equally mixed. 47 percent didn’t like the idea that they couldn’t reward great service and 20 percent didn’t like that they couldn’t punish poor service. Of those who thought the current system of customer determined tips is fine — 30 percent thought they’d end up paying more for the meal under no tip policies.

You can understand why current restaurant operators hesitate to rock the boat. What essentially equates to bi-polar consumer response to potential cultural change does not bode well for hospitality industry results.

Equity in wages within hospitality establishments is a huge issue for restaurant owners. The fact that the people preparing the food nearly always earn less than the people who serve it, is frustrating for employers.  

Those outside the industry often suggest employers leverage the current system by pooling and distributing tips across their entire team. The problem is that’s not legal.

Only those who are not in management and perform functions that theoretically “touch the table” are eligible to receive a portion of their wages in the form of gratuities. Tip pools, while legal, can only be distributed among servers, hostesses, food runners, bussers, bartenders, etc.

The only sure way for restaurants to guarantee equity and reward across functions is to move away from tipping and pay everyone an hourly wage (likely over the objections of most tipped employees who often make more per hour than their managers). For this to be economically feasible, most restaurants would have to raise prices anywhere from 15 to 25 percent.

Would consumers tolerate the menu sticker shock and keep the bottom line bill in mind?

Maybe.

But in an industry where margins and profits average 6 cents on the dollar, most operators can’t afford to deal in maybes. So the chances that we’ll see mass adoption of no tip policies anytime soon are pretty slim.

The restaurant industry offers careers, not place holders

If you ever find yourself frustrated in your career or worried about your job prospects, please try to resist uttering the words, “I could always go flip burgers.”

It implies that “burger flipping” aka “the restaurant industry” is a workplace of last resort. We’re not.  In fact, we are an industry loaded with opportunity for advancement, compensation based on performance, and entrepreneurship.

Today, one in ten Iowans work in Iowa’s restaurant industry. That’s 9 percent of the state’s work force (145,400 people).  There are more than 6,000 eating and drinking establishments generating $3.6 billion in annual revenue in Iowa. That doesn’t even take into account the industries built around providing goods and services to restaurants. Think of the financial impact food purveyors, soft drink and alcohol distributors, equipment manufacturers and other restaurant service providers have on the state’s economy.  It’s far reaching and financially significant.  

We’re proud of the fact that people can start out in entry-level positions and end up owners. One in three Iowans found their first job in a restaurant, but more significantly, 80 percent of restaurant owners started in entry-level positions within our industry. We’re one of the few industries where this trajectory of career growth is still possible. And while it’s true you can become an owner without an advanced degree, that’s not the only, or even the preferred path.

Iowa has eight college culinary/restaurant management programs and countless restaurant-focused career tech ed programs in high schools across the state. Just this month, the Iowa Restaurant Association along with DMACC Continuing Education, launched a Hospitality Professional Development Institute for those seeking industry-specific management, human resources and cost control training. Every restaurant in the state is required by law to have a certified food protection manager—a designation that requires a $150 full day course and a standardized exam.

Want sexy? There is an entire cable television network dedicated to our industry and a growing stable of celebrity chefs whom even elementary school children recognize.

We are also champions for diversity. The restaurant industry boasts more minority managers than any other industry and minority ownership figures are also high—particularly at a national level. Over the past several decades, there’s been an 80 percent increase in Hispanic-owned restaurant businesses, a 188 percent increase in African American-owned restaurant businesses, and a 50 percent increase in women-owned restaurants.  Nationally, 50 percent of all restaurant owners are women.  In fact, Iowa’s restaurant industry may well be the key to moving our state out of the basement of female-owned businesses (we currently rank 50th in the nation.)

I was recently discussing the perception that those of us in the restaurant industry “ended up here” versus “chose to be here” with a young man with an economics degree who left his traditional office job to return to a downtown Des Moines restaurant in a management role.

He explained to me, “I look out the window and think ‘I’m still doing all of the same business-focused work I did when I was stuck at a desk in one of those office buildings, but now I get to feed and entertain 300 people every day too.’ I like that.”

Most of us like it and we’re proud to be here.

So perhaps if you actually are frustrated with your career or worried about your job prospects, you should choose to join us—we’re not a place holder industry—we’re a world of opportunity.

--Jessica Dunker Career Fair Logo with Date and Location

Daily discounts no deal for restaurants

Like millions of people across the country, my morning routine includes a few moments perusing my laptop to see what “deals” await me in my inbox. With offers on everything from shoes and electronics to event tickets and restaurant discounts, retailers from across the globe are vying for my attention as I sip my morning cup-of-joe.

Jessica Dunker

I’m the first to admit, sometimes I take the bait. Who doesn’t want a great deal?

But as business owners, what are we saying about the value of our offerings if we continually cultivate a culture in which everything is “on sale” all of the time?

This new world of “all-the-time online discounts” has become especially precarious for restaurants.

Online discounters (e.g. Groupon and LivingSocial) sell printable certificates that consumers often equate with “gift certificates.” But gift certificates have true dollar-for-dollar value behind them. Daily deal certificates don’t and that can end badly.

As an example, a consumer might pay $25 for a $50 food and beverage certificate. The $25 paid is split evenly between the daily deal company and the restaurant. So when the consumer redeems the certificate, the restaurant provides $50 worth of food and drink for $12.50.

What’s worse, consumers who misunderstand how these work, or those who don’t read the fine print, might spend only $40 at the restaurant and walk away thinking they are generously leaving the remaining $10 as a tip for the wait staff. Those who spend over have been known to tip only on the additional cash outlay they made.

Think it doesn’t happen? Sadly, it does.

So why do restaurants (and other retailers) continue to put themselves and their staffs in these situations?

They feel like they have to. Consumers are making decisions about where to go using these discount tools.

Those promoting the daily deals approach will claim deal shoppers often spend more than the certificate value or that the deal will introduce new patrons to the establishment. Sometimes this is true, but more often than not the numbers don’t add up.

Even a great experience doesn’t necessarily produce return patronage.

In fact, I am convinced the vast majority of daily deal bargain shoppers are just that— daily deal bargain shoppers. The only place they return over and over is the daily deal website pages in search of a new deal. What’s more, most do everything possible to spend no more than their certificate amount. Their loyalties can easily be bought with a bigger, better discount.

When restaurants reach out to our organization for our thoughts on utilizing a daily deal program, we tell them if they are looking at these offers as pure marketing spends—much like advertising on the radio or placing a print advertisement—then they likely won’t be disappointed, they will get exposure. Our second suggestion is that they try a low dollar entry point (eg $5 for $10 of product) to ensure they don’t lose their shirts in product costs.

Everyone loves to get a great deal, but restaurants leveraging these tools need to take extra care to ensure they’re reaping a little bit of reward as well.

-Jessica Dunker

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