« Should public schools care about customer service? | Main | Avoid brain fatigue at your conferences »

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.

Comments

The comments to this entry are closed.

« Should public schools care about customer service? | Main | Avoid brain fatigue at your conferences »

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

This site is intended for informational and conversational purposes, not to provide specific legal, investment, or tax advice.  Articles and opinions posted here are those of the author(s). Links to and from other sites are for informational purposes and are not an endorsement by this site’s sponsor.