Given food is a fundamental requirement for all people – restaurants and other establishments that meet this basic need are always in demand. According to the National Restaurant Association (“NRA”) over 42,000 new restaurant licences are issued each year and every one of those should be armed with a restaurant business plan.
It is widely recognised that restaurants have the highest attrition rate of any business type. The attrition rates in the sector very wildly, ranging from 90% failing in the first year, to as low as 20% in the first year of trading. A recent academic survey conducted by researchers at Michigan State University found that 27% of start up’s failed in the first year; after three years 50% of those restaurants were no longer in business; after five years 60% had fallen away and before the end of the decade 70% of restaurants were no longer trading. While these may seem like scary statistics a subsequent study at Cornell University in 2005 revealed that 81.4% of small business failures result from factors within the owner’s control. In other words, despite these damning metrics, failure is by no means inevitable. So how can restaurateurs evade this landmine? Three words leap to mind, Restaurant Business Plan.
The Need For A Restaurant Business Plan
Every restaurant will require start up funding to get the operation off the ground. Whether that is a bank loan, a government grant or some form of equity funding, it is absolutely necessary to have a restaurant business plan. Funding is clearly an important hurdle, but the reason that the attrition rate is so high is because restaurant owner fail to plan in a sector that is characterised by:
- High Competition
- High elasticity of demand (it is a luxury item)
- Intensive marketing to maintain sales
- Acquiring the appropriate staff
- Low profit margins in the sector
- Working capital intensive
This list is by no means exhaustive but it does highlight numerous pressure points that can lead to a rapid failure if they are not addressed and managed appropriately. This makes the need for a detailed restaurant business plan absolutely pivotal. The list above also underscores the need for the restaurateur to be flexible in their strategic approach to ensure they stay ahead of the curve. A restaurant business plan is not merely a static document to obtain funding, it should evolve with the business and be continually amended to ensure the business strategy continues to be effective. If you remain static in the hospitality sector you are actually moving backwards. While this is true of many sectors it is particularly true in the restaurant business.