Why Restaurants Fail

Editor's note: In February 2004, we challenged the 90 percent first-year restaurant failure rate that was being passed off as "common knowledge" inside and outside the industry. We conducted our own research, which suggested that the first-year failure rate was closer to 25 percent. Not great, but not much different from the failure rate in any sector.

Happily, we learned that an Ohio State University study, spearheaded by H.G. Parsa, Ph.D., confirmed that figure. Parsa's landmark study, which was published in Cornell Quarterly (please follow this link to view the study in its entirety), did not only attempt to determine the restaurant failure rate, but identify the root causes. Seven years after that study was released, we talked to Parsa about the study, its "back story," and what he's learned since.

If nothing else, it is important for independent operators to evaluate the risk factors for restaurant failure in light of their own businesses, and correct problems before they become fatal.

Why do restaurants fail?

The answer -- answers -- aren't at all simple, and may just surprise you.

The reasons are many and varied and, in some cases, not the least bit obvious. While a lack of working capital is most people's first guess, underlying factors can and often do include anything from a lack of proper planning for slow times or retirement to unrealistic expectations, quality-of-life issues and even the inevitable passage of time.

It was nearly seven years ago that Dr. H.G. Parsa decided he wanted to know why.

"People always said that 90 percent of restaurants fail in their first year," says Parsa, a professor at the Rosen College of Hospitality Management at the University of Central Florida in Orlando. "Then in the late '90s the NBC television network broadcast a program titled 'Restaurant: A Reality Show," sponsored by American Express and starring chef Rocco DiSpirito [who, in a commercial that accompanied the show], said that 90 percent of restaurants fail in their first year. That puzzled me. I'd been in the restaurant industry for 15 years and I'd never seen anything like that. So I called American Express, and as you can expect I didn't get any answer. Instead, I got shifted around."