Thrillist editor Kevin Alexander wrote a brilliant three part series on what he has called “The American Restaurant Industry Bubble.” For each segment, he went over a few different causes of what we consider an overvaluation of the industry, including the rise (and cost demand) for artisanal foods, fluctuations in labor costs, and gentrification’s effect on rent. While the piece took an amazing approach for the industry to take a step back and examine the bigger picture, most local restaurants are still susceptible to the same economic conditions as always.
Now, you may be thinking, “Well, that Thai place down the block just closed, maybe he’s right.” However, that’s not an accurate cursor of the entire industry. Individuals are eating out more than ever and the service industry is still one of the largest workforces we have. Yes, while current trends are pointing the other direction, it still begs the question: Why are some of our favorite local spots closing?
While we’ll go into more detail later on why independent restaurants are closing at a slightly higher rate than before, we can confidently say that, overall, the restaurant industry is still in a great position to succeed. As history has shown us, people have been serving food since the days of pub houses, and there’s no better time than right now to continue on that tradition.
It’s true that independent restaurants and chains have been shutting their doors more frequently than before, but this isn’t anything new. Restaurants in a local area have always had somewhat of a ‘revolving door’ system; when one closes down, another one is ready to take its place.
Even with the decline of independent restaurants, chain restaurants have actually been on the rise, especially when it comes to franchises growing.
Finally, people (especially millennials) are going out to eat more than ever before, and this trend isn’t going away anytime soon. In fact, according to The National Restaurant Association, restaurant sales increased 36% between 2010 to now. Additionally, the service industry is still one of the largest we have, comprising of approximately 10% of the current national workforce.
Reasons for Failure
As Kevin notes in the article, there are real dangers in the reasons why a lot of great restaurants fail, including skyrocketing rent costs, too high of food costs per demand, and lack of skilled labor willing to work their way up. However, while these factors have been on the rise due to structural issues within the industry, most restaurants fail for the same reasons they always have. These simple and un-alarming reasons include poor management or business practices, terrible customer service, awful tasting food, bad location, and an unclear concept/idea.
It’s important to note that these factors have less to do with the current climate of the industry or economic conditions, and more to do with a lack of preparation or experience. Quite simply, (and as hard as some people may find it to believe) not all restaurants are run or started by people with restaurant experience. However, that trend might be changing quicker than we think.
As we stated above, restaurants close and open all the time, which is great for the savvy owner. By buying into spots where restaurants were previously located, owners can save tremendously on start-ups costs. This is due to some equipment being considered as a part of the property (I.E. a walk-in fridge comes with the cost of the building). Many restaurateurs are also willing to sell off their equipment in a bulk package with the purchase of the building.
Finally, with the amount of turnover present in the restaurant industry, lenders have started to gravitate towards chefs and previous owners that provide stability and reputation. Peer-to-peer lending as well as angel investing networks have bloomed, giving seasoned restaurateurs plenty of financial resources right at their fingertips.
One thing is clear: restaurants are here to stay. Surviving may be difficult, but you will have a strong foundation of future success for years to come.
While the restaurant industry remains a great opportunity for savvy entrepreneurs, all new restaurant ventures require some up-front investments to create the best possible culinary experience. If you’re unclear on how to finance up-front costs like equipment, human resources, and mortgage, contact the Currency Capital team for guidance.