Expert answer:economic analysis problem
Answer & Explanation:Please read this PDFFirst, according to the article content raised three issues. (VERY IMPORTANT: There is no questions in this article! you need ask three questions which worth to be discussed)Second，answer three questions raised by your own (each question answered at least two sections, 150 characters)20150910220942restaurantsfail.pdf
20150910220942restaurantsfail.pdf
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© 2005 CORNELL UNIVERSITY
DOI: 10.1177/0010880405275598
Volume 46, Number 3 304-322
10.1177/0010880405275598
Why Restaurants Fail
by H. G. PARSA, JOHN T. SELF, DAVID NJITE, and TIFFANY KING
Past research on restaurant failures has focused
mostly on quantitative factors and bankruptcy rates.
This study explored restaurant ownership turnover
rates using qualitative data, longitudinal data (19961999), and data from Dun and Bradstreet reports. In
contrast to frequently repeated statistics, a relatively
modest 26.16 percent of independent restaurants
failed during the first year of operation. Results from
this study indicated marginal differences in restaurant
failures between franchise chains (57.2 percent) and
independent operators (61.4 percent). Restaurant
density and ownership turnover were strongly correlated (.9919). A qualitative analysis indicated that
effective management of family life cycle and qualityof-life issues is more important than previously
believed in the growth and development of a
restaurant.
Keywords: restaurant failure; dinner-house operation; entrepreneurship; restaurant
bankruptcy
I suffered from mission drift. When things didn’t work, I
would try something else, and eventually there was no “concept” anymore.
—A failed restaurateur
The restaurant industry and its analysts have long
pondered the enigmatic question of why restaurants
fail. Restaurant failures have been attributed to eco-
304
Cornell Hotel and Restaurant Administration Quarterly
nomic and social factors, to competition and legal
restrictions, and even to government intervention. In
the current complex environment of the restaurant
business, we believe that it is imperative that prospective and current owners understand why restaurants
fail (see Sidebar 1).
Most hospitality research has focused on the relative financial performance of existing restaurants
instead of examining the basic nature of restaurant failures, and most of these studies considered only bankruptcy reports.1 Most bankruptcy studies are limited in
their scope, however, because many restaurant closures result from change-of-ownership actions, rather
than bankruptcies. These change-of-ownership transactions are treated as legal matters instead of actual
bankruptcy procedures and may not be included in
public records. Furthermore, because the focus of academic research has remained primarily on bankruptcy
studies, the qualitative aspects of business failures
have received little attention. In writing this article, we
hope to determine the underlying factors that
determine the viability of a restaurant.
Types of Restaurant Failures
Restaurant failures can be studied from economic,
marketing, and managerial perspectives. Of these three
perspectives, we observe that restaurant failures have
been studied primarily from the economic perspective.2
AUGUST 2005
WHY RESTAURANTS FAIL
Economic perspective. This category
includes restaurants that failed for economic reasons such as decreased profits
from diminished revenues; depressed
profits resulting from poor controls; and
voluntary and involuntary bankruptcies,
involving foreclosures, takeover by creditors, receiverships, or frozen assets for
nonpayment of receipts.3
Marketing perspective. This category
consists of restaurants that cease to operate
at a specified location for marketing reasons, such as a deliberate strategic choice
of repositioning, adapting to changing
demographics, accommodating the unrealized demand for new services and products, market consolidation to gain market
share in selected regions, and realignment
of the product portfolio that requires
selected unit closures.4
Managerial perspective. This category
consists of restaurant failures that are the
result of managerial limitations and
incompetence. Examples of this group
include loss of motivation by owners;
management or owner burnout as a result
of stress arising from operational problems; issues and concerns of human
resources; changes in the personal life of
the manager or owner; changes in the
stages of the manager or owner’s personal
life cycle; and legal, technological, and
environmental changes that demand operational modifications.5
Definitions of
Restaurant Failure
Complicating the analysis, we could
find no universal definition of restaurant
failure, despite the fact that the way a business’s failure is defined can greatly alter
the failure rate. Studies that use a narrow
definition of failure, such as bankruptcy,
necessarily have the lowest failure rates,
AUGUST 2005
MANAGEMENT
The Myth of the Restaurant Failure Rate
In summer 2003, the NBC television network broadcast a program titled Restaurant: A Reality Show. Among other occurrences on this show, an advertisement by American Express
claimed, “90 percent of restaurants fail during the first year of
operation.” To verify the possibility of 90 percent first-year failure, we conducted several spreadsheet simulations. The simulations were based on assumptions that roughly parallel the
study in the accompanying article: fifteen hundred restaurants in the market; new-business failures during the first
year, 90 percent (the American Express figure); average industry turnover of 10 percent per year (similar to our study’s 1999
finding); number of new restaurants opening per year, 15 percent; and average market growth rate, 3 to 4 percent per year
(a national average as reported by the National Restaurant
Association). In the second series of simulations, we replaced
the 90 percent first-year failure rate with a 30 percent rate,
drawn from our study (see the accompanying exhibit).
Comparing those two calculations over a twenty-year period,
we concluded that if 90 percent of restaurants actually failed
during their first year of operation, we would see fewer restaurants at the end of each year, a finding that is contrary to the
observed reality in the restaurant industry. In addition, when
90 percent failure was inserted in the equation, simulations
indicated that, in twenty years, the market would shrink from
1,500 units to 254 units, or a loss of 84 percent of the existing
restaurants. Taking that simulation to its inevitable conclusion, no restaurants would remain in about ninety-four years.
These results are practically impossible under normal conditions and run contrary to the National Restaurant Association’s observed 3 to 4 percent growth rate (www.restaurant.
org).
On the other hand, the 30 percent failure rate resulted in the
market’s growing by 219 percent, to 3,287 units, a more realistic number. We conclude, therefore, that the reported 90 percent restaurant failure rate is a myth. These results are
strongly supported by the outcomes of economic data simulations reported by the Sydney and many other academic
research studies showing that restaurant failure during the
first year of operations is about 30.0 percent. Indeed, when
American Express was asked for its data, it stated in writing
that it could not provide data supporting the 90 percent failure
assertion it made.—H.G.P. and J.T.S.
Cornell Hotel and Restaurant Administration Quarterly
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WHY RESTAURANTS FAIL
SIDEBAR 1 EXHIBIT
Restaurant Failure Simulation: 90 Percent versus 30 Percent
Comparison of First Year Restaurant Failures:
Myth (90% ) Vs Reality (30%)
N
u
m
b
e
r
of
U
n
i
t
s
3500
3000
2500
Organizational Life Cycle
2000
As with all business organizations, restaurants follow certain stages in a life
cycle.7 At any point along these life-cycle
stages, a business can suffer setbacks catastrophic enough to lead to failure.
Throughout the life cycle, the first stages
are the most vulnerable, which is why the
highest proportion of businesses that close
are relatively new.8 This “liability of newness” has linked organizational adolescence to increased organizational mortality rates.9 One reason for early failure is
that new businesses typically have limited
resources that would allow them to be
flexible or adapt to changing conditions.10
Following that logic, it is believed that
the longer a company is in business, the
less likely it is to fail. Prior research has
found that as each year of survival goes by,
the failure rate is likely to go down, and by
the fourth, fifth, and sixth years, only a
modest, but steady, number fail each year.
After seven years, the propensity for failure drops dramatically.11
1500
1000
500
0
1 2 3 4 5 6 7 8 9 1011121314151617181920
Number of Years
30% First Year Restaurant Failure Rate
90% First Year Restaurant Failure Rate
Note: The figure shows the number of restaurants in a hypothetical market under the assumption that 90 percent fail in the first year (bottom line) or that 30 percent fail in the first year (top line). Other assumptions
reflect national averages and findings of the accompanying study, as follows: average annual industry turnover, 10 percent per year; number of new restaurants opening, 15 percent per year; and average market
growth rate, 3 to 4 percent per year.
while studies that use a broad definition,
such as change of ownership, show the
highest failure rates. The definition chosen is usually dictated by the data that the
researcher has available, with each definition subject to its own inherent advantages
and disadvantages.
Because no reports are required when a
business closes, gathering such data
involves subjective approaches. An
advantage of bankruptcy as the definition
of failure, for instance, is the relative ease
of obtaining data. The disadvantage of
bankruptcy data, however, is its narrow
nature. Restaurants that close for any other
reason would simply not be included—
even for a financial reason, such as failing
to achieve a reasonable income for its
owners or investors.6 On the other end of
the spectrum, the change-of-ownership
definition or “turnover rate” includes all
306
types of business closures. Consequently,
turnover rates are much higher than bankruptcy failure rates, regardless of whether
the turnover was due to the owner’s retirement or due to a change of ownership,
such as when a sole proprietorship adds a
partner.
Cornell Hotel and Restaurant Administration Quarterly
Competitive Environment
The environment in which the restaurant operates helps to determine its success or failure. Some attributes of the competitive environment that can influence a
restaurant’s failure are the business’s
physical location, its speed of growth, and
how it differentiates itself from other restaurants in the market. In addition to the
problem of having less cash to handle
AUGUST 2005
WHY RESTAURANTS FAIL
immediate situations, operators of new
restaurants are often unable to manage
rapid growth or changes, lack experience
in adapting to environmental turbulence,
and usually show inadequate planning.12
An additional failure factor for independent restaurateurs is the ability of chain restaurants, with their economies of scale, to
outspend the independents to gain greater
market share.
taurant row,” an operation could find itself
in a cluster of restaurants within which it
cannot compete effectively. In that regard,
a restaurant’s inability to differentiate
itself from its competition can be fatal.
The restaurant’s reaction to competitive
pressures from excess density depends in
part on the nature of its ownership.
Firm Size
External environments can change rapidly and companies may not be able to
change accordingly.19 Knowing the nature
of one’s market is of primary importance
to success. Many restaurants fail each year
from an inability to understand, adapt to,
or anticipate market trends, especially
given that some market trends are more
difficult to foresee than others. For
instance, many restaurateurs must have
been shocked by the wild popularity of the
Atkins-inspired low-carbohydrate diet,
followed almost as suddenly by its apparent abandonment by many customers. To
provide the products desired as market
preferences shift, operations must trust
and have working relationships with their
suppliers. Because the resources necessary for business survival come from the
external environment, this relationship is
important in explaining restaurant failure.
O’Neill and Duker found that governmentrelated policies affect business failures.20
Along that line, Edmunds pointed to the
heavy burden of taxation and regulation as
contributing to increased business-failure
rates.21
Jogaratnam, Tse, and Olsen suggested
that successful independent restaurant
owners must develop strategies that
enable them to continuously adapt to the
changing environment and find ways to
“link with, respond to, integrate with, or
exploit environmental opportunities.”22
Typically, external environmental factors
In addition to the age of the firm,
research has found a correlation between
size and survival. In this regard, the larger
firms are more likely to remain in business
than small operations.13 Richardson stated
that “both suppliers and bankers are prejudiced against smaller firms. They tend to
take longer to act against a slow-paying . . .
large enterprise than they do against a
smaller firm, because they equate bigness
with safety and security.”14 That said,
small firms tend to be positioned for
growth, but if that growth occurs too rapidly, a restaurant’s propensity to fail actually increases because of the ensuing
financial stresses. 1 5 These financial
stresses include a high cost of goods sold,
debt, and relatively small profit margins.16
Blue, Cheatham, and Rushing discussed
how, at each stage of expansion, there is
increased financial risk for a small operation, which increases the likelihood of
failure.17
Restaurant Density
A restaurant’s location in its market and
its ability to differentiate itself from its
competition also help determine whether
it will survive.18 While a restaurant can
benefit from close proximity to competition and restaurants are often located in
clusters to attract more traffic, as in a “res-
AUGUST 2005
MANAGEMENT
External Factors
Cornell Hotel and Restaurant Administration Quarterly
307
MANAGEMENT
WHY RESTAURANTS FAIL
affect a segment of the industry broadly,
rather than hit any single brand, for example, when a seafood shortage causes problems for all seafood restaurants or high
prices for beef hurt hamburger and steakhouse segments. Consequently, the rate of
restaurant ownership turnover may differ
across different restaurant segments.
Internal Factors
Management capabilities are of primary concern in preventing restaurant
failure. Haswell and Holmes reported
“managerial inadequacy, incompetence,
inefficiency, and inexperience to be a
consistent theme [in] explaining smallbusiness failures.”23 Poor management can
be connected to “poor financial conditions, inadequate accounting records, limited access to necessary information, and
lack of good managerial advice.”24 Other
internal factors affecting failure rates of
restaurants include poor product, internal
relationships, financial volatility, organizational culture, internal and external
marketing, and the physical structure and
organization of the business. Managers’
“inability to manage rapid growth and
change” can lead to business failure, concluded Hambrick and Crozier.25 Sharlit
wrote, “The root causes of many business
problems and failures lie in the executives’
own personality traits,”26 while Sull commented that managers may suffer from
“active inertia.”27
Makridakis believes that corporations
fail due to “organizational arteriosclerosis,” overutilization or underutilization of
new technology, poor judgment in risk
taking, overextending resources and capabilities, being overly optimistic, ignoring
or underestimating competition, being
preoccupied with the short term, believing
in quick fixes, relying on barriers to entry,
308
Cornell Hotel and Restaurant Administration Quarterly
28
and overreacting to problems. West and
Olsen determined five strategic factors
used to determine the grand strategy of a
firm. The management or owner’s strategic positioning has a strong influence on a
business’s success.29 In agreement, Lee
stated, “The most important criterion for
success . . . is management. Managers . . .
direct the marketing, oversee product
quality and standardization, and decide
when and how to adapt.”30
Studying Failure
We investigated restaurant failure using
qualitative and quantitative methods in
two independent steps. Step I consists of
findings from quantitative assessment of
restaurant failures using longitudinal
data from 1996 to 1999; step II reveals
findings from qualitative investigation of
managerial perceptions and views of
restaurateurs.
Step I: Quantitative
Investigation—A SuccessFilled Industry
Step I of our study involved the analysis
of restaurant ownership turnover data
from 1996 through 1999. The data were
collected with the help of the health
department of Columbus, Ohio, a major
metropolitan area in the Midwestern
United States.
Most of the earlier studies assessing restaurant failure have used either telephonedirectory business listings or bankruptcy
data. To overcome the incomplete nature
of data from bankruptcy filings and telephone directories, our study used data on
2,439 operating-license permits from the
Columbus health department. (We
removed from the data set the licenses for
other food-service facilities, such as
daycare centers, hospitals, and grocery
stores, to achieve our total N of 2,439.)
AUGUST 2005
WHY RESTAURANTS FAIL
MANAGEMENT
Exhibit 1:
Restaurant Ownership Turnover (ROT) in the Test Market, 1996-1999
Year
One
Year
Two
Year
Three
In
Business
Total
Total ROT
ROT percentage per year
Cumulative percentage
638
1,107
1,457
26.16
19.23
14.35
26.16
45.39
59.74
982
40.26
2,439
100
Number of independent
restaurants failed
ROT percentage
Cumulative percentage
408
27.51
27.51
699
19.62
47.13
910
14.23
61.36
573
38.64
1,483
100
Number of chain restaurants
failed
ROT percentage
Cumulative percentage
230
24.06
24.06
408
18.62
42.68
547
14.54
57.22
409
42.78
956
100
1.77
1.71
2.22
1.40
1.55
Ratio of independent to chain
restaurants
Not only must every restaurateur renew
the health permit annually, but any change
in the restaurant’s legal ownership
requires a new permit.
The health department ascribes to each
restaurant location a specific identification number. This ID is a permanent number that does not change with a change in
ownership. Similarly, each restaurant
owner has a specific identification number. A comparison of the ownership and
location ID numbers reveals any change in
restaurant ownership, as well as providing
information regarding multiple locations
operated by the same owner.
Diminishing Failure Levels
Restaurant ownership turnover rate was
calculated for one-, two- and three-year
periods from 1996 through 1999. Failure
AUGUST 2005
rates declined for each year, with the highest failure rate noted during the first year
(26.16 percent) followed by the second
(19.23 percent) and the third year (14.35
percent) (see Exhibits 1 and 2). Likewise,
the highest restaurant ownership turnover
occurred during the first year. These
results are consistent with several other
studies.31 In his 2004 study of 24,000 restaurants in the Los Angeles area, for
instance, John Self reported a first-year
failure rate of 24.3 percent and a threeyear cumulative rate of 50.9 percent for
1999 through 2002. 32
The three-year cumulative restaurantfailure rate for franchised chains was
57.22 percent, while it was 61.36 percent
for independent restaurants (Exhibit 3).
This difference is statistically significant
(p < .05). The failure rate is slightly higher
for independent restaurants (4.14 percent-
Cornell Hotel and Restaurant Administration Quarterly
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MANAGEMENT
WHY RESTAURANTS FAIL
Exhibit 2:
Restaurant Business Failures per Year, 1996-1999
30.00%
25.00%
20.00%
15.00%
10.00% ...
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