The Real Restaurant Failure Rate Is Lower Than You Think (2024 Data)

You've probably heard the crazy restaurant trend that 90% of restaurants fail within the first five years of operations. Well, it’s not true.

Apparently, this number was originally shared on a TV advertisement with no source listed—and the myth grew from there. And to be honest, that bothers me!

As CEO of Owner.com, I get to personally meet hundreds of successful restaurant owners. They’ll be the first to tell you that this is a tough business. But it’s a very rewarding one, too. And if we go around telling people 90% of restaurants fail, we’ll see far fewer new restaurants started.

So let’s set the record straight! Time for us to play “Math vs. Myth” and get the actual data:

What’s the real restaurant failure rate?

Only 17% of restaurants fail in their first year. And around 51% of restaurants survive past their 5th year in business.

Here’s a chart of the data:

So, how did I find the real data to answer this question?

I called the U.S. Bureau of Labor Statistics (BLS). That’s the federal agency that keeps close tabs on labor and business performance in the United States—including business failure rates for every industry.

Here’s what they told me: A member of their team worked with a professor from the University of California, Berkeley on a research paper called, Restaurant Mortality in the Western US. You can read that paper here. With this data, we can finally know what the restaurant failure rate is in America:

In stark contrast to the commonly cited statistic that 90 percent of restaurants fail in their first year, only about 17 percent of restaurants failed in the first year—lower than the average first-year failure rate of 19 percent for all other service-providing businesses.

Restaurants actually have a better survival rate than other service-based businesses. And even when you compare restaurants to all private businesses in the US, the numbers still look pretty good.

Of course, this doesn’t mean restaurants are an easy business. But they’re important parts of our communities and a path toward business ownership for so many people.

And so we shouldn’t discourage people from starting them. Especially with bad data!

So, why do restaurants end up failing?

The other week, I was at a major restaurant trade show.

A restaurant owner came up to me at our booth, pulled me aside, and said he was about to invest over $300,000 in opening his new pizza concept. He wanted to know if I had any advice.

Specifically, he asked: “What mistakes should I look out for? What are the most common reasons why restaurants fail?”

Before I could get into the reasons I'd seen in my time running Owner, he said, “Skip the obvious stuff, Adam! I know about location and good food. What reasons might not be obvious to anyone not in the restaurant industry?”

I loved that!

I knew I had to share this...

Over the past five years, Owner.com has been used by restaurants across the country selling every type of cuisine. I’ve seen the numbers behind thousands of restaurants.

And I've seen firsthand why restaurants fail.

I started telling this owner what I’d seen. He pulled out his notepad and started taking very careful notes. I knew whatever I shared here I had to make available to restaurant owners later on. Because I want more restaurants to succeed.

So let’s do this. Here are the five non-obvious mistakes that cause restaurants to fail.

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5 non-obvious reasons why restaurants fail

Luckily, if you know these ahead of time, I’ve seen that you can plan around them. And, in many cases, avoid these issues altogether.

Reason #1 – They fail to find menu-market fit

Menu-market fit means how well your menu fits the demands of your local market. Both parts of this equation matter.

A good restaurant can fail in the wrong market. You must meet the needs of the market you’re in. Preferably, an unmet need. Otherwise, it’s like trying to sell water to a well!

Market research can save you a lot of heartache here. And while it may seem complicated, we can do simple market research ourselves.

🎯 What to do:

1. Check Google for unmet demand

When I go to Google and search for food, it’s usually because I don’t have a place I already love. If I did, I’d just go to them directly. That makes Google a great tool to check for general demand and also unmet demand in your area.

Here are the steps I take:

1. Head over to the Google Keyword Planner tool (which is free)
2. Type in terms that are related to your concept. I recommend checking both the concept and popular cuisine types. For example, “Mexican restaurant” or “best enchiladas” and then select the city I’m in.
3. Then, see how many competitors sell something similar. And be sure to check their reviews.

It’s a good sign when the Search Volume to Restaurant ratio is off balance. That’s when lots of people are searching for a specific cuisine type, but there are few competitors with great menus.

This means there is clear unmet demand. You’ll have to gauge the competition yourself, so let’s cover that next. 

2. Check competitors for market pain

Guests have no problem leaving critical feedback. So their reviews may show where local competition has left potential market gaps open.

Here’s where I find the 4Ps of marketing really useful. And there’s no need to break out the old college textbook! Just look at reviews for competitors and place orders with all of them. Then make notes in each of the four categories:

• Product: How’s the quality of available options? Do customers only like specific dishes? Is there a lack of a great option for a popular dish?
• Place: What does their location look like? How convenient is it to get there? Do they offer online ordering, or is takeout available?
• Price: Does the price match food quality? Do customers bring up the price a lot? Do the prices fit the local market?
• Promotion: Do customers mention how they found the restaurant? Is this place involved in any community events?

Reason #2 – They fail to build a clear and distinct brand

Brand is the set of expectations people have when they think about your restaurant. When someone walks in your door, places an order, or tells a friend, “brand” is whatever they think of first.

The best restaurant brands are focused. I’ve seen the same problem happen time and time again; unfocused brands make everything about running a restaurant harder. Specifically, these issues:

• You aren’t known for anything. Great restaurants stick out in customer’s minds for specific reasons. “Oh, you have to go there. The food and atmosphere is perfect to start a night out!” The worst thing that can happen is your restaurant falls in the messy middle with everyone else. 
• Your menu gets out of control. Some of the most successful restaurants I’ve seen have slim menus. Bloated menus make it hard to be great at any single cuisine. But they also make food storage, training cooks and staff, and pricing your menu much more complicated.

The solution to this isn’t to redo your logo—at least not yet. It’s much better to start with an ideal customer and then reach them with a brand that fits them.

🎯 What to do:

1. Choose your ideal customer

Your ideal customer is who your restaurant and menu feel perfect for. To increase your chances of success, shape your ideal customer on the evidence you’ve already seen:

• Based on what you know about your market (see above)
• Based on a real customer who has spent an outsized amount at your restaurant

Talkin’ Tacos understood this from the beginning. Centered in Miami, they’re surrounded by a young, vibrant crowd. So their brand meets the expectations of that type of customer with vivid colors, bold Mexican art, and trendy dishes—including birria tacos and even birria ramen! They’re able to build a great brand because they know who they appeal to.

2. Shape your brand to match your customer

Once you know what sort of customer you want, shaping your brand starts to feel like a puzzle. And that’s much better than a completely blank page.

Shaping your brand mostly comes down to what you sell, what you say, and how you serve customers. When these are all working together, your brand becomes clear to customers.

Metro Pizza is an excellent example. They're one of the top 20 highest-volume pizzerias in the entire country. They pride themselves on being the neighborhood pizzeria for the suburbs of Las Vegas, for families and older residents. As a result, their brand is comforting, authentic, homey, and convenient. And everything about their brand tells that story and sets those expectations.

Reason #3 – They don’t control their margins

The business that can spend the most to acquire each customer usually wins in the long run. That’s why margins matter—you have to make money on dishes even after service and marketing expenses.

The thing is, lowering quality to lower restaurant costs rarely works. If anything, guests will put up with a lot as long as the food is amazing. So we have to improve our margins in other ways:

🎯 What to do:

1. First, know your profit margins

We know restaurant profit margins are slim. But we can’t improve our profit margins until we know exactly what our profit margins are. That way, we can closely track if our efforts are having an impact over time.

There are actually two types of profit margins you should track. Here’s a quick explanation of each:

Gross Profit Margin: 

• Focuses on revenue vs. the cost of the food you sell.
• Subtract the cost of goods sold (COGS) from your total revenue, and then divide that number by your total revenue.
• Useful for: Setting menu pricing and monitoring inventory management.

Net Profit Margin: 

• Takes all expenses into account; not just food costs
• Subtract all your operating expenses from your total revenue, then divide that number by your total revenue.
• Operating expenses should include labor costs, marketing expenses, rent, and any other expenses that go into your business’s operating costs.‍
• Useful for: Identifying cost leaks and tracking your restaurant’s financial health.

2. Earn more direct orders

Truthfully, it’s hard to influence profit margins. But one of the most universal ways to do it is to earn more direct online orders vs. orders coming in from third-party apps.

DoorDash charges restaurants 30% commissions on many orders. Uber Eats and ChowNow aren’t much better. So the more orders we can move over to our website or branded mobile app, the fewer fees we’ll pay. That’s an instant boost to our margins.

3. Upsell to increase check size

As a general rule, restaurants should charge 3x times the food cost of the dish to help increase check size. But if we triple the price of say, chicken parm, it could get wildly expensive. Instead, we’ll set a price on the higher end. Then we’ll add complementary dishes to our menu—dishes designed to be upsold with the chicken parm, like garlic breadsticks.

These items are almost pure profit. So we’ll pair them with chicken parm on our online menu and train staff to suggest them when it’s ordered. This improves the profitability of the entire meal.

4. Keep menus focused

Super large menus only work for the Cheesecake Factory. For small independent restaurants, they become deadly. Spoilage becomes an issue, which drives food costs up.

Quality control ends up slipping because it’s too confusing for the kitchen to master 40 different dishes. If you have a simple menu like Chick-fil-A, it makes your operations 10x easier. You don't need to have dozens of menu items—which reduces spoilage and keeps food costs down overall.

Reason #4 – They fail to get repeat customers

Data shows regulars can make up to 65-80% of a typical restaurant’s profits. Unless you’re in a tourist area, regulars really matter.

It’s also true that it’s a noisy world out there. Sometimes customers don’t return just because they got busy. That’s why the most successful restaurants I know work hard to stay top of mind with their guests. 

Fortunately, that’s not so hard to do with the right tools and tactics:

🎯 What to do:

1. Make sure to capture customer data

The first step makes all the others possible! It’s simple: If you collect customer data at checkout, you’ll be able to reach customers later.

Email and phone numbers are what matter most. These are a direct line to your customers that aren’t affected by an algorithm. They’re marketing channels you control.

With Owner.com, this is turned on by default. You may have to work with your web developer to capture this information if you’re on another platform.

2. Set up automatic campaigns

Every point where a customer makes a decision about your restaurant is part of the “customer lifecycle.” Personally, I prefer to focus on the key moments.

These are the few moments that really matter. At each moment, you can send an automated message to influence a customer’s next move in your favor.

Not sure where to start? These are two of the most profitable campaigns I know to send during a key customer moment:

Days after a guest’s first order: Owner’s “You might also like…” template is one of my favorites. Rahul from Saffron Indian Kitchen sends a great one. After a customer’s first online order, Rahul uses Owner to automatically send customers recommendations by email, all based on what they ordered. Rahul earned $4,000 in repeat orders just 30 days after setting these emails live.

When guests start slipping away. Phillip, the founder of Sushi Me Rollin’, sends an awesome “win-back” campaign. He uses Owner to message customers who’ve ordered over 3 times, but who haven't ordered in 45 days. These emails/texts share a customer’s past orders and offer a special discount to reorder. This campaign worked right away—Phillip quickly saw $1,500 in new orders per month.

3. Make it easy to reorder with a mobile app

Regulars really like the convenience of mobile apps—they can order “the usual” in just a few taps. Or grab a quick impulse snack from their phone.

At Owner, we’ve built thousands of custom restaurant mobile apps. And our data proves they work:

• Restaurants with apps get 85% more return customers than restaurants without an app.
• Regulars who use a restaurant’s app order 2x more on average than non-app customers.

There’s another benefit: Apps save your business thousands in third-party fees. That’s because frequent regulars are now ordering from you instead of DoorDash or Uber Eats.

4. Offer a rewards program to return

‍Restaurant loyalty programs are effective because they “gamify” the act of reordering. This is really just a phrase psychologists use to say, “People like completing things when they (a) have a clear goal and (b) can see their progress.”

Loyalty programs give guests both of these things. We’ve seen that when you apply the next two techniques, your loyalty program is almost sure to increase order frequency and average order size:

• Use points-based rewards. If you hand customers a blanket $10 reward, they’ll probably use it right away and likely on a high-ticket item. With points, customers are more inclined to order more in order to reach the next milestone. And, you can select the rewards that work best with your current margins. Which brings us to...
• Reward guests with low-ticket items. It’s smart to limit your rewards to menu items that complement main dishes and already have high margins. This way, the customer still feels great. But you don’t eat into the margins for your higher-ticket items—like meat-based dishes.

Reason #5 – They ruin first impressions with a bad online experience

Can a bad website and online ordering really sink your restaurant?

If you offer delivery or takeout? Absolutely. A study on Restaurant Dive found that 77% of diners visit a restaurant’s website before they decide to order takeout from a restaurant. 

Your website is your restaurant’s first impression. Especially for delivery and takeout orders.

Fortunately, there’s good news. Through my product, Owner.com, I’ve seen the data for thousands of restaurant websites. And I’ve seen one winning formula work extremely well regardless of restaurant type:

🎯 What to do:

1. Nail the first impression with your homepage

Our first priority is to leave a great initial impression. We have a few seconds to make this impression. That’s why I always encourage restaurant owners to nail these two things on their homepage:

• Clear headline up front. Guests make split decisions on the homepage. So let’s place a headline at the top that helps guests quickly understand what we specialize in. An example would be, “Our family's handmade recipes brought from Sicily, Italy to Lakeside, California.” 
• Highlight popular dishes. People eat with their eyes. We must catch their attention by pairing our words with a strong, mouth-watering visual. I like an overhead shot of popular dishes or even a single shot of our “signature” item.

I see restaurant website conversion rates consistently go from 2%–3% to over 15% by pairing this change with the one below. So keep reading!

2. Follow a proven formula for online ordering

A great first impression gets guests to stick around. Now we need to make placing an order simple and appealing enough to do.

We’ve tested this extensively at Owner. Here are 3 things your online ordering must have:

• Accelerated checkout. The time to finish an order matters a lot. But when I say “accelerated checkout,” I specifically mean checkout options like Apple Pay. Some guests love these options and will default to using them everywhere.
• Detailed photos. We already have our hero image at the top of the homepage. Now we need to make sure all of our menu items are paired with similarly great food photography. This helps catch and keep a guest’s interest when they’re browsing specific menu items.
• Social proof. A guest’s next question is, what do people in my community think of this place? That’s why, under the most popular dishes, I always recommend showcasing reviews and a star rating so guests can see your food has ‘wowed’ other diners.

We bake all of the above into Owner’s online ordering experience. It’s a huge reason why websites on Owner.com convert 2-4x better than average restaurant websites.

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