According to researchers at Cornell University and Michigan State University, 27% of restaurant startups fail during their first year.

50% of new restaurant startups fail during their first three years.

70% of all new restaurants no longer exist after ten years.

To read more about the restaurant failure rates go to:

http://www.restaurantowner.com/public/302.cfm

This month's issue of Restaurant Startup & Growth has the answer. If you own a restaurant and have been reading our newsletters, you have already decided to subscribe to Restaurant Startup & Growth magazine. More information on subscribing appears below.

Why do restaurants fail? If you know the answer, then you can avoid it. The answer comes from Dr. H.G. Parsa, PhD. and researcher. I know what you're thinking. Did this guy ever own or manage a restaurant? Actually, he is an industry veteran who had worked his way up from the bottom to management positions with companies like Pizza Hut, Wendy's and Denny's. He earned his Ph.D. in Marketing at Virginia Tech then taught at SUNY Buffalo for seven years.

According to Parsa, here are several factors that can lead restaurants to ruin:

Location. The number 1 reason that restaurants fail is location.

Now this is really interesting. The highest failure rate in restaurants come from restaurants located in high traffic downtown locations. These downtown locations have high real estate costs and labor is hard to find.

Rainy Days. People don't open up restaurants with enough capital to survive for three to six months of "slow days". It takes time before you build up your customer base. You need enough money to survive those slow days and build your business days.

I remember a nice donut shop opening in my local mall (The Palisades Mall). It opened up right next to Target. I've never seen a store open and close so fast. I saw them getting the store ready for about 90 days. Nice fixtures, great cash register system and lots of employee training. The store had its grand opening and closed down three days later. Open and gone in 72 hours.

Size. Size is a third fact causing restaurant failures. Dr. Parsa found that the highest rate of restaurant failure happens in the smallest restaurants, the moms and pops. Why? Small operations tend to carry with them relatively low entry and exit barriers. In other words, it's easier for people to get into the business and easier to get out.

Restaurants tend to have lower upfront investments than retail stores making it easier to start than many other types of retail stores requiring larger inventories.  Restaurants have higher variable costs than typical retail stores.

Quality of life. The fourth most common reason restaurants fail has to do with quality of life. "Many, many times restaurant owners quit because they can't take it anymore. They burn out."

Restaurants have high variable costs compared to retail stores. That means somebody has to closely watch what's happening. You need an owner or manager watching you store seven days a week.

Dr. Parsa brings up Dave Thomas, the founder of Wendy's. His daughter complained that she never saw her dad. He was always working and didn't even know where the kids went to school. People get married to their businesses instead of their spouses and many eventually burn out.

Retirement. Ill health leading to retirement is another major reason for a restaurant closing down. Restaurant owners don't live forever. At some point, they need to leave. Most owners don't have a transitional plan that passes on the restaurant to someone who could profitably manage it.

Taj Mahal syndrome. Dr. Parsa, who was born in India, coined the term Taj Mahal Syndrome. The Taj Mahal was built "not for a living person, but for a dead person. Nobody lived in that building."

"Restaurants are the same way," he says. "People want to build but that's it: they don't know what to do with it once it's built. Restaurant owners most of the time have a dream of opening a restaurant like the Taj Mahal, but they don't know how to do the next level, managing it and building it beyond. They thought that once they opened, things would happen automatically. They don't. They never realized it's more about what happens after a restaurant is built. Before is easy...It's what I call entrepreneurial incompetence. They are competent enough to come up with the idea, but totally incompetent when it comes to taking it to the next level."

Dr. Parsa gives another analogy. People who are dating always think in term of getting married and planning the wedding. They don't think about marriage after the wedding. People spend a fortune on their wedding without thinking about spending money on the marriage.

Time. Most restaurants have a 10 year life Period! American food habits change every 10 to 15 years. In the 19th century, the number 1 food item was steak. In the 1920s, it was the hog dog. In 1947 to 1955, the hot dog was replaced by the hamburger. By 1980, it was pizza.

People choose to dine in a given restaurant for three things (according to Parsa): The food, the ambience and the service. Service changes. Habits change. Technology changes. People start looking for other things to do.

Dr. Parsa suggests that menus should be updated every three months. Test new items and get rid of those items that are not selling.

You can read the entire article (and lots more) in the March, 2010 issue of Restaurant Startup & Growth available at Barnes and Noble (and other locations).

You can get three free issues of the magazine plus a free email subscription to Profit Tip of the Week at:

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You can download a prior version of Dr. Parsa's research by going to:

http://www.econ.ucsb.edu/~tedb/Courses/Ec1F07/restaurantsfail.pdf