Restaurant Failure Rate Much Lower Than Commonly Assumed, Study Finds
COLUMBUS, Ohio – The common business wisdom is that restaurants fail at an alarmingly high rate – maybe as high as 90 to 95 percent in the first year.
In fact, the alleged 90 percent failure rate was repeated during each episode of the recent NBC reality show “The Restaurant.”H.G. Parsa
But new research suggests the actual numbers may not be nearly so grim. A longitudinal study of restaurants in Columbus, Ohio found the failure rate for restaurants was 57 to 61 percent for a three year period (1996-1999) – still high, but much more in line with other businesses, said H.G. Parsa, author of the study and associate professor of hospitality management at Ohio State University.
Moreover, his review of other published studies also suggest failure rates of restaurants to be closer to 60 percent or less after three to five years, and nowhere near to 90 percent.
“The 90 percent figure seems to be a myth, a myth that is harmful to the restaurant industry,” Parsa said.
Many restaurants close not because they couldn’t succeed financially, but because of personal reasons involving the owner or owners.
“If lenders believe this myth, it makes it difficult for serious entrepreneurs to get funding to open a new restaurant or makes them pay higher interest rates.”
Parsa presented his study last month in Palm Springs, CA at the annual meeting of International CHRIE, the International Council on Hotel, Restaurant, and Institutional Education.
In his study of Columbus restaurants, Parsa used data from the local health department representing more than 2,439 restaurants operating in the city. He calculated failure rate for the restaurants for a three-year period, 1996-1999.
The highest failure rate was noted during the first year when about 26 percent of the restaurants failed. About 19 percent failed in the second year and 14 percent in the third year. Cumulative failure rate for the three-year period (1996-99) was 59 percent.
Among franchised chains, the failure rate was 57 percent over the three years and among independent restaurants, the rate was 4 percent higher – 61 percent.
Parsa said health department data is more reliable than data used in many other studies. Many studies examine only restaurants listed in the Yellow Pages, which doesn’t include all that operate in a given market. Also, many studies define failure as those that file for bankruptcy, which would not include restaurants that close for non-financial reasons (such as an owner who no longer wants to run the business).
In fact, many restaurants close not because they couldn’t succeed financially, but because of personal reasons involving the owner or owners. Parsa interviewed restaurant owners in Columbus as part of his study to find out why some closed and others remained open.
“Many of the failed restaurant owners attributed their failure partly to family issues such as divorce, poor health or simply a desire to retire,” Parsa said.
All mentioned the immense time commitments that a restaurant requires.
“The successful owners were either very good at balancing their family and work lives or single or divorced. The failed owners were no longer willing to make those familial sacrifices.”
With the number of restaurants that close because of non-financial reasons, Parsa said the percentage of restaurants that could succeed economically probably is even higher than what he found in his study.
Parsa said his review of other research on restaurant failure also found failure statistics to be well below the 90 percent level that was quoted on “The Restaurant.” The Dun & Bradstreet report, a well respected business journal, did a survey of business failures that suggests “eating and drinking” places have a failure rate of about 106 per 10,000 units, which is only 1.06 percent – however, it uses the conservative definition of failure, which only includes those that went bankrupt or closed with unpaid financial obligations. Dun and Bradstreet has published business failure records from 1920 through 1998, and ceased publication in 1998.
A 1991 study by hospitality professors at Michigan State and Cornell universities found a failure rate of 57 percent over three years and 70 percent after 10 years. Other studies have not shown restaurant failure rates any higher, Parsa said.
“After an extensive literature review on restaurant failures, I can find no evidence of a 90 percent failure rate anywhere,” Parsa said. “My own research also shows that the failure rate is only about 59 percent for a three-year period”
“Figures that are not based on verifiable research only serve to hurt the reputation of the restaurant industry and perpetuate the myth of a high level of restaurant failures.”