The foodservice industry has always been an attractive option for entrepreneurs who are looking to start a business. However, the harsh reality is that it is also considered one of the riskiest business ventures to be involved in.
Thankfully, it’s not all doom and gloom. In fact, success is entirely achievable when business owners take the time to understand the common risks and challenges associated with restaurant ownership, and devise appropriate fail-safes to ensure a favourable outcome.
Today, we explore 7 reasons why restaurants are considered a high-risk business venture, in a bid to help you navigate and overcome common industry-related challenges.
- Increased Risk Of Workplace Injury
Restaurants are known for being fast-paced and high-pressure environments, which unfortunately also makes them a high-risk workplace for injuries. Restaurant workers often work long and irregular hours, which can lead to fatigue and exhaustion. When workers are tired, they may be more likely to make mistakes or take shortcuts that can lead to injuries. Additionally, working in a restaurant often requires physical labour, including lifting heavy objects, standing for long periods of time, and repetitive motions such as chopping and stirring. These tasks can put a significant strain on the body, leading to a wide variety of injuries and accidents. While effective policies and safety equipment can make a world of difference, even the most vigilant business owners may not be able to identify and address every potential hazard.
To counteract these conditions, restaurant owners are encouraged to invest in public liability insurance to cover the cost of legal fees, compensation claims, and other expenses that may arise due to a workplace injury or accident. Without public liability insurance, restaurant owners would likely have to pay for these costs out of their own pocket, which can be financially devastating for their business.
- Higher Overhead Costs
One of the primary reasons why restaurants are considered a high-risk business venture is due to the high overhead costs associated with running one. Rent, utilities, equipment, salaries, and supplies all add up quickly, and many new restaurants struggle to break even, let alone turn a profit. Even established restaurants can find themselves in dire financial straits if they don’t manage their costs effectively.
High overhead costs are due in part to the nature of the hospitality and food industry where fresh ingredients are essential. As a result of disrupted supply chains, rising food costs and inflation, numerous restaurants have struggled to maintain profit margins, especially over the last 2-3 years. Consumers are also feeling the pinch of inflation, with many tightening their belts and reducing their out-of-home food consumption, thus further exacerbating the profit margin struggles that hospitality businesses face in 2023.
- Intense Competition
Another reason why restaurants are considered a high-risk business venture is because of the intense competition in the industry. There is certainly no shortage of restaurants globally, ranging from high-end establishments, casual cafes and multinational fast-food chains. This means that independent restaurants need to work extra hard to differentiate themselves from their competitors, further driving the need to offer unique dishes and dining experiences that will draw in customers.
Restaurants that fail to keep up with changing consumer preferences and trends are also likely to lose customers to competitors who offer more exciting and enticing dining experiences. With this in mind, it is imperative that entrepreneurs learn how to gain a competitive advantage in the restaurant business to ensure continued and long-term success.
- Strict & Changing Regulations
Another factor that must be considered is adhering to local industry standards and regulations. Let’s take the Australian hospitality industry as an example here. The restaurant industry in Australia is subject to a wide range of regulations, including food safety regulations, employment regulations, and licensing requirements. For example, restaurants that serve alcohol are required to hire employees with RSA training (or provide relevant training), to ensure staff understand their obligations in selling and providing alcohol responsibly.
These regulations can be challenging for new businesses to navigate, requiring significant investments in staff training, equipment, and facilities. And when regulations change or become stricter, restaurants must invest time and money to ensure compliance, which can be a significant financial burden, especially for small businesses. Unfortunately failure to comply with these regulations can result in severe penalties and even the closure of the business.
- High Staff Turnover
The restaurant industry is notorious for its high staff turnover rates. This can be attributed to several factors, including low wages, long working hours, and a lack of overall job security. Moreover, restaurant work can be stressful, with high-pressure situations and a fast-paced work environment that can be overwhelming for many staff, leading to burnout and a desire to leave the job.
It is no secret that high staff turnover can have a significant impact on the success of any business, let alone a restaurant, as it can result in decreased productivity, decreased morale, and increased training costs. To reduce turnover, restaurant owners may need to consider offering better pay and benefits, creating a more supportive work environment, and providing more opportunities for career growth and advancement.
- Poor Industry Talent Pool
Another major challenge that restaurants face and which contributes to its high-risk nature is a poor industry talent pool. The hospitality industry requires a range of skills, including customer service, communication, and problem-solving. However, there is currently a shortage of skilled workers in these areas, which can make it challenging for businesses to find the right people for the job.
Moreover, many jobs in the hospitality and restaurant industry require long and irregular working hours, including nights, weekends, and holidays. This can make it challenging for businesses to find workers who are willing to work these hours, especially when many other industries offer more attractive pay, benefits, and career advancement opportunities, making it difficult for the hospitality industry to compete for talent.
Luckily, all is not lost. Restaurant businesses can overcome these challenges and attract a strong talent pool by implementing strategies such as offering competitive salaries, benefits, and training and career advancement opportunities can help to attract and retain employees who are looking for long-term career growth. Creating a positive work environment can also help to attract and retain employees. This can include providing a safe and welcoming workplace, recognising and rewarding employee achievements, and promoting a culture of teamwork and collaboration.
- Seasonal Plunges
Finally, seasonality is another factor that can impact the profitability of restaurants and hospitality establishments. The harsh reality is that you can invest all your time and energy into developing a world-class menu and attracting customers with the best marketing campaign, but you can’t change nor control seasonality. During peak season, restaurants may be inundated with customers, but during the off-season, they may struggle to attract business. These off-seasons are also often referred to as seasonal plunges.
If a restaurant is heavily dependent on a particular season or holiday, its revenue may be more volatile. This can result in cash flow issues and difficulty covering fixed costs such as rent, utilities and staff salaries. Overall success will be dependent on how well a restaurant is able to adapt to changing demand and adjust their operations accordingly.
And there you have it — 7 reasons why restaurants are considered a high-risk business venture in 2023. At the end of the day, no business can avoid all risks and while starting a restaurant can be a challenging endeavour, those who are willing to invest the time and resources required to mitigate these challenges can be rewarded with a successful and profitable business in the long run.