What’s the Real Reason Most Restaurants Fail?

In the restaurant industry, success can be elusive. Here, stories from spots that didn’t make it, and the lessons learned.

Illustrations: Ashlee Fujimoto

 

Jill Owens seemed to have everything in place to open and run a successful restaurant in Hawai‘i.

 

She had the experience, having worked in both the kitchen and as management in restaurants for more than a decade, including Indigo, Ocean Club, the concessions at Aloha Stadium and Bistro on the Go. She had the training, honing her skills in culinary school. She had a strong business plan, a great concept and financial backing. And she had passion, that magical, intangible thing that turns the grueling job of running a business into something more meaningful.

 

In 2013, Owens signed a 10-year lease on a spacious 3,600-square-foot restaurant space on Beretania Street near UH and invested hundreds of thousands of dollars in renovations and upgrades. It had great parking, it was right in town. Everything was lined up.

 

And then Owens found out she was pregnant.

 

“Yeah,” Owens says. “It was bad timing.”

 

She was eight months pregnant when she opened Holoholo Bar & Grill that November. The restaurant had a simple mission: Serve tasty and affordable local-style food in a friendly atmosphere. It was a place you would meet your friends after work for draft Guinness and Portuguese corn-dog muffins, a place where your family would celebrate a birthday, a place to hang out and linger for hours.

 

“Everybody used to joke that it was like Cheers,” she says. “It was true: Everybody did know your name.”

 

A month after opening, she had an emergency C-section to deliver her daughter, La‘akea, then went back to work 10 days later.

 

Owens worked 80 hours a week at the restaurant, scheduling herself in the kitchen and on the floor. Revenue was steady, but it wasn’t keeping up with the rising cost of running a restaurant in Hawai‘i.

 

Finally, on Feb. 13, 2016, after two years in business, Owens made the heartbreaking decision to close.

 

“I was burned out, I’m still burned out,” she says. “I get offers all the time [to work], but I just don’t want to. I’m not ready.”

 

It’s a fact: Running a small business, let alone a restaurant, is tough. According to a national study done on failed restaurants by Cornell University in 2006—outdated but still useful—27 percent don’t make it past the first year, half fail in the second and 60 percent close after three. It may be even tougher in Hawai‘i, where costs are higher and competition is greater.

 

“Owning a restaurant is the ultimate dream occupation because it covers so many bases,” says Jo McGarry Curran, commercial real estate adviser and founder of MoJo, a consulting company that works specifically with restaurants. “Restaurants are social, they’re theatrical, they’re full of excitement, they’re expressions of not only food but what we believe in … But the problem is that people don’t get all of it, everything it takes.” 

 

In the past year alone, there have been several notable closures in Honolulu, including Hale Ōhuna in Kaimukī after three months and Kenny’s Restaurant in Kalihi after 49 years. Each one had different reasons for closing, ranging from lease issues to underperformance to owners who needed to deal with health or family issues.

 

The decision to close a restaurant is rarely an easy one. Restaurateurs have to consider everything—the financial investment, employees, the public response. And it can have a deeply personal effect for everyone, from owners to chefs to regular patrons who have come to love a particular dish, the friendly bartenders or a familiar atmosphere.

 

“It’s a volatile business,” says successful chef and restaurateur Alan Wong, who closed Amasia in the Grand Wailea on Maui two years ago after the hotel changed ownership. “When things are going great, it’s awesome. But when things are lean, it’s tough … You can’t just think, ‘If I build it, they will come.’”

 

ONE BAD DECISION

Closing for renovation led to Seed’s ultimate demise. photo: courtesy of bluewater mission

Sometimes it just takes one bad decision to break a restaurant, especially in the critical first two years.

 

Seed Restaurant opened in February 2014 in a small building in one of the municipal lots in Kaimukī, with truly noble intentions: It would be a way for Bluewater Mission to provide rehabilitative employment for people coming through the nondenominational church’s transitional homes for victims of human trafficking, homelessness and abuse. The goal was two-fold: provide them valuable workplace experience while raising money to further support the church’s outreach programs.

 

“We didn’t start out with much knowledge [of running a restaurant] but were willing to try,” says Jorden Seng, the church pastor.

 

The church did everything right: It hired consultants and restaurant professionals to provide guidance, developed a solid business plan complete with contingencies, had chefs review its food and menus, and provided training for its employees from various industry veterans.

 

“We were as thorough as we could be, under the circumstances,” Seng says.

 

From the moment it opened, the restaurant basked in positive press about its mission, and online reviews raved about the baked katsu chicken, veggie stir-fry and seared ‘ahi wrap. It wasn’t hard for the community to support a restaurant concept like this. The restaurant was turning 90 covers during dinner at its peak, with lines out the door.

 

“We had to alter our operations in the first months in order to accommodate unwieldy lines at the door for dinner and weekend breakfast,” Seng says.

 

Not surprisingly, he adds, the restaurant had challenges with the consistency of its employees, many of whom were living on the street, just out of prison or transitioning off drugs.

 

After about a year, the church decided to launch a crowd-sourced fundraising campaign to help with renovations. In three months, it raised about $170,000 to buy new equipment, paint and revamp the restaurant. The plan was to close the restaurant temporarily during renovations.

 

But unless you were on Seed’s email list or following the restaurant on Facebook, which wasn’t updated all that often then, you wouldn’t have known why it had closed during that time—or even that it had reopened three months later.

 

“We did our best to get people back in here. That was our inherent challenge,” says Ryland Young, who works at the church and served as assistant general manager of the restaurant. “We didn’t do a good job retaining the customers we had and getting them back to the restaurant.

 

 

By March 2016, the restaurant wasn’t generating enough revenue to keep up with expenses, and the church decided to close it.

 

“They made a classic, classic mistake,” Curran says. “They closed and nobody knew when it had reopened. They never advertised that they were reopened. Up until that point, they were doing something quite remarkable. They really put a lot of effort into the restaurant.”

 

But the church doesn’t consider the restaurant a total failure. It did make good on its mission to help others. 

 

“In the end, a large number of our employees were able to gather their lives together through Seed and graduated from our restaurant to other full-time jobs,” Seng says. “We saw individuals go from living or working on the street to living and working with dignity and freedom. So, that’s not bad! But we learned that a tremendous number of things have to go right, with the right timing, for a restaurant to succeed in Honolulu. And it’s tough for any employer to be generous and just when the business environment is so hard.”

 

WAIT—WHAT?

 

Restaurant closures can happen quickly—so quickly that sometimes chefs and partners aren’t aware of what’s going on.

 

Back in January, Kawehi Haug found out from her neighbor that the restaurant she co-owned, Bethel Street Tap Room, in Chinatown, was closing.

 

She was blindsided.

 

“We were forced to close our doors … because we are apparently tangled up in a legal lease battle between the primary leaseholder of the space and the landlord,” she posted on the restaurant’s website. “And, as subletters, we have no recourse. We are as shocked by the closure as anyone else.”

 

Everything—the liquor, the wine glasses, Haug’s laptop—is still locked up in the restaurant.

 

“Honestly, we’re super bummed out and really angry,” Haug said just after her restaurant was shut down. “We literally invested our life savings, time and energy into making our bar-bakery concept work, and it was working! We were turning a profit in our 11^th month of business, which is phenomenal for a food business of that size. It feels like a huge loss.”

 

Bethel Street Tap Room—which garnered a very loyal following for its house-made pickles, hefty hoagies, Nitro coffee and very relaxed atmosphere—opened in 2014, with Haug’s popular cupcake business, Let Them Eat Cupcakes, occupying a corner.

 

When the bar closed, Haug put on her apron and got back to work, reopening her bakery in its former space, which was primarily used for production, and expanding the menu to include éclairs, marshmallows and gluten-free baked goods. In April, Haug brought back the Nitro coffee and started working on new bench seating inside the small space, so customers could sit and relax. The closure of Bethel Street Tap Room was a huge setback, but Haug is moving forward, one buttercream-topped cupcake at a time.

 

“We’re still always hustling and working to grow our bakery business and hopefully expand to bigger and better projects,” she says.

 

Last December, another high-profile closure hit social media and shocked foodies and everyone who said, “Oh, man, eating there was on my list!”

 

After just three months, Hale Ōhuna, a craft cocktail and noodle bar run by chef Lee Anne Wong of Koko Head Café, closed its doors on Wai‘alae Avenue. There was no advance notice, just a sign on the door and a post on Instagram that read, “It is with the greatest regret that we close our doors permanently at Hale Ōhuna today.”

 

“The primary reason for closing was financial,” says part-owner Kevin Hanney, who also owns 12^th Ave Grill, a block away. After Hale Ōhuna’s closing, he remodeled its awkward, narrow space and in April opened Avenue’s Bar + Eatery, a neighborhood gastropub helmed by a new chef. “[Hale Ōhuna] was an ambitious project with delicious and beautiful food and a great bar program, but it just did not catch on as hoped.”

 

Compare the two. Hale Ōhuna boasted a sophisticated menu, much of it locally sourced, with carefully crafted cocktails, elaborately plated dishes and luxurious bowls of noodles with ingredients you don’t often see on restaurant menus, such as pa‘i‘ai, ‘ulu poi and wakame. Wong’s noodle dishes were bold and flavorful—and cost upward of $18, which challenged the cheap-noodle culture in Hawai‘i. Avenue’s, on the other hand, has broad appeal, with feel-good menu items that include ‘ahi melts and buttermilk-battered Jidori chicken with a bacon-and-corn gravy, a solid bar and accessible prices.

 

“I think what people want is a very casual, very affordable place, a neighborhood watering-hole-type of place,” Hanney says. “Selling noodles is like trying to sell ice to Eskimos. People don’t want to pay $16 to $20 for a bowl of noodles, even if it’s full of local ingredients.”

 

 

He pointed to the narrow space as one reason Hale Ōhuna, with its pricier dishes, may have not worked.

 

“The biggest challenge is this narrow space,” he says, pointing to the downstairs dining area of the awkward, bi-level space. “If you have people sitting here, you’d have to squeeze to get past. So it has to be a very casual concept. People have to be having fun, so they’re not bothered by getting bumped. You can’t be serving $50 food here. If this space was four feet wider, it would be a whole different story.”

 

Bethel Street Tap Room and Hale Ōhuna closed for different reasons: the former because of lease disputes, the latter because of low sales (it opened in September, one of the slowest times of the year for restaurants). But they both had great concepts executed by passionate restaurant veterans. Sadly, sometimes that isn’t enough.

 

“There’s such a combination of things that go into running a restaurant that people don’t understand,” Curran says. “You might understand that it’s a lot of work, but you don’t understand the costing and pricing. Or you might be really great with numbers, but like Jill, you get pregnant. It happens. There’s so much to consider, and that’s what makes it so challenging. Running a restaurant is multifaceted. It’s not like opening up a shoe store because you’re passionate about shoes.”

 

WHEN IT DOES WORK

Dishes from Hale Ōhuna. 

Photos: Steve Czerniak 

 

But even as some restaurants fail, thousands more are still in business—and thriving.

 

In some cases, it’s hard to understand why.

 

“I think anybody who drives down Wai‘alae Avenue every day has to always marvel at the success of W&M [Bar-B-Q Burgers],” Curran says. “Who would have ever thought you could open up a little place like that and people are reversing in and out of your parking lot? It’s a whole culture on just how to park there! I love it.”

 

In real estate, location is everything. And that’s true for restaurants, too. But there are lots of examples of restaurants that have thrived despite seemingly challenging storefronts.

 

The Pig & The Lady is one such example, says Curran, who worked with the Le family to open the restaurant in Chinatown.

 

“We essentially put them in a very dark space that people had been walking past every day for years and nobody even saw it as a restaurant space,” she says. “But we knew it would draw people wherever it was. We could’ve put them on the top of the Occidental Building with no parking and people were going to come. Sometimes it’s not so much location as it is who you are and what you’re doing.”

 

Wong admits his friends thought he was crazy to open a restaurant on the third floor of an office building with no parking and no ocean view. But, in 1995, he opened the 88-seat Alan Wong’s Honolulu to rave reviews, earning the prestigious James Beard Award the following year. Now, his restaurant averages 175 covers a night.

 

Before he opened it, though, Wong did a lot of planning. He estimated the average check, including beverages, would be $38 (about $60 in 2016 dollars)—a very conservative figure for a fine-dining restaurant.

 

“We wanted to be conservative because we wanted to exceed the expectation, so we set it low,” he explains. “We were under no illusions of making plenny money.”

 

Setting reasonable expectations while planning for slumps in business is important for any restaurant, Wong says.

 

“You have to plan for the what-ifs and the just-in-cases,” he says. “Sometimes good restaurants have a great concept but not enough money or resources to make it work. And then you gotta pull the plug.”

 

Wong suggests that anyone who’s considering opening a restaurant—or even expanding an existing one—seek help and guidance. You need to know the costs, the problems that may arise that you aren’t considering.

 

“One misconception is that, when you have a full restaurant, you must be a millionaire,” Wong says. “When, actually, in restaurants, it’s very, very hard to make a profit.”

 

Despite enjoying some much-needed time off—and spending much of it with her 2-year-old daughter—Owens hasn’t ruled out starting another restaurant in the future. That despite still paying rent for a space she’s not using and knowing she’ll never recoup her financial losses.

 

“Would I do it again?” she asks herself, staring off in the distance, her mind already envisioning a quainter space, a smaller menu, a more focused plan. “Maybe. But it’s a very small maybe.”

 

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So You Wanna Open a Restaurant…

Jo Mcgarry Curran.  Photo: courtesy of jo mcgarry curran

A lot of people daydream about starting their own restaurant—maybe a cute brunch spot, a burger joint or a neighborhood wine bar. Well, turns out the path to restaurant success is tougher than you might think. We asked restaurant consultant/foodie Jo McGarry Curran for tips on how to avoid disaster.

 

don’t freak out

Find your identity and stick with it. If sales are slow on your American Bistro lunches, resist the temptation to add chicken curry or pad thai as specials. Confused menus are the last bastion of a restaurant struggling to find its way—and the first sign that things are not going well. 

 

no vacations?

If there’s one thing that’s certain in the restaurant business, it’s that you’ll be working when everyone else is enjoying a day off. Think of all the family holidays you enjoy now, and then imagine heading to work on each one of them from the day you open up.

 

Good Food Isn’t Enough

It’s important for a restaurant to serve good food, but business smarts are also essential: A strong lease can be the difference between success and failure. Compounded base rents can become unrealistic over just five years, so read the details carefully and do the math first. Also, consider how long the term of the lease should be. A longer lease is often the smarter way to go, as long as the rent increases are stable. Figure in the cost of starting your business versus the amount of rent you’ll pay over the period of the lease, and then calculate the potential returns.  

 

the fine print can kill you

Check out the clause that mentions “additional charges,” and really understand what they mean. Some common area maintenance fees are almost as high as the base rent and if the building needs a new roof, it’s likely a share of the costs will be passed onto the tenants. 

 

know where the exits are

When opening a restaurant, selling is the last thing you think about, but it’s an important detail. Before investing your life savings, think about how you’ll get out of the business, if the time comes. Some landlords will ask for a percentage of any premium you realize if you sell your business, and it’s important to be realistic about how drastically depreciation can hit.

 

READ MORE STORIES BY CATHERINE TOTH FOX