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— Retail Properties Quarterly — September 2015
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SESSIONS GROUP
REAL ESTATE SERVICES
I
n a 2003 American Express
advertisement, celebrity chef
Rocco DiSpirito claimed that
nine out of 10 new restaurants
fail within the first year. Unfor-
tunately, that was not the first time
I had heard this ridiculous claim,
but coming from a celebrity chef,
and on national television, really?
Since 1994 I have been battling,
begging and even pandering to
lenders for funding for restaurant
projects, tenants and buyers. Then,
thanks to nationwide advertise-
ments like the one from American
Express, my job become even hard-
er. I always estimated the restau-
rant failure rate to be similar to the
retail failure rate in general. Slowly I
began educating lenders, at least the
few that would listen, about false
claims of high restaurant failure,
based on my professional experi-
ence and the very low failure rate of
our restaurant clients.
The “90 percent first-year fail-
ure rate” of restaurants already
had grown to mythic proportions,
though, and it was hard enough to
debunk the myth itself, let alone
American Express and chef DiSpiri-
to. Thankfully, I found an article
written by Jeff Grabmeier from Ohio
State University titled “Restaurant
Failure Rate Much Lower Than Com-
monly Assumed,” which referenced
research by Dr. H. G. Parsa. The
study focused on 2,439 restaurants
in Columbus, Ohio, using health
department data over a three-year
period (1996-1999). According to
Parsa’s research,
the highest failure
rate was in the first
year at 26 percent,
about 19 percent
failed in the sec-
ond year, and 14
percent in the
third year. Parsa’s
research showed
that the cumula-
tive failure rate
for the three-year
period was only 59
percent – a far cry from the 90 per-
cent first-year failure rate claimed
in the American Express advertise-
ment.
Parsa focused on health depart-
ment licenses that showed a change
of ownership, which, in my opinion,
is more accurate than other studies
that rely on bankruptcies or data-
base listings. However, a change
of ownership does not necessarily
mean the restaurant failed. Some
of the restaurants in this group sold
and continued to operate. Therefore,
using this data, the true failure rate
is considerably less.
It is important to note that res-
taurant failure rates vary by state
and by trade area for many rea-
sons. An article published in Cor-
nell Hospitality Quarterly, entitled
“Why Restaurants Fail? Part IV: The
Relationship between Restaurant
Failures and Demographic Factors,”
referenced more of Parsa’s research.
The study was conducted in Boul-
der from 2000 to 2010, and failure
rates were calculated for the first
few years. The data showed that the
first-year failure rate was 24.95 per-
cent.
So why is the legendary 90 per-
cent failure rate so easy to believe?
The answer is simple; think about
how you, as a consumer (not a
landlord, broker or lender), relate to
retail businesses in general. What
is important to you? What can you
live with and what can you live
without? Now try to remember how
many retail businesses have closed
in the last few years, specifically
how many restaurants have closed?
If you are like most people, you
remember more restaurants closing
than other businesses, so you rea-
son that the failure rate for restau-
rants must be higher.
This misconception is easy to
understand. Think about the last
restaurant that you remember
closing. Maybe you were going to
meet a friend for dinner and drinks
and discovered the restaurant you
chose was closed. What happens
next is very interesting, as you start
remembering all the reasons why
you liked that restaurant. Maybe
it was the amazing homemade
pasta, the cute bartender who made
a great martini, meeting a friend
for the very first time or maybe a
memorable date. You had a personal
connection to the restaurant and,
therefore, its closing becomes a
memorable event.
Now think about shopping for an
item, for example, a new pair of
shoes. Perhaps you have a favorite
store and you drive to your local
retail center and discover that the
store has gone out of business. You
can search for another location, or
maybe just glance across the park-
ing lot and see another shoe store.
Either way, your shoe problem is
solved and it is not a memorable
event.
Restaurants are a bigger part of
our lives. You probably can name all
the restaurants within walking dis-
tance from your office, but can you
name every retailer? When restau-
rants close it is big news and many
relate to it. Just like Heather Lock-
lear in a Faberge Shampoo com-
mercial from the 1980s, “I told two
friends about it and they told two
friends and so on and so on.”
The 90 percent failure rate isn’t
the first urban legend to contra-
dict fact, but it is one of the most
widely distributed and believed.
Sure, we can blame the media, the
statistic-quoting experts that do not
cite their sources or even American
Express for this fallacy. However, I
believe that banks play the biggest
role in perpetuating the myth. After
all, they have the most to gain, as it
is much easier to ask for additional
collateral and higher rates and fees
for a high-risk or discouraged indus-
try.
You can call the 90 percent first-
year failure rate a myth or an urban
legend, but I prefer simply to call it
false. So please, start spreading the
news!
s
Restaurant Update
Shawn Sanborn
President, Sanborn
and Co., Denver
