Restaurant Failure Rate: Do 90% Fail in Their First Year?

Is it true that most restaurants fail within their first year? You will hear this claim on restaurant makeover shows and read it in various articles concerning the restaurant business. Estimates vary between 60 to 90% of restaurants failing within their first year. Ninety percent is the most common claim, meaning nine out of ten restaurants fail! Is this true? Do up to 90% of restaurants fail within their first year of business? No. It is, in fact, impossible for this to be true. The true restaurant failure rate is much lower, around fifteen to twenty percent.

Restaurant with permanent closure sign in window, to illustrate restaurant failure rate.

Restaurant Failure Rate Quick Answer Guide

According to many sources, 60% to 90% of restaurants fail in their first year.
The most popular figure is 90%
According to studies, the average restaurant failure rate is 15% to 20% in the first to second year of business.
The restaurant industry generally has a growth rate of 3-4%.
If the 90% figure were true, in a couple of decades, the number of restaurants would drop by over 80 percent, and the industry would eventually disappear.

Do Almost all Restaurants Fail in Their First Year?

The claim that most restaurants fail in their first year, up to 90%, is false. And, once a restaurant gets past its first year in business, its chances of failure drops. The failure rate for restaurants, of course, depends on whose statistics you are looking at.

For example, according to a 2005 study published by H.G. Parsa, et al. in the Cornell Hotel and Restaurant Administration Quarterly, a “relatively modest” 26.15 percent of independent restaurants failed within the first year during the period covered by the study.

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Why the 90% Restaurant Failure Rate is Impossible

Furthermore, the study found little difference in failure rate between franchised and independent operations. The authors, when taking into consideration the number of restaurants in the market, a turnover-rate of 10% per year, the number of new restaurants opening each year, and the average market growth, concluded that if 90 percent of new restaurants failed within the first year, we would see fewer restaurants every year.

In other words, as each year passed, the total number of existing restaurants would drop. In a couple of decades, the number of restaurants would drop by over 80 percent. In time, there would be no restaurants left at all.

What Percentage of Restaurants Fail Within Their First or Second Year?

According to the The National Restaurant Association, the restaurant industry enjoys a 3 to 4 percent growth rate. A failure rate of 90% just cannot be possible. Moreover, the Parsa study found that the second year failure rate was 19%, and the third-year failure rate was 14%. ¹

Another study, published in 2014, came up with an even lower failure rate. Using data from the U.S. Bureau of Labor Statistics and tracking restaurants from 1992 to 2011, they found that only 17% of the 81,000 independently owned restaurants failed in the first year. This was even lower than other service-oriented businesses, which had a failure rate of 10%. As an estimate, we can safely conclude that only 15 to 20% of restaurants fail within their first or second year.

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The Average Lifespan of Small Restaurants is 3.75 Years, According to Study

However, according to the study, “The median lifespan of a restaurant startup with 5 or fewer employees is 3.75 years, slightly shorter than that of other service businesses of the same startup size (4.0 years).” ²

In simple terms, we can surmise that the failure rate of restaurants is not very different from that of other startups in other industries. The restaurant business is, in fact, a prosperous one. However, as Forbes points out, smaller restaurants with fewer employees tend to have a higher failure rate than larger ones. ³

What is Restaurant Failure?

It is actually difficult to define restaurant failure and there is no universal definition. Statistics that rely on bankruptcies will result in a higher failure rate. This is too narrow a definition.

As well, it is a mistake to think that restaurant failure is the same as restaurant closure. And restaurant turnover is not the same as closure. Statistics relying on too broad a definition or restaurant failure tend to result in higher failure rates. ⁴

Restaurants can fail due to economic reasons, such as poor controls and failure to make a profit. However, other circumstances may occur, such as a fire or personal problems that force a restaurant into bankruptcy.

As well, some restaurants are closed for marketing reasons. An owner might decide to close the doors of a restaurant, for example, because he wants to relocate to a better location. Change of ownership may occur for voluntary reasons. Chain restaurants often close for various reasons decided on at the corporate level, even though the location is not technically failing.

It is difficult, then, to ever have exact statistics of restaurant failure rates, but one thing is clear: The statement that 90% of restaurants fail in the first year is a myth, and it always has been. As well, with each year a restaurant survives, its chances of failure drops.