Relationship marketing and the ability to build and sustain a loyal customer base are just as critical as the ability to manage a restaurant financially. The immediacy and trust that customers develop over time with a restaurant becomes an integral part of its brand, and the continual reinforcing of this trust-experience-loyalty triad is critical for the growth of any independent or franchised restaurant.

Additional factors that positively affect long-term restaurant viability are having a distinctive and highly differentiated concept that is defensible even in areas where there is high restaurant density. The core concepts of Differentiation, cost leadership, and focus have been suggested as competitive advantages for coping with competition (Porter, 1980, 1985). A firm can achieve profitability over a rival in two fundamentally different approaches to business strategy: either differentiation or cost leadership. Porter (1980, 1985) views differentiation and cost leadership as mutually exclusive strategies.

Another set of defining attributes as they relate to successful restaurants that overcome the challenges of their first twelve to eighteen months of operations is that they have the ability to see the long-term implications of financial decisions and not just try to "buy" market share today; are quick to adopt new technologies including Customer Relationship Management, billing, and accounting systems; and have made the commitment of keeping their managers up to speed with the latest techniques in saving time and ensuring high levels of customer satisfaction. This includes the ability to continue learning and refers to the modification of routines in response to feedback from past experience and the environment (Cyert & March, 1963).

In the highest performing restaurant the intangible assets are just as closely managed and fostered to grow as the tangible ones.

Baruch Lev et. al) is considered the leading researcher to define a quantification of intangible assets as just as critical to the growth of a hospitality-based business as tangible assets. He posits in his research that competitive advantage can even be attained through efficient and aggressive use of intangible assets.

Zhao and Olsen et. al.) have a much more pragmatic approach to this issue of intangible assets being the primary differentiator of a company. They claim that while there are competitive strengths to be found in these, their quantification is not nearly as clear-cut.

Additional best practices include the ability to define a clear vision, mission and operations strategy and use them to create a solid culture that rewards exemplary effort on behalf of customers. These restaurants also are finding that making their cultures aware of costs and how to control them is also critical. Finally. The restaurants that survive their first year to eighteen months of operation focus on having a balanced approach to their lifecycles, giving their employees a chance to spend holidays with their families, in addition to the owners themselves. There is also a strong orientation to protecting family members' time and not getting tempted into an "all or nothing" attitude when it comes to hours given to the restaurant's operations.

Conversely the restaurants with the lowest levels of probability of surviving include those that exhibit the following characteristics per the research of (Parsa et. al.):

Unclear and unfocused theme and strategy as it relates to offerings, service levels, pricing. As a result communications in all forms, from advertising to PR, all reflect confusion and the public doesn't know what the restaurant's position and value is. As a result no one visits.

Lack of process-centric operations strategies including defining best practices in services levels of servers, sanitary standards and internal controls on sanitary conditions, and continual quality control on suppliers of perishable and non-perishable goods. As many metropolitan areas define these standards and post their grades both in the establishment and also in the newspapers, the restaurants that go out of business are those that get reputations for being either just at sanitary levels or below standard.

Lack of focus on service with no incentives or recognition for excellence in this critical area. This is admittedly difficult to quantify yet many studies have shown that this is a critical reason for restaurants failing. Considering the model shown in Figure 2, the role of service in defining the overall perception of a restaurant is a critical value driving several variables in the model. Clearly what's needed is a strong focus on creating a culture where exemplary service and its resulting compliments back to the restaurant get rewarded generously.

The inability of a restaurant to overcome a poor location that isn't near a high traffic area, where potential customers can see the establishment as they travel back...

Researchers have often cited bars and clubs located across the street from police stations which close within eighteen months of opening due to the fear of getting DUIs or being stopped immediately after leaving the bar or club. Additional examples include putting an ethnic restaurant in the middle of a rural community that may be wary of foreigners and anyone unlike them. A lack of awareness surrounding locations that either creates conflict or stirs ethnocentrism are major errors made in placing a restaurant.
An example would be opening a Middleastern restaurant in the rural areas of the United States where there is a tendency to stereotype anyone looking like they are from that region of the world as an unfamiliar foreigner.

Conversely for any ethnic restaurant that begins to move closer towards the role of being more of a mainstream establishment and loses its unique flavoring and distinctiveness enters a no-mans land of no true differentiation. This is a common mistake for many ethnic restaurants that move from their specific niche, for example Indian foods, to more health-conscious vegetarian foods and lose their primary audience in the process.

Inability to financially handle unforeseen expenses that occur in the first twelve to eighteen months of operations, and a lack of credit lines to rely on to overcome unforeseen expenses. According to many researchers far more restaurants fail due to a lack of focus and lack of business judgment than on a lack of financial resources.

Lack of commitment to the restaurant due to either family conflicts or a lack of focus by everyone in the family to supports the establishments' success. According to (Parsa et.al. 304-322) this is one of the major qualitative aspects of why restaurants fail over time.

Summary of Restaurant Challenges

For the most part, companies within an industry have little or no control over its environment (at least in the short-term) (Matovic, 2002) compared to the internal factors of managerial incompetence, lack of consistent messaging and vision, and lack of consistent standards for ensuring quality service and products highlight the fact that the high failure rate percentages for first year restaurants are largely a myth. The fact that the majority of a restaurants' challenges come from inside and not necessarily from the outside is a key take-away from this literature review. The challenges of running a restaurant are actually much like any other small business in this regard.

Effectiveness of Entertainment

In a sense the role of entertainment within the context of restaurants is very much aligned with the key economic theories of Dr. Schumpeter. (Schumpeter et. al) was the first to recognize innovation as the central component of competition and the driving force behind industry evolution. "Schumpeterian industries" tend to be unstable and continually reformed as the restaurant industry is today. These industry structures are identified as those subject to rapid product innovation with relatively steep experience curves.

Research is divided on the effectiveness of entertainment within restaurants. On the one hand there are the examples of Landry's Restaurants and their Rainforest Cafes, which have very loyal customer bases yet have eluded profitability and require an inordinate level of investment of gain market share (Landry Financials 2006). The fact that these higher-end restaurants strive to deliver a total entertainment experience are the extreme on the entertainment spectrum, yet they do show the difficult nature of offering entertainment while attaining profitability. The role of entertainment in attracting clients is uncontestable. Yet the managing of entertainment as part of the total experience of a restaurant is a challenge for many restaurants. It's far from simply getting a stage built and inviting in acts; for entertainment to be effective it must be integrated into the overall branding, positioning and value proposition of the restaurant itself.

Landry's financial challenges in integrating entertainment within their Rainforest Cafes is in juxtaposition to the success of Chuck E. Cheese's (CEC) as a model of best practices in integrating entertainment into the broader entertainment mix of a restaurant. Table 1, CEC Entertainment financial ratio analysis, provides an overview of the performance of this chain with specific focus on profitability analysis. This data is sourced from CEC Enterprise's series of filings with the (Securities and Exchange Commission, 2006).

Table 1: CEC Entertainment financial ratio analysis

Profitability Ratios

Return on Equity (%)

Return on Assets (%)

Return on Investment

Gross Margin

EBITDA of Revenue (%)

Operating Margin (%)

Pre-Tax…