Why Moats are Essential for Profitability (Restaurant Edition)

Here are some illustrative facts about competition levels in the restaurant business:

In spring 2016, there were 624,301 restaurants in the US.

Between 2006 and the industry’s peak in 2014, the number of restaurants in the U.S. grew 7.3% to more than 638,000—outpacing the population 6.9% growth rate.

“New York, New Jersey, and Connecticut — have more restaurants than anywhere else in the United States; 16.9 restaurants per 10k people. In 2013 there were 232,611 establishments in the U.S. fast food industry.

The primary reason why restaurants fail so often and have low profitability is that there are too many of them. This is true in any business. Supply is the killer of value. Adding to that oversupply problem are people who stray out of their circle of competence, since risk comes from not knowing what you are doing. Even worse, some people are in the restaurant business for non-economic reasons and that makes the economics worse for people who desire to make an actual profit. A famous Ohio State study revealed that 26.16% of independent restaurants failed during the first year of operation. That is consistent with other studies that show: “Over three years, that number [of failures] rises to three in five. While a 60% failure rate may still sound high, that’s on par with the cross-industry average for new businesses, according to statistics from the Small Business Administration and the Bureau of Labor Statistics.”

Owning and operating a restaurant is a tough business, xtraCHEF can help.


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