How to Conduct a Feasibility Study for a New Restaurant

The majority of new restaurants opened by first-time operators fail within the first year. Even established chain restaurant companies sometimes open new locations that fail. The basic tool for determining the market potential of a proposed restaurant is a thorough feasibility study, also known as a market study. The University of Wisconsin (UW) offers extensive advice and resources for anyone looking at starting a new restaurant, noting, among other things, that a successful feasibility study requires extensive research and analysis, not a superficial glance based on wishful thinking.

Analyze industry trends and their impact on your local market. Study data that sheds light on restaurant trends and threats, advises UW. Research and other industry data is available from a number of sources, such as the National Restaurant Association, state and local restaurant associations, and hospitality databases at colleges and universities that offer hospitality programs. A key to success is identifying trends in consumer eating habits and then deciding how those trends will affect your new restaurant – for better or worse.

Perform a more in-depth analysis of your local market. Review demographic and economic statistics and trend data for your market to help you determine the business potential of your restaurant. Compare your local data to similar data for your state or region to determine the relative strength or weakness of your individual market. A critical consideration is the geographic size of your market, says UW. Be realistic in predicting how far customers will travel to eat your food.

Analyze national economic data, such as business trends, restaurant sales and tourism statistics, to get a more accurate sense of your market potential. That’s important, says UW, because fundamental economic data is closely associated with restaurant performance in a given set of circumstances, such as a recession. Sources of information can include the U.S. Bureau of Census, U.S. Department of Commerce and your local Chamber of Commerce.

Size up the competition. Study currently operating restaurants in your area to help you analyze demand and general market potential. Identify key competitors in your category. It won’t do you much good to know about expensive steakhouses if you’re opening an inexpensive hamburger joint. Compare apples to apples and focus on the most successful, longest-operating restaurants that will be your direct competitors. Play “mystery shopper” and dine out anonymously at established competitors to see exactly what you’ll be up against. Make sure you discover all new restaurants planned for the area, too – especially if they'll be direct competitors based on price, type of food or location.

Analyze the strengths and weaknesses of your proposed location. Location will be one of the top factors in your success or failure, notes UW. For example, if you’re located off the beaten path, you'll have to work harder to attract customers and get them to your door. On the other hand, if you’re located outside a shopping mall that's busy every day, you’ll have a natural flow of walk-in business in addition to customers who seek you out and travel to you. Key aspects of location analysis include traffic volume and patterns, a profile of the neighborhood’s residential and commercial balance, and anything that can increase the area’s potential, such as a major new apartment complex or housing development.

Refine your concept, based on your new knowledge. Look for ways to set yourself apart in the market. Develop a deep understanding of your prospective customers and build your entire marketing plan around customer demographics and preferences identified in your earlier research.

Project your sales potential. Based on all market data you've accumulated, make an informed prediction of your potential for attracting customers and at what basic dollar amount per visit. The basic business model for a restaurant is based on two metrics: “covers” (the number of customers you serve each day) and average dollar amount per check, notes UW. Although there are no “formulas” for predicting restaurant sales, the combined knowledge from all your homework will allow you to make reasonable projections.

Compile detailed financial projections. Based on your general projection of sales potential, create a month-to-month operating budget based on projected sales and known startup and operating costs. Do detailed projections for the first three years. Ask your accountant to check your work to make sure it’s a viable plan. Once you have a final set of long-term financial projections, there are only two possibilities. If you meet the projections and don't exceed your operating budget, you'll stay in business and make money. If you fail to meet the sales goals, or run over budget in your operations, you'll fail. It’s that simple.