Barriers to Entry in the Restaurant Industry

The restaurant industry has low barriers to entry, making it an attractive new business option for many entrepreneurs, according to the University of West Georgia. Though consumers often hear statements like, "The majority of new restaurants fail," in reality, only one in four restaurants close or change ownership within their first year of business, says H.G. Parsa, an associate professor in Ohio State University's Hospitality Management program. With that said, there are still several common barriers to entry in the restaurant business you need to be aware of.

Lack of sufficient start-up capital is one of the biggest barriers to entry in the restaurant industry. Starting a restaurant is an expensive venture. According to a 2010 industry survey of over 400 restaurants owners, the average start-up cost for a restaurant with $425,000 in annual sales is $125,000 with no land purchase and $175,000 with land purchase. For a restaurant that brings in $850,000, the average start-up is $225,000 with no land purchase and $375,000 with land purchase. Restaurant owners can secure start-up funding through friends and family, bank loans, Small Business Administration loans and venture capital.

Another barrier to entry in the restaurant industry is overcoming customer skepticism. Building a brand takes time, and customers may be wary of your new restaurant when you are first starting off. For example, if you are starting a restaurant focused on healthy eating, some people may perceive your food as being tasteless and bland because it's healthy. However, once you have been in business and have established a credible brand presence, you will be in a much better position with your restaurant.

Location can be another barrier to entry in the restaurant industry. The location of your business is one of the most important factors to the success of your restaurant. If you are scouting locations and you are not able to secure land or a lease at your preferred location, you may be forced to consider other less attractive options. Plus, if you want to lease a current restaurant space, you may be looking at major renovations if the retail space is not currently built for a restaurant.

The amount of marketing you need to do when first starting out may be another barrier to entry in the restaurant business. To help spread the word about your new business, you need to develop a marketing strategy, and this takes money and time. Some prospective restaurant owners do not have the marketing backgrounds necessary to run this part of the business. In these cases, it's best to hire a marketing professional who can help you develop a marketing strategy for your restaurant.