In the restaurant industry, the cost of raw materials and wages is approximated to account for up to 70% of its operational expenses hence it is imperative for restaurateurs to constantly seek ways to reduce costs and maximize their profits (Cocanower, 2019). A very effective way to approach this conundrum is to consider the factors, whether internally or externally, that can cause the restaurant to lose out on its monetary resources. A restaurant business is associated with several high-risk factors that can result in loss of resources therefore one should be keen on identifying and evaluating all major risks in the business and devise effective and efficient risk management techniques to minimize the occurrences of these risks and their aftermath.
Major risk exposures in the restaurant business:
Slips and Falls-
More than 3 million food service employees and over 1 million guests are injured annually as a result of restaurant slips and falls, according to the National Floor Safety Institute (2016). The NFSI indicates that the restaurant industry spends over $2 billion on such injuries each year and that these injuries are increasing by about 10% annually. Slips and falls are classified as one of the greatest sources of General Liability (GL) claims in the industry.
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Fire and missing fire extinguishers -
The restaurant business is directly linked to loss via fire due to its open flames, hot equipment, electrical connections, and chemicals hence it is imperative to have an effective fire prevention system in place. It is reported by the National Fire Protection Association (NFPA) in Quincy, that an average of 8,000 eating and drinking establishments report a fire each year. These fires amass an estimated $246 million in direct property damage (Brett, 2018). It is essential for restaurants to have a fire prevention system in place but at the same time, nothing can guarantee a fire won’t occur. For this reason, every business, especially kitchens, should have the right fire extinguisher ready and examined for proper functionality at all times.
Food Spoilage or Contamination-
Food safety is a major cause of concern for the restaurant business. Food poisoning is the most frequently reported restaurant injury according to the Centers for Disease Control (2015). A power outage, mechanical failure, or other event can cause food spoilage. The food will then need to be discarded to eliminate any possibility of food poisoning to restaurant patrons, taking profits right out of the restaurant’s ‘pocket’. An estimated 300,000 hospitalizations and 5,000 deaths in the U.S. alone are related to food-borne illnesses; which gives an idea of the likely economic implications for the restaurant industry (Fiorito, 2016). The cost estimate of food safety incidents is very costly, most of which comes from notifying consumers, removing food from shelves, and paying damages as a result of lawsuits.
On-the-job Injury or Illness-
Being in an environment where extensive use of equipment, tools, and cutlery are present an influx of accidents and on-the-job injuries are bound to occur. Such incidents are but are not limited to cuts and punctures due to the handling of knives, burns, tripping, and so on.
Employee Lawsuits-
On average, it’s estimated that three out of five businesses will be sued by their employees. Restaurants, just like any other business, are vulnerable from the pre-hire process to a reduction in workforce, and everywhere in between. Claims can stem from just about anything, including discrimination or someone taking a “joke” the wrong way and being offended (Mackoul, 2016). Another common claim that the restaurant business is susceptible to is that of alleged violation of hours and wages laws. The hospitality industry faces more wage and hours violations than any other industry. In 2017, the Department of Labor (DOL) took over 7,000 hospitality wage and hour claims in the United States, recovering more than $483 million USD in back wages for employees. That’s nine times more than any other industry (Hussain and Dawson, 2013). These claims can be exceptionally devastating to the restaurant industry if action is not taken and proper layers of protection are not implemented.
Equipment Breakdown-
Machinery and equipments such as stoves, grills and freezers, computers and air conditioners are some vital factors to consider when running a restaurant but in the event these equipment start to malfunction due to cases like power surges, mechanical failures or lack of maintenance the business can experience expensive repairs and loss of income.
Lack of Appropriate Licensing-
There are several licenses that are involved with running the restaurant business some of which are required to acquire before starting the business and others needed for the continued existence of the business. Operating the restaurant without the specified licenses can result in the business being fined, closed down, and in some instances, the owner of the business can be given jail time (Fiorito, 2018). Such licenses include but are not limited to:
- Business License- in most countries, in order to operate a business locally one must have a commercial license.
- Food Service License- The local Health Department will issue this license after specific requirements have been passed in the restaurant upon examination.
- Liquor/Alcohol License: Before the restaurant can begin to serve any form of alcoholic beverages it has to acquire a liquor/alcohol license in order to continue operating legally if there is an incident of someone getting inebriated to the extent that injuries or property damage result, the appropriate authorities will request said license and if lacking the restaurant will be fine accordingly for selling and serving alcohol without appropriate licensing.
Employee Theft-
By nature, restaurants provide an environment full of opportunities for which employees can take advantage of stealing business profits. Criminologists have determined key factors that cause employee theft, two of which are opportunity and motivation (Fikes, 2019). Research conducted by criminologists shows that motivation is a key factor in whether or not an employee will steal from their employer. Examples of theft motivation in the restaurant industry may include employees who feel underpaid and overworked, as well as mistreatment by owners or members of management (Hussain and Dawson, 2013). According to the United States Chamber of Commerce, annual revenue loss due to employee theft in the United States ranges from $40 to $400 billion hence, minimizing these occurrences is imperative to reducing loss and maximizing profits.
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