3 Types of Risks Restaurants Face

Two years ago, I invested in a Mexican restaurant chain stock. It was a high flying company that was expanding at breakneck pace. Unfortunately, a few weeks after I had invested, there was an E. Coli outbreak at one of its restaurants. Around a hundred people got ill. News spread like wildfire across the country, and people got scared to eat at any of the chain’s restaurants.

Consequently, sales took a hit, and until today the company has yet to recover from that setback fully. This led me to realise about the fragility of a company’s reputation and the many risks that businesses face. As such, I thought it would be useful to highlight to investors looking into food and beverage businesses three key risks that restaurants face.

Copy-cat competitors

As with any industry, fending off competition is an important issue. However, restaurants may face even greater risk in this respect. For one, there is little that they can do to stop a competitor from copying their products or setting up a restaurant near them.

Even fast food giants face similar risks with many of them copying each others’ business tactics and menus. When looking at which restaurant stock to invest in, it is therefore important to find companies that have a stable and loyal customer base. This can be achieved by garnering a strong brand reputation and creating an image that resonates with customers.

Difficulty finding waitstaff

Many restaurants in Singapore face the problem of difficulty finding staff to operate the restaurant. This may seem like a trivial problem but in fact is one of the major reasons why restaurants fail in Singapore.

Good long-term staff is challenging to find in the restaurant service industry and continuously training and looking for new staff can be costly and time-consuming for restaurants.

Risk of infection outbreak in restaurant

As with the example mentioned earlier, infection outbreaks can be extremely damaging to a company’s reputation. Even the largest, most well-run company can be hit by an infection outbreak. All it needs is for a negligent wait staff to come in with a virus, and there can be unwanted snowball effect to customers.

This can damage the restaurant’s reputation and cause fear among even its most loyal customers. As investors, we should look for restaurants that take pride in food safety and have safety precautions in place to at least reduce the risk of an outbreak in their restaurants.

The Foolish bottom line

Any company is exposed to their unique business risks; restaurants are no different. As investors, we need to be aware of any risks our investments may be subjected to.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.