In summer 2003, the NBC television network broadcast a program
titled Restaurant: A Reality Show. Among other occurrences
on this show, an advertisement by American Express
claimed, “90 percent of restaurants fail during the first year of
operation.” To verify the possibility of 90 percent first-year failure,
we conducted several spreadsheet simulations. The simulations
were based on assumptions that roughly parallel the
study in the accompanying article: fifteen hundred restaurants
in the market; new-business failures during the first
year, 90 percent (the American Express figure); average industry
turnover of 10 percent per year (similar to our study’s 1999
finding); number of new restaurants opening per year, 15 percent;
and average market growth rate, 3 to 4 percent per year
(a national average as reported by the National Restaurant
Association). In the second series of simulations, we replaced
the 90 percent first-year failure rate with a 30 percent rate,
drawn from our study