Of the many challenges facing the restaurant industry today, the rising cost of labor is one of the most formidable. According to the U.S. Bureau of Labor Statistics, average hourly earnings in food and drinking establishments jumped from $15 in 2018 to $19.42 in 2022. Factors contributing to this trend include the ongoing labor shortage and recent increases in federal, state and local minimum wage requirements. In a recent survey by FSR magazine, restaurant operators were asked to name their most significant challenges. The top three answers were food costs (92%), labor costs (89%) and energy and utility costs (63%).
To address this challenge, restaurants should calculate and track their labor costs and consider strategies for controlling them.
Know your costs
You cannot manage your labor costs unless you know what they are, so the first step is to calculate them. Keep in mind that these costs include not only wages, but also costs associated with healthcare, vacation, sick days and other benefits, as well as overtime, bonuses, payroll and payroll taxes. You cannot evaluate your labor costs in a vacuum, however. To understand how they impact the efficiency of your operations and your profitability, you should calculate labor costs as a percentage of gross revenues.
This metric allows you to compare you labor costs to similar establishments in your industry and to identify trends in your own costs over time. It can also be helpful to calculate labor costs separately for different job categories, to give you an idea of areas where you may be overspending on labor.
You may have seen rules of thumb that say restaurants should strive to maintain labor costs near 30 percent of gross revenues. These rules of thumb can give you a general idea of whether your labor costs are on target, but the right number for your restaurant depends on many factors, including the type of restaurant (e.g., quick service, fast casual, casual, fine dining, etc.), geographical location, staff size and efficiency. Your financial advisors can help you determine a labor cost percentage that is reasonable in light of your establishment’s particular characteristics.
Related Read: Nine Tips for Combating the Restaurant Labor Shortage
Strategies to consider
There are a number of strategies available for reducing labor costs. Whether or not they are suitable for your restaurant depends on the nature of your business and its financial circumstances. Here are some examples:
- Reduce Reliance on Front-of-House Workers
Consider using technology — such as contactless order and payment systems — to boost the efficiency of front-of-house staff. Other options include shifting to a counter-service format or using kiosks for ordering and payment, although these approaches will not work for every restaurant. In addition to reducing labor costs, digital ordering systems allow you to cut menu printing costs. Reservation management systems can also help you reduce labor costs.
- Focus on Scheduling
Efficient scheduling starts with reliable sales forecasts. Create schedules designed to avoid understaffing or overstaffing and to minimize overtime.
- Shift Costs to Your Suppliers
Some restaurants may be able to reduce labor costs associated with food preparation by purchasing pre-processed foods, such as pre-chopped ingredients or premade soup or gravy bases.
- Take Advantage of Automation
Consider using robotic kitchen assistants, robotic waiters or other automated technology to reduce reliance on human labor.
- Minimize Turnover
The cost of recruiting and onboarding new employees is high, so it is important to keep turnover to a minimum. In addition to offering competitive wages and benefits, create a positive work environment, provide employees with training and career growth opportunities, and reward excellent performance with bonuses, awards and other recognition.
Related Read: How To Strengthen Staff Culture After a Challenging Few Years
Regardless of the strategies you use to control labor costs, it is important to have systems in place to track labor costs on a daily basis. That way, you can spot any dangerous trends early and take steps to reverse them before it is too late.
For more information, please contact Brian Israel at [email protected] or 312.670.7444 . Visit ORBA.com to learn more about our Restaurant Group.