Labor cost often makes up the biggest share of a restaurant's overall expenses. The percentage of labor cost to sales averages 22-40% for restaurants. It can even go as high as 75%. Operators are always looking for ways to cut labor cost to secure a higher profit margin for their business.
Define Labor Cost and List its Components
Every smart business knows it has to scale up revenue and keep costs low to stay, well, in business. Overheads, labor and inventory must be optimally utilized to this effect. For the restaurant industry, labor cost is often the source of the greatest financial strain.
Restaurant labor costs typically make up 30-35% of the total revenue of a restaurant business. But with minimum wage rates in the U.S. consistently swinging up, this percentage is elastic. Some restaurant businesses, depending on the nature of service, may end up diverting as much as 50% of revenue to pay for labor.
According to a 2019 study by the software firm Harri, 45% of restaurant owners reported labor cost hikes to the tune of 3-9%. A BDO article further pointed out that the average restaurant labor cost percentage rose to 31.6% through the second quarter of 2019, from 31.2% for the same period the previous year.
It is the continual aim of restaurant management to keep labor costs low. Restaurants typically aim to keep labor costs to within 20-30% of revenue. To get a better sense of how labor shapes the profitability of a business, let's first understand what labor cost is all about.
Restaurant labor cost includes salaried employee wages, hourly wages, overtime, incentives and bonuses, payroll taxes, health insurance, paid days off, meals, supplies, training, public transportation allowances, and so on. Labor costs may be calculated on a weekly, monthly or annual basis.
Average labor costs may vary from one restaurant type to another. That's because labor and food costs differ according to the product sales mix, quality of food and service, hours of functioning, and pricing. For that reason, luxury and full service restaurants have higher labor costs than fast food or casual dining establishments.
A Chron article (the Houston Chronicle website) notes that fast food restaurants can cap their labor costs at 25%, while table service restaurants generally see expenditure on labor touching 35-40%. A fine dining restaurant, with more items on the plate and more products prepared in-house, would spend much more on labor than, say, a steakhouse that sells high-end, but relatively easy-to-prepare items like steak and baked potato.
Labor costs may be fixed or variable. Fixed labor cost simply outlay on permanent, salaried staff. These could include servers, hosts, managers and cooks. Variable labor costs refer to payments made to temp staff. These may include extra servers and cooks brought in during a busy Friday night, or around Christmas or New Year, or to cater to a big private party.
How to Calculate Labor Cost and Why it's Important?
Restaurant labor cost percentage is an important metric to consider when reviewing the total operating cost of a restaurant. The outlay on labor and the total cost of goods sold (COGS) offers a clear picture of a restaurant's prime cost. This is a crucial yardstick that management and investors look at to gauge the financial health and efficiency of a foodservice business. According to industry pundits, a restaurant's prime costs must be 60% or less of total sales.
Calculating restaurant labor costs, therefore, is a vital first step when preparing a business plan. It can be done by toting up the grand total of wages, incentives, bonuses, insurance, allowances, and so on, of all employees. However, not all employees put in equal hours. An alternative is to figure out the total labor cost by hours worked. Data gathered from the POS system, like Altametrics' Plum POS, can help a restaurant owner clearly determine labor costs and make projections accordingly.
There are two broad ways to calculate restaurant labor cost-
as a percentage of total sales
as a percentage of total operating cost.
For calculating restaurant labor cost as a percentage of total sales/revenue, expenditure on labor is to be divided by the total annual revenue earning. The latter is essentially the bottom lineof the business, referring to earnings before taxes or other deductions are made. It can be measured with the help of the restaurant's POS system. The figure is then multiplied by 100 for a percentage value.
To calculate labor cost percentage in terms of total operating costs, one needs to count the amount spent on labor for every dollar spent on operating costs incurred on marketing, rent, food, drink and, so on. Again, this value is multiplied by 100 to arrive at a percentage.
Once a restaurant owner has determined the labor cost percentage, the next task is to find ways to reduce labor costs. In the restaurant industry, labor costs have always weighed heavily on razor-thin profit margins. The problem has become more fraught with the revision of minimum wage rates and shrinking of the labor pool. Given the tight labor market, restaurants have to shell out more to recruit, train and retain employees. According to the 2019 State of Full Service Restaurants report, seven in 10 restaurants face regular labor shortages. Some businesses have been able to soften the blow by adopting technology like ordering kiosks and online ordering.
All said and done, laying off staff may not be the ideal way for a restaurant to control labor costs. For one, it's not humane. Secondly, it can dent customer service and hence, sales. Restaurants, therefore, must be creative in their efforts to curtail labor costs. Here are 5 steps they could follow. . .
The average labor cost for restaurants is increasing by the day and squeezing profits.
This article lists 5 ways you can reduce labor cost and run a leaner, more profitable enterprise.
Different restaurant workers do different tasks and earn different hourly wages or salaries. Clubbing labor into categories can give management a clear idea of which positions cost more. To divide labor into groups, front-of-the-house staff like servers, bussers, hosts, and bartenders can be put into one bracket, while back-of-the-house staff like cooks and dishwashers can make up another. Managers can be considered separately. These broad categories can be further divided into subgroups based on similar work done.
Grouping hourly employees will tell restaurant owners exactly how much theypay employees in each pay band per hour, over a period of time. This provides a better picture of total labor costs. Reviewing staff productivity only on the basis of labor as a percentage of sales won't reveal areas for improvement.
Grouping employees helps identify the staff category responsible for the biggest monetary strain on the establishment. It also shows which group costs more in terms of wages paid per hour. It even highlights the time of the day, week, month, or meal period when most variances is visible. This allows restaurant owners to plan and streamline restaurant operations better. For instance, if it is discovered that bartenders are more expensive to employ than servers, a resto-bar may replace a bartender with two servers.
A smart restaurant owner is able to rejig employee schedules to make sure human resources are optimally utilized. Scheduling is better done by referring to labor reports from the restaurant POS system. Here's how . . .
Average sales data from the POS helps arrive at a sales forecast. Techniques like sales per man-hour can then be used to predict how much revenue an employee stands to generate in an hour. Schedules can be drawn to match hourly revenue.
However, if POS reports reveal that a restaurant had over-projected sales and staffing needs during a big event in the pastlike, for example, the screening of the Superbowl, which was expected to draw large crowds to the restaurantmanagement would be careful not to commit the same mistake during similar events in the future. Additionally, restaurant could do with fewer servers during lean periods, like at around five in the evening, when most guests tend to order only pre-dinner drinks. Most of the dinner staff, in the meanwhile, can be scheduled an hour later to drive down labor costs. Service staff may be placed on call when it's hard to tell how busy a restaurant will turn.
Labor management software like Altametrics' Zip Schedules is perfect for preparing worker schedules. With data based on sales and transactions, it helps management avoid over- and under-staffing, ensures consistent customer service, and lowers labor cost.
Zip Schedules is further supported by Zip Forecasting. This software helps set up the preferred labor percentage of sales to guide schedule creation. Zip Forecasting can also offer daily staff predictions at 15, 30, or 60-minute intervals. Assimilating all that information is Zip Reporting, a software that can translate business data into actionable insights. These tools are invaluable for restaurant owners looking to raise profit by lowering labor costs.
A restaurant normally works with servers, bussers, a host, a manager, cooks, and dishwashers. On a busy night, this team may cost the restaurant only 20% of sales. However, when business is slow, employing the same number of staff can drive labor costs to as much as 50% of revenue. How can this staggering figure be lowered?
A restaurant can cross train employees. This will reduce the number of employees needed at any given time without affecting business efficiency. For instance, the host can take up the manager's duties. The restaurant stands to gain even if it pays the host a few extra dollars, rather than scheduling a manager separately for the entire shift.
Likewise, hosts can be trained to serve food to salvage situations when servers don't turn up for work. A manager can then take up the host's duties. This will save the restaurant the expense of having to call for extra staff and paying for them in the process.
Unnecessary and unchecked overtime can hurt a business and must be avoided at all costs. Overtime costs can be a great money-sucker, particularly in states that mandate high overtime rates. These states require that employees receive as much as double-time pay when they cross 40 hours of work a week.
It's businesses that can't control overtime costs that run the highest labor costs. Software like Altametrics' Zip Clock and Zip Schedules can help with the problem. They compare actual and scheduled labor hours to spot the extra time an employee clocks without permission. Management is then alerted to the unscheduled overtime. A smart organization makes it a point to pay employees on the basis of when they are scheduled to start their shift, and not when they actually clock in.
Small steps can be taken to keep labor happy. These include offering bonuses and incentives for turning up to work on time, setting qualifications to earn a wage increment, and rewarding and appreciating employees. Rewards can go a long way in reducing turnover, increasing efficiency, and boosting employee confidence.
This would ultimately help lower labor costs. After all, sourcing, interviewing and onboarding new employees is a time-consuming and costly process. With Zip Shiftbook and Zip Clock, management can evaluate the attendance and performance of employees over a period of time. In addition, commendations recorded in the Employee Journal of the Zip Shiftbook can help identify deserving candidates for incentives. These tools make it easier for an establishment to set up an objective rewards program.