5 Proven Ways to Reduce Restaurant Labor Cost and Increase Profits
Define Restaurant Labor Cost
Every restaurant counts its staff (its chefs and servers, managers, bussers and bartenders) as its prime assets. However, labor is also one of the most expensive assets of a restaurant, multiplying its operating costs significantly. Calculating labor expenses is crucial for a restaurant, not least because a restaurant, being a labor-intensive business, cannot function without its staff.
So what exactly is restaurant labor cost and how does it affect a business? For restaurant owners, labor cost is the sum total of all the expenses that go into maintaining a workforce. The costs include wages, bonuses, healthcare, payroll taxes and leave, training, staff conveyance, and so on.
And what's labor cost percentage? Labor cost percentage is the portion of total revenue you have to spend to pay employees, while also taking care of their needs. Typically, the restaurant industry reports an average labor cost percentage of 20-40%. This may vary according to the restaurant type, and services offered.
Combined with other operating costs such as rent, maintenance, cost of food, and so on, the total operating cost of a restaurant invariably shoots up. Any business in the restaurant industry keen to improve its profit margins therefore needs to reduce its labor costs, but without compromising on quality of service.
How to Calculate Labor Cost Percentage
We already know that almost any expense related to the labor of a restaurant will count as part of the total labor costs of the business. It is one of the key components of the prime cost of a restaurant. (This includes food costs, and other operating costs incurred in running the establishment.) What's the best way to calculate restaurant labor cost and manage expenses?
The restaurant business must, first and foremost, identify the total labor cost incurred to maintain its workforce. This includes regular wages, hourly wages, health care spending, and so on. Next, the total sales figures from the POS system (point-of-sale) or restaurant management system must be pulled up. This is the bottom line against which restaurant labor cost and percentage must be calculated.
The formula to calculate labor costs percentage is-
(Total labor cost / total operating costs) X 100 = Total labor cost percentage
Different restaurant types have different cost percentages and labor spending. A fine dining restaurant will not employ the same kind of labor force as a fast food outlet or a food truck. A fine dining restaurant employee will require a different set of skills, training and work methods compared to a fast-food handler, who will be skilled in different ways.
According to Upserve, food beverage outlets like fast food joints or quick service restaurants typically run up an average labor cost percentage of 25%, while fine dining restaurants have a labor cost that exceeds 40%.
U.S. Labor Cost:
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Labor Cost Percentage and its Relation to Profits
The prime costs of a restaurant business determine if the restaurant is profitable and how much of a profit margin it can expect. Restaurateurs use this metric to gauge their business efficiency. According to studies, restaurant owners typically look to keep their prime costs below 50-60% of the total sales to make sure the business is profitable. With labor costs contributing significantly to the prime cost of a restaurant business, you will want to know how to cut it down.
- If you're used to having a full house with all tables booked and your staff buzzing around to serve dozens of customers, you must be one happy restaurateur. In that case, you will need full service and run up a higher labor cost to run the show. Proportionately, you will also see the food sales and profit margins grow.
- However, if your restaurant has many empty tables and low bookings, you may not want to keep a full staff on all days, because it will only increase your labor cost and prime cost, and end up depleting your profits.
5 Factors that Cause Labor Cost to Rise
- High Attrition Rate- When running a restaurant business, you must know the value that skilled employees bring to your establishment. Skilled chefs, servers and bartenders only get better with further training at work. So when these employees quit and you fail to retain them, you eventually end up hurting your business with a high attrition rate (the rate at which employees leave a company). You will now have to hire new skilled labor, offer them higher salaries and train them to meet your standards.
- Unplanned Salary Structure- Poor staff management may force a restaurant to hire employees when there's a staff shortage, causing labor costs to go up. If you do not divide labor according to their skills and have unorganized payment structures, you may end up losing a lot of your revenue in unscheduled wages.
- Seasonal Hiring- During peak season, such as Christmas and New Year, restaurants often opt for seasonal hiring and bring in additional staff on a per hour or daily basis. But if you are struggling to lower your food costs and ratchet up profits, you may want to rethink this. Seasonal hiring may cut into revenues and harm the business.
- Lack of Training- If your restaurant labor is not adequately trained to handle ingredients, dishes, or even customers, it will end up wasting resources and time. This will eventually affect the sales and profit margins of the business.
- Automation and Equipment- Manual methods of employee management, scheduling and timekeeping not only consume time, but also end up placing an additional burden on labor costs as it may leave gaps in the process. With manual methods, it's difficult to track employee malpractices, such as buddy punching or time theft at work, which will end up impacting the labor cost percentage.
5 Proven Ways to Reduce Labor Cost
Now that we have identified ways by which restaurant labor cost can undercut your business, let us look at ways to fix these issues and control labor spending.
- Talent Management- The more you spend on new hires, their training and pay packages, the more your labor costs go up. So as an employer, you need to look for ways to retain your valuable and trained talent, keep them happy with perks, and address their concerns. With a high attrition rate, you may end up with a higher labor cost percentage when you consider the entire cycle of an employee quitting, being paid severance benefits, new talent sought, salary hikes offered them, training them to meet your business needs and so on.
- Seasonal Hiring- If you already have a high number of employees on the payroll, you may want to assign them more shifts (without violating labor laws) and increase productivity, instead of hiring additional hands during peak seasons. On the other hand, if you have a lower labor cost, you may want to hire and train new talent at minimum wage, or bring in skilled labor as hourly employees to meet demands.
- Train and Utilize Staff- If you are a fast casual restaurant serving food beverage to your customers, you should look at training your servers so that they can manage the bar and serve food when needed. This may help you to cut your labor cost by eliminating 2-3 specialized positions if you don't really need them.
- Automation Tools- From online ordering, to table management and staff management, technology can get several jobs done quickly and efficiently at a restaurant business. So if you are looking to cut costs and bring down your labor cost percentage, you may want to look at different restaurant backend management software, such as employee scheduling, POS system, payroll management, and time clocks.
- Optimize Salary Structure- Be sure to check the minimum wage rules in your state and plan your labor budget in advance. Also plan for the different salary brackets and talents you need. Instead of hiring all experienced, high-value chefs and bartenders, try to have a mix of experienced candidates and freshers working together. This will boost your work culture, balance labor costs and make sure you meet your bottomline goals.
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Can Software Help Reduce Labor Costs?
Restaurants, although a labor-intensive business, have found valuable resources in technology. While you can never replace your chefs and bartenders, you may look at automating other operational requirements that otherwise burn a hole in your pocket and eat into revenue.
The number of tools offered by back-office solutions like Hubworks makes business management and operations easy for any business owner. A restaurateur can lower labor spending and operational costs by getting technology, instead of human labor, to do back of the house work.
Tools such as Zip Schedules take care of employee scheduling and communication within the team, Zip Clock manages time cards, timesheets and plugs all scope for employee malpractices that can harm the business. The POS system, Plum POS, manages sales and integrates with inventory systems like Zip Inventory, doing away with the need to depute personnel to keep count of inventory, sales, etc. All these tech solutions reduce labor and consequently lower labor costs.
Restaurant Labor Cost FAQs
Q1- Is restaurant labor cost fixed?
A- This depends on your restaurant type and the kind of workforce you have. If you are a fine dining restaurant, you'll want to maintain a fixed labor cost with a fixed number of employees who will stay with your business for the long term. On the other hand, fast food restaurants can look to pay employees according to hours worked, and hire staff based on daily, monthly or seasonal needs. In such a system, the labor cost will be variable.
Q2- What is unit labor cost?
A- Unit labor cost is calculated by dividing the total labor compensation by the total output. When productivity increases, the unit labor cost reduces. This can be profitable for business. But when labor costs go up with productivity remaining the same, your profit margins may dip. So, unit labor cost is an important factor to consider when running a business.