In today's competitive restaurant industry, managing labor costs effectively is not just a strategy—it's a necessity for survival and success. This article dives into the essential aspects of labor costs in the restaurant business, from calculating labor cost percentages to implementing strategies that align with your operational goals.
Aimed at restaurant owners eager to optimize their bottom line, we will explore proven methods to streamline staffing, enhance efficiency, and ultimately boost profitability.
By reading to the end, you'll gain actionable insights and practical solutions to tackle one of your biggest challenges, paving the way for a more profitable and sustainable business.
9 Factors That Affect Restaurant Labor Cost
Many factors influence restaurant labor costs in the food industry. Each factor contributes to the overall expense of maintaining a productive workforce.
Understanding the factors that affect your restaurant’s labor costs is essential to grow your bottom line:
| Factor | Effect on Restaurant Labor Cost |
|---|---|
| 1. Wage rates and regulations | This is one of the most direct influences on labor costs. Minimum wage laws and overtime regulations often dictate rates. |
| 2. Employee skill levels | More skilled employees, such as chefs or sommeliers, command higher wages. |
| 3. Staffing needs based on demand | The fluctuating nature of the restaurant industry has a direct impact on labor costs. Peak dining times, seasonal changes, and special events can dictate the number of staff required. |
| 4. Turnover rates | The restaurant industry experiences a higher turnover rate. Recruiting and training new staff incurs further labor costs. Higher turnover leads to higher employment costs. |
| 5. Employee benefits | Employee benefits such as health insurance, paid leave, and retirement plans can help retain quality staff but also increase labor costs. |
| 6. Geographic location | Restaurants situated in urban areas have more access to staff but also have higher wages. Rural areas have lower wages, but the availability of workers is more limited. |
| 7. Use of technology | POS systems and online ordering can streamline operations and reduce the need for additional staff. |
| 8. Operational efficiency | Efficiently run restaurants can minimize employment costs without compromising on service quality. |
| 9. Legal compliance and penalties | Failure to comply with local labor laws can result in fines and legal fees. Understanding and adhering to these regulations is essential to avoid unexpected expenses. |
Restaurant Costs
How much does it cost to run your new restaurant? How will you manage labor costs, food costs and other expenses? Ditch the calculator and read these tips before you start calculating figures.
How to Calculate Restaurant Labor Cost Percentage
Labor Cost Percentage, a crucial KPI, calculates labor expenses (wages, benefits, taxes) as a ratio to total sales, guiding restaurant owners on efficiency and profitability. It helps make informed decisions on staffing and operations.
For an in-depth understanding of this metric's significance, explore further insights into the Ten Essential Restaurant KPIs you’ll want to track.
Here are three top methods for calculating your restaurant labor cost percentage (RLCP):
METHOD #1: Measured Against Percentage of Sales
Calculating labor cost as a percentage of sales is a widely used method among restaurant owners to manage and assess labor expenses in relation to the restaurant's revenue. Here’s how you calculate it:
- Calculate the total amount spent on labor: This includes wages for all employees (both hourly and salaried), taxes, and employee benefits. Essentially, any expense that is labor-related should be included in this calculation.
- Identify the total revenue your restaurant generates: This is the gross income before any deductions like taxes. Your Point of Sale (POS) system dashboard can provide you with this information.
- Calculate the Labor Cost Percentage: Divide the total labor cost by the total revenue to find the labor cost percentage. Then, multiply the result by 100 to convert it into a percentage.
Worked Example
Let's say your restaurant paid $300,000 in total labor costs for the year and generated $1,000,000 in sales. To calculate the labor cost percentage:
- Divide labor cost by revenue: $300,000 / $1,000,000 = 0.3
- Convert to percentage: 0.3 x 100 = 30%
Therefore, the labor cost percentage is 30%. This means for every dollar earned, 30 cents are spent on labor.
METHOD #2: Measured Against Total Operating Cost
Calculating labor cost as a percentage of total operating costs provides insight into how labor costs compare to other operational costs, such as supplies, marketing, rent, and utilities. Here's how to implement this method:
- Determine Your Restaurant’s Annual Labor Cost: Calculate the total amount spent on labor over a specific period, such as a month or a year. This includes all wages, salaries, benefits, taxes, and any other labor-related expenses.
- Determine Your Total Operating Costs: Identify all other operating expenses incurred by your restaurant. This encompasses costs like supplies, marketing, rent, utilities, and any other non-labor expenses necessary to run your restaurant.
- Calculate the Labor Cost Percentage: Divide the total labor cost by the total operating costs to find the labor cost percentage. Multiply the result by 100 to convert it into a percentage.
Worked Example
Imagine your restaurant has monthly labor costs of $9,000 and total operating costs of $15,000. To calculate the labor cost percentage:
- Divide labor cost by total operating costs: $9,000 / $15,000 = 0.6
- Convert to percentage: 0.6 x 100 = 60%
In this example, labor costs represent 60% of the total operating costs. This percentage is significantly higher compared to when labor costs are measured against sales, reflecting the substantial impact of labor expenses on the restaurant's overall financial health.
METHOD #3: Measured Against Total Hours Worked
Calculating labor costs against total hours worked offers a granular view of how labor expenses are distributed across different employee groups within a restaurant. This method allows restaurant owners to pinpoint which segments of their workforce contribute most significantly to labor costs, enabling targeted strategies to optimize staffing and reduce expenses. Here's how to calculate it:
- Calculate Total Labor Costs for Each Employee Group: Begin by determining the average hourly wage for each group of employees in your restaurant, such as bartenders, waiters, chefs, and kitchen staff. Then, multiply the average hourly wage by the total hours worked by each group over a specific period.
- Calculate Overall Labor Costs: Add up the total labor costs calculated for each employee group to determine the overall labor costs for your restaurant during the same period.
Determine the Percentage of Labor Costs for Each Group: To find out which group is costing you the most, divide the total labor costs of each group by the overall labor costs, then multiply by 100 to get the percentage.
Worked example
This table provides a clear overview of the labor costs distribution among different employee groups within a restaurant, based on the worked example provided. It shows the average hourly wage, total hours worked, weekly labor costs, and the percentage of total labor costs for each group of employees:
| Employee Group | Average Hourly Wage | Hours Worked | Weekly Labor Costs | Percentage of Total Labor Costs |
|---|---|---|---|---|
| Chefs | $20 | 200 | $4,000 | 30.42% |
| Waiters | $15 | 250 | $3,750 | 28.52% |
| Bartenders | $18 | 100 | $1,800 | 13.69% |
| Kitchen Staff | $12 | 300 | $3,600 | 27.37% |
| Total | - | 850 | $13,150 | 100% |
4 Proven Strategies to Reduce Labor Costs
In the face of rising labor costs and the challenge of finding new staff, restaurants are seeking innovative ways to maintain profitability while ensuring their staff's needs are met. Here are four proven strategies to help reduce labor costs in your restaurant:
1. Align Staff Scheduling with Sales Forecast Predictions
Scheduling software is a digital tool designed to help restaurant owners manage their workforce more efficiently. It automates the process of creating work schedules, taking into account various factors such as employee availability, shift preferences, and business needs.
This software often integrates with Point of Sale (POS) systems to match staff levels with customer demand accurately, ensuring that restaurants are neither understaffed nor overstaffed at any given time. Some examples of Scheduling Software include:
| Software | Description | Key Features | Pricing* |
|---|---|---|---|
| 7shifts | A well-rounded team management tool for restaurants, offering an intuitive drag-and-drop scheduling feature. | Drag-and-drop scheduling, labor cost management. | Starts at $29.99/location/month for the "Entree" package. |
| ZoomShift | Known for its ease of use, ZoomShift provides color-coded schedules and forecasts labor costs with ease. | Color-coded schedules, labor cost forecasting. | Starts at $2.5/user/month with monthly billing. |
| Sling | A free employee scheduling tool that's great for restaurants with multiple locations. | Free for basic features, unlimited users and locations. | Free for basic features, Premium at $2/user/month. |
*Average Cost of Scheduling Software: The average cost can range from free to approximately $30 per location per month, depending on the features and scale of operation. Many providers offer custom pricing for larger or more complex needs.
How Scheduling Software Lowers Restaurant Labor Costs:
Scheduling software lowers restaurant labor costs by ensuring that staffing levels are directly tied to customer demand.
EXAMPLE: A restaurant can use historical sales data to predict busy periods and schedule the appropriate number of staff to meet this demand without overstaffing. If a restaurant expects a 20% increase in customers on Friday nights based on past data, the scheduling software can recommend increasing staff by a corresponding percentage. This prevents the common pitfall of having too many employees on the clock during slow periods, thereby reducing unnecessary wage expenses.
2. Cross-Train Your Staff
Cross-training your restaurant staff is a strategic move that can significantly reduce labor costs while enhancing the overall efficiency and service quality of your establishment. By equipping your team with the skills to perform multiple roles, you create a more flexible, responsive, and competent workforce. Here are some strategies for implementing effective cross-training programs in your restaurant:
1. Cross-Training Waitstaff for Inventory Management
Strategy: Train waitstaff to handle inventory checks and management. This involves teaching them how to use a Point of Sale (PoS) system that integrates inventory management features. They can learn to review stock levels, identify items that need replenishment, and place orders through delivery apps like Deliveroo or Glovo, or directly purchase items from suppliers or supermarkets.
Training/Certification Needed: Basic training on the PoS system and inventory management software. No formal certification is required, but a brief course on supply chain basics could be beneficial.
Cost Saving: By cross-training waitstaff for inventory management, restaurants can save on hiring a dedicated inventory manager. Assuming the cost of a part-time inventory manager is around $15,000 annually, even a 50% reduction in reliance on a dedicated role could save $7,500 per year.
2. Cross-Training Kitchen Staff in Customer Service
Strategy: Equip kitchen staff with customer service skills to assist in front-of-house operations during peak times. This includes basic training in greeting customers, managing reservations, and handling customer inquiries or complaints.
Training/Certification Needed: Customer service training program. A food handler's license may be required for kitchen staff interacting more directly with customers or handling food in the dining area.
Cost Saving: By having kitchen staff capable of supporting front-of-house operations, restaurants can optimize staffing during peak hours without hiring additional front-of-house staff. Assuming the cost of an additional part-time host or customer service staff is $12,000 annually, effectively utilizing kitchen staff in dual roles could save up to $12,000 per year.
3. Leverage Technology to Track Labor Costs
By integrating advanced technology into your restaurant operations, you can achieve significant labor cost savings. Here's how restaurant owners can use technology to reduce labor costs while maintaining, or even improving, service quality for their customers:
| Technology Solution | Strategy | Benefits | Cost Savings Example & Potential Annual Savings |
|---|---|---|---|
| Self-Service Solutions | Introduce self-service ordering systems like touch-screen kiosks and tableside tablets. | Reduces need for front-of-house staff, faster service, reduced order errors, enhanced customer experience. | Reducing front-of-house staff by one employee per shift could save $15,000 to $20,000 annually. |
| Modern POS System | Upgrade to a POS system with advanced labor management features. | Data-driven staffing decisions, efficient use of labor resources, improved customer service. | Reducing overstaffing by 10 hours per week at an average wage of $10 per hour could save over $5,000 annually. |
| Online Presence and Communication | Improve online ordering and reservation systems, enhance website and social media. | Attracts more customers, streamlines operations, reduces manual task workload on staff. | Automating order and reservation management could significantly save by reallocating staff hours or reducing staff needed. |
| Forecasting and Staffing Needs with Data | Use data analytics for accurate forecasting of staffing needs based on customer traffic patterns and sales trends. | Prevents understaffing and overstaffing, maintains high service standards while optimizing labor expenses. | Reducing unnecessary labor hours by 5% through better forecasting could result in thousands of dollars in savings annually. |
4. Menu Engineering to Reduce Labor Intensity
Menu engineering is a powerful strategy for restaurant owners looking to reduce labor costs without compromising on quality or profitability. By carefully designing your menu to balance high-profit items with those that are less labor-intensive to prepare, you can significantly decrease kitchen workload and staffing requirements.
Here's how to effectively implement menu engineering in your restaurant:
Balanced Menu Design
How It Minimizes Labor Intensity: By including a mix of high-profit items that are less labor-intensive to prepare, you reduce the time and manpower required for meal preparation. For instance, dishes that use similar base ingredients can be prepped in bulk, cutting down on individual preparation times. This approach also allows for more efficient use of kitchen equipment and space.
Cost Savings: If a restaurant can reduce preparation time by 2 minutes per dish on average across 100 dishes served daily, assuming an average labor cost of $15 per hour, this equates to a daily saving of approximately $50. Over a year, this simple efficiency could save around $18,250 in labor costs.
Impact on Kitchen Workflow
How It Minimizes Labor Costs: Streamlining kitchen operations involves organizing the kitchen layout for efficiency, cross-training staff, and implementing batch preparation for common ingredients. This reduces the time staff spend on individual tasks and decreases the need for specialized roles. For example, a dishwasher who is also trained to perform basic prep work can fill downtime with productive tasks, reducing the need for additional prep staff.
Cost Savings: Assuming cross-training allows you to reduce kitchen staff by one part-time employee (20 hours a week) at $15 per hour, the direct labor cost saving is $300 weekly, or $15,600 annually. Additionally, a well-organized kitchen can reduce meal preparation time by 10%, further increasing savings through improved staff productivity.
3. Technology and Tools for Menu Engineering
Here's how a PoS and Inventory Management Software can reduce your labor costs:
- Point of Sale (POS): Modern POS systems analyze sales data to identify less popular or low-margin items that can be removed or adjusted, focusing staff efforts on dishes that offer better returns. Automated scheduling features can optimize staff rosters based on forecasted demand, preventing overstaffing.
- Inventory Management Software: This software reduces the time staff spend on inventory counts and ordering, automates stock level alerts, and suggests reorder quantities based on historical sales data, minimizing waste and ensuring ingredients are used efficiently.
Cost Savings: By using a POS system to optimize staffing, a restaurant could reduce unnecessary labor hours by 5% to 10%. For a restaurant with a monthly labor cost of $20,000, a 5% reduction translates to a monthly saving of $1,000, or $12,000 annually. Inventory management software can further reduce food waste by 2% to 5% on average. For a restaurant with annual food costs of $100,000, a 3% reduction in waste saves $3,000 annually.
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Takeaways
- Understand Labor Cost Influencers: Identify key factors such as wage rates, employee skill levels, and demand fluctuations to tailor your labor cost management strategy effectively.
- Optimize Staffing with Sales Data: Use sales data from your POS system to align staffing levels with customer demand, preventing overstaffing and reducing labor costs.
- Implement Cross-Training Programs: Cross-train employees to perform multiple roles, increasing operational flexibility and reducing the need for specialized staff.
- Leverage Technology for Efficiency: Adopt technology like POS systems and online ordering to streamline operations and minimize the need for manual labor.
- Engineer Your Menu for Profitability: Design a menu that balances high-profit items with those that are less labor-intensive to prepare, enhancing profitability and efficiency.
- Streamline Kitchen Operations: Organize your kitchen layout and implement batch preparation to reduce preparation time and labor needs.
- Automate Scheduling and Payroll: Utilize scheduling software that integrates with payroll processing to save time and reduce errors in labor management.
- Reduce Turnover with Employee Benefits: Offer competitive wages and benefits to retain staff, lowering turnover rates and associated hiring and training costs.
- Monitor and Adjust Menu Based on Performance: Regularly review and adjust your menu based on item performance data from your POS system to focus on profitable and popular dishes.
- Capitalize on Inventory Management Software: Implement inventory management software to optimize stock levels, reduce waste, and ensure efficient ingredient usage, contributing to labor cost savings.