The human resource structure is at the core of the hospitality industry, and the labor cost accounts for most expenses in the restaurant business. The percentage of restaurant labor costs to sales averages 22-40%; in some cases, it can be almost as high as 75%. This, coupled with the capital-intensive nature of this industry, makes running a restaurant a very costly affair. This also makes it necessary for restaurants and cafes to control labor costs to maintain profit margins. According to Kroll’s Restaurant Industry Insights Report , around 40% of U.S. restaurants have invested in technology to maximize kitchen productivity and reduce labor costs.
Labor costs in a restaurant encompass all expenses related to employee compensation, including wages, salaries, overtime pay, benefits, payroll taxes, and paid time off. These costs are pivotal in determining a restaurant’s financial health, as they often represent a substantial portion of operating expenses. Effectively managing labor costs is essential for maintaining profitability and ensuring efficient operations.
Labor costs can be categorized as fixed or variable in the dynamic restaurant industry. Fixed labor costs pertain to salaried employees whose compensation remains consistent regardless of business volume, such as managers or chefs. Variable labor costs involve hourly staff whose work hours fluctuate based on customer demand, including servers and kitchen assistants. Striking the right balance between fixed and variable labor is crucial; overstaffing leads to unnecessary expenses, while understaffing can compromise service quality and customer satisfaction.
Recent industry data highlights the significance of labor costs. Labor expenses constitute about 31.6% of a restaurant’s total operating costs. This percentage can vary depending on the type of establishment. For instance, fine dining restaurants may experience higher labor costs due to the need for specialized staff and a higher level of service. In comparison, quick-service restaurants often have lower labor costs. Factors such as minimum wage increases and a shrinking pool of potential workers have also contributed to rising labor costs in recent years.
8 Effective Tips To Reduce Restaurant Labor Costs
Reduced revenues and stiff margins may lead to desperate measures, such as slashing monetary incentives and firing employees. But that is not the way to go. Here are some proposed ways to reduce labor costs, which you can use to minimize restaurant labor costs.
1. Control Employee Attrition Rate
According to a study, the hospitality sector in India has the highest attrition rate in the country and globally. Attrition-related costs include recruitment and training new workers and lost working hours and efficiency. Heavy competition, long working hours, and the search for growth opportunities elsewhere drive this phenomenon. The high attrition rate is one of the primary reasons behind the towering restaurant labor costs.
Providing better growth opportunities, offering incentives, introducing employee loyalty programs, and improving work culture can all help control the attrition rate. A clear employee welfare policy and team-building exercises are also helpful for employee retention.
2. Work On An Appropriate Salary Structure
A commission-based salary structure can significantly improve cost control and motivate employees. Therefore, creating a composite compensatory package for the staff is advisable, including a fixed and commission/performance-based incentive structure. If you have pension or retirement plans, convert them into profit-sharing programs. The temporary or part-time workforce can be appointed to a complete commission-based compensatory structure.
You can review profits and salary levels regularly and eliminate the costs that put you above the industry average. However, this step should be taken only after an open discussion with employees affected by it; otherwise, it might lead to high employee turnover.
3. Cross Train The Team
Cross-training ensures that one employee is trained to handle multiple tasks and roles. This ensures that you have a workforce who can multitask, leading to the growth of the staff’s professional capabilities. The latter is usually welcomed warmly by employees. Cross-training can also cover unforeseen and sudden vacancies in the restaurant. It increases efficiency, develops empathy, and provides team-building opportunities at the organizational level.
The restaurant business is dynamic and mainly affected by seasonality and occasions. Review your customer footfall on weekends, holidays, and festive seasons, and accordingly schedule your full-time employees, hire part-time help, and plan your food budget. This will help you control your payroll costs, minimize kitchen waste, and run your restaurant at its best capacity during the peak season.
4. Employ Part-Time Help
Part-time hires usually charge an hourly rate that is lower than that of permanent employees. Also, the entitlement of permanent staff to statutory benefits is a much more significant financial commitment. This is why engaging part-time employees makes a lot of sense. A restaurant can offload unskilled and general chores to such a temporary labor force, thus reducing the burden on professional and permanent staff.
Certain days of the year are more busy than the other comparatively slow days. It is a good idea to hire seasonal workers to cater to the periodic footfall in your restaurant. You can hire them on a contractual basis for a few months, and they also offer them permanent employment if they are invaluable to your business. This is a great labor cost reduction strategy for restaurants.
5. Invest In Hiring
Investment in recruitment goes far beyond money and funds. The process requires time and effort. Focus on your requirements and review job profiles accordingly. Instead of hastily filling a vacancy, look for the best fit.
Remember, hiring the wrong person for the wrong job will only increase attrition and the cost of recruitment and training. According to the estimates by industry experts, hiring costs about 25% of the average employee’s salary! Misfits can harm the restaurant’s reputation and affect the business in the long run.
6. Role of Technology in Labor Cost Management
Technology is replacing human labor in the restaurant business,’ would be a big statement to make, had restaurant technology not grown leaps and bounds in recent years. Although not entirely, technology has automated restaurant operations so much that little human effort and labor are now required. Features like Automatic Billing, Online Ordering, and Table Reservations have significantly reduced the need for human interference.
Technology has become a game-changer in managing labor costs in the restaurant industry, providing tools that enhance efficiency, reduce expenses, and improve overall operations. One powerful tool is employee scheduling software, which simplifying the complex process of creating and managing staff schedules. By leveraging automation, this software ensures optimal staffing levels based on historical sales data, anticipated demand, and business trends. It also enforces clock-in accuracy, preventing unauthorized early clock-ins or extended breaks that can inflate payroll. Moreover, it helps reduce overtime costs by flagging potential overtime situations, enabling managers to adjust schedules proactively. These efficiencies save money and enhance employee satisfaction by fostering fair and predictable scheduling practices.
Another significant technological aid is labor report analysis software, which empowers restaurant managers to make data-driven decisions. Detailed labor reports provide insights into staffing patterns, payroll tax trends, and overtime costs, helping identify inefficiencies or overstaffed shifts. For example, if data reveals excessive overtime pay during specific shifts, management can redistribute workloads or hire additional part-time staff to cover peak periods. These insights are invaluable in optimizing labor expenses while ensuring high customer service levels.
Finally, point-of-sale (POS) systems revolutionize labor cost management by streamlining tasks and improving operational efficiency. These systems allow servers to take orders directly at the table, reducing the time spent running back and forth to a stationary POS terminal. This increased efficiency means fewer employees are needed to manage the same volume of orders, translating to reduced labor costs. Furthermore, mobile POS systems enhance customer service by speeding up order processing and payment times, leading to higher sales and improved table turnover rates.
7. Optimize Operating Hours for Cost Efficiency
Another effective way to manage costs without compromising service quality is to evaluate your restaurant’s performance during different times of the week and adjust operating hours accordingly. By closely reviewing sales data and customer foot traffic, you can identify slower periods where revenue barely covers the cost of keeping the restaurant open. Instead of operating during these less profitable hours, consider reducing your business hours to focus on peak periods when demand and profitability are at their highest.
This strategic approach offers several benefits. By closing during slow periods, you can significantly reduce labor costs, energy expenses, and other overheads associated with operating during non-peak times. Additionally, concentrating your resources on busier hours allows your staff to deliver a better dining experience, as they can focus on serving more customers with greater efficiency and enthusiasm. This heightened attention to customer service during high-demand periods can enhance your reputation and increase customer loyalty.
8. Measure And Boost Employee Efficiency
Measuring and optimizing staff efficiency is difficult in the restaurant business. However, you can still do that by defining goals and setting Key Performance Indicators (KPIs) for each team. For instance, the kitchen team can be assigned to control Food Costs. Similarly, each server can be given a target of generating a particular sales figure.
You can analyze your staff’s performance by fetching reports from the POS software, measuring and improving their efficiency, and reducing restaurant labor costs without any layoffs.
Expert Opinion
Scott Greenberg is a renowned keynote speaker and author who has inspired audiences in around 50 U.S. states and across the globe. With a client list that includes prestigious organizations like Nike, McDonald’s, PrideStaff, the U.S. Air Force, Choice Hotels, and RE/MAX, Scott is celebrated for his ability to help businesses and leaders think, lead, and serve at a higher level. Scott shares his insights on controlling labor costs in his thought-provoking article in the Nation’s Restaurant News :
“Setting clear and measurable performance benchmarks is crucial for employee engagement and productivity. Employees need to know what’s expected, and they need to be able to track their progress. This is important for management to hold them accountable, and for team members to self-motivate. People like to see their score and derive satisfaction from hitting their numbers.”
– Scott Greenberg
Conclusion
Restaurant labor costs are one of the significant restaurant expenses that bleed a restaurant dry. Hence, you must analyze each aspect of your restaurant business and take appropriate steps to effectively managing labor costs. Reducing labor costs in a restaurant is not just about cutting expenses; it’s about finding more competent, more efficient ways to run your business while maintaining the quality of service your customers expect.
By leveraging technology, optimizing schedules, cross-training employees, and analyzing labor data, restaurant owners can achieve a sustainable balance between cost management and operational excellence. Strategies like focusing on peak hours, investing in employee satisfaction, and streamlining tasks ensure that your team remains motivated and your customers remain happy. Implementing these cost-saving measures improves your bottom line and sets the foundation for long-term success in the competitive restaurant industry. Remember, every small change can lead to significant savings, making your business more resilient and profitable.
Labor costs typically range from 30% to 35% of a restaurant’s total sales, depending on the type of establishment. Fine dining restaurants may have higher labor costs due to specialized staff, while quick-service restaurants generally have lower percentages.
Most restaurants’ reasonable labor costs are between 20% and 35% of gross revenue. This range allows for profitability while maintaining quality service and operations.
The ideal labor cost depends on the restaurant type, but it should be around 30% of total revenue. This balance ensures efficient staffing while maintaining profitability.
A good labor cost percentage for most restaurants is 25% to 30% of revenue. Staying within this range helps maintain a healthy profit margin.
To reduce labor costs, streamline employee schedules, cross-train staff, analyze labor reports, and use technology like scheduling software or mobile POS systems. These measures help improve efficiency and reduce unnecessary expenses.
You can keep labor costs low by scheduling based on demand, cross-training employees, avoiding excessive overtime, and leveraging data to forecast staffing needs accurately.
- Monitor labor percentages regularly.
- Optimize employee scheduling based on peak and slow periods.
- Reduce overtime and prevent early clock-ins or late clock-outs.
- Cross-train employees for versatility.
- Use technology for data-driven decisions and task automation.
Labor costs can be reduced by efficient scheduling, cutting non-essential shifts during slow hours, and improving staff productivity through training and automation.
Restaurant labor costs should ideally be around 30% of total revenue, though the percentage can vary based on the type of restaurant and business model.
Labor cost per meal is calculated by dividing total labor costs by the number of meals served. For many restaurants, this typically ranges from $2 to $5, depending on the type of service and operational efficiency.
