Article

Labor Pains:
Ways to Stem the Rising Cost of Labor

The rising cost of labor continues to put pressure on the entire restaurant industry, including the independent operator, of course. Whether created by state minimum wage hikes or increasing market competition for labor, it chips away at margins in a business in which margins are already slim.

Some operators, particularly the chains, have addressed increasing labor costs through menu price hikes; however, you can only increase the price of dining out so much until your guests seek a better deal. And paying less than your competitors is a recipe for being continually understaffed. As Heidi Shaban-Cortese, owner of Saffron Sky Mediterranean Bakery Cafe in Fort Worth, Texas, puts it simply: "If you pay less, retention becomes a problem."

Indeed, there are more effective ways to manage labor costs. Let's review.

More Effective Scheduling

The most effective way for an independent restaurant to cut labor costs is to convey to staff that "there is always the likelihood that scheduled shifts may be terminated early or extended based upon business volume," suggests Ed Norman, principal for Clevenger Associates based in Dubuque, Iowa. "Let employees go early on the quiet shifts, and keep flexibility in order to have them stay when busy. One can easily trim hours on slow days by letting people off 15 to 45 minutes early. However, I have found that many independents simply stay with set schedules and fail to manage those hours."

Norman has found employees need to understand not just the dynamics of the system, but why it is being implemented. They need to grasp that "the amount of times they may be left off early may equal the times they are asked to stay late."

Another effective method involves staggering start times for employees. Instead of having four or five employees who clock in at the same time, says Norman, "stack them in every 15 minutes. This ramping up helps minimize the total hours in very slight increments."

Indeed, these are widely used practices in the business. That said, something to bear in mind is predictive scheduling laws on the books in your city or state. More than likely, they do not affect your business as they target larger operations with 250 or more employees. Depending on the size of your business and the number of units, you might need to keep them in mind when adjusting schedules.

These laws can vary with jurisdiction; however, in general, predictive scheduling requires advanced notice of work schedule and a written estimate of each employee's anticipated work schedule at the time of hire. This is an area of restaurant management in which data analytics promises to be a critical tool for anticipating future scheduling needs.

ADDITIONAL RESOURCES:

How Data Analytics Promises to Change Independent Restaurant Operations

The increased affordability and availability of data analytics tools means that now, even small, independent restaurants and startup operators can benefit from the same predictive analytics and business insights previously reserved for large chains and tech giants like Google or Amazon. In this article, we will look at what exists, what to look for on the horizon, and how it could provide a competitive advantage to operators who adopt it.

Even if your business is not affected by predictive scheduling laws, sending home staff mid-shift can increase staff turnover when employees leave to find more predictable schedules and income working for operators such as Dave Alexius Mulder. He reduced the staff costs at his restaurant by 10% and greatly improved retention by crafting more efficient staff schedules and adjusting his teams.

Reducing staff costs through efficient staff scheduling while ensuring maximum revenue and quality of service "remains a primary objective, in my opinion, in running a business," says Mulder. While operating the MOMO Restaurant, Bar & Lounge, Mulder observed that he had too many part-time staffers "and that staff was asking me for more shifts." To resolve this situation he continues, "we optimized the team by reducing our overall headcount and increasing the working days assigned to each bartender." This and other steps resulted in an overall savings of nearly $28,000 per year.

"In the five-and-a-half years I worked at MOMO, I organized daily, weekly and quarterly training programs for 45 staff members, 15 of whom I had direct responsibility for," Mulder continues. These sessions consisted of staff orientation, education about signature and classic cocktails, efficient cocktail making, and obtaining regular feedback from staff on any concerns or suggestions on how they could improve our operations. "Good communication with my staff, and involving them in decision-making, increased their confidence, speed and service," he says. "As a result, I built a team of 15 bartenders, with very little turnover, through incentives and team building.

Our staff turnover average went from less than one year to over three years." Mulder sees staffing as the first of five key aspects of bar management -- the others are customer service, designing a dynamic cocktail menu, inventory management, and cost control -- that are "critical to ensure continual growth and success in this industry." Bruce Goode, owner of Adventures Restaurant in Rice Lake, Wisconsin, says he has taken the "contrarian" approach by making his kitchen labor a fixed cost "to ensure these folks are getting the hours they need to pay rent.

Instead of sending them home, we find things for them to do, or they usually volunteer to take a three-day weekend on occasion if it fits for them."

Goode has raised his starting wages to accommodate experienced cooks and enable them to move from their previous positions without losing income. He has also increased the wages of his staff "to be above the new crew coming in, so they do not feel under-appreciated."

Matthew Mabel, a former restaurant operator and the founder of Surrender, a bar and restaurant consulting business in Dallas, Texas, notes that retaining people in today's market "is about culture," Mabel says, "giving people a reason to be part of something; not about hours." Another step Goode has taken is increasing menu prices an average of 5% to cover the additional expense. "We are now happily over-staffed with a quality crew. Staff easily gets the time off they desire, overtime is at a minimum, and the average wage is not up that much due to the reduction of overtime versus last year."

Goode notes food-cost savings from the menu price increase have more than paid for the labor. As a result, Goode says, profits were up for the third quarter. "I used to treat kitchen labor as a variable expense. Now I'm ensuring they get their pay and their hours. We'll figure it out from there. And profits are up."

Along similar lines, Norman feels that keeping people while cutting labor cost is a matter of offering a fair wage to begin with that will bring in good people, then training them on what they need to know. "Teach them how to build tips by upselling. Teach them how to properly talk with customers, and how to wait on tables to achieve the best overall experience. This will vary depending on the type of restaurant and service style."

"Hire and retain great managers," says Jay Bandy, president of Goliath Consulting Group in Atlanta, Georgia. "People want to work for people that they want to work for." Sharing numbers also helps. "Be honest and transparent with staff on business goals, budgets and sales. The more they know, the better informed they are when hours are cut due to seasonal sales fluctuations."

John C. W. Thomas, director of Sangster Design Group in New South Wales, Australia, remains convinced that the wrong way to reduce labor costs is having the wrong managers in place, those who are neither experienced nor trained to manage hospitality establishments. "If they have not had any kitchen experience, they regularly fail to understand how kitchens work. They place inordinate pressure on the chefs' shoulders to produce more with less. Check out the mental health and suicide rates of chefs -- one of the highest amongst skilled trades."

Thomas's own experience is illustrative. "I was appointed executive chef in 1995 for a well-known Sydney establishment by the owner, who was a builder but had little (restaurant) experience. After considering the details of his offer, I advised him I was not taking the role, to which he replied, 'But I have just sacked the kitchen team so you could start.' He actually thought I was going to provide a high-quality á la carte experience for 120 diners plus functions seven days a week for lunch and dinner on my own. Suffice to add, he shut down this Sydney icon about three months later."

Creation of a team environment is key, Norman has found. "Managers and supervisors have to understand that when shift cuts are made, there is a possibility that they will have to step in to do regular jobs if things pick up unexpectedly."

According to Mark Bires, co-founder and owner along with Mindy Friedler of Jerry's Sandwiches in Chicago, Illinois, the best idea is to pay your top staff well. "The wrong way to approach this and end up with higher turn" by trying to cut payroll costs through low wages.

"Pay staff as well as possible and advisable," Bires says, "as turnover and lower quality staff lead inevitably to lower sales -- which in turn leads to higher payroll costs. You end up chasing your tail in a downward spiral. Good kitchen staff, for example, can do the work of one-and-a-half to two new/lesser staffers, so it is well worth paying them well and keeping them."

Thomas recommends that labor budgets have performance clauses included for all team members. "This mitigates endless requests for pay raises, and motivates teams to manage their work as well as the business they have a vested interest to look after. It also helps retain the right staff." Mabel instructs restaurateurs to look at labor cost on a shift-by-shift basis, and to make sure their managers are kept in the loop so they can make adjustments in real time. "When you do, what you will find is that you've hit your goal or spent less than your goal, and managers will make bonus." This method works well because creates "clarity on what I can be doing right now, every shift, every day."

The Right Staffing at the Right Time

"If you don't have the right labor in the right place at the right time you are either wasting it, impacting profit, or creating a bottleneck that will hinder providing better hospitality and service," says Juan Martinez, principal of Profitability, a foodservice consultancy in Miami, Florida.

Prep is the easiest position to reduce, Martinez explains. "It is not that you are cutting prep, but rather that you are shifting the prep to where labor is available, typically after the peak hours of business." More difficult is any position that relates to providing immediate service to the guest. "We call this guest-service labor."

Front of the house is the easier to cut, says Norman, as staffing is dependent on the volume of patrons. "No patrons coming in the door is the time to think about reduction of staff. Harder? Back of the house, although not impossible for some ancillary areas."

Cuts should begin with anyone who assists or is an assistant, Bandy says, "like serving assistants, bussers, assistant managers." He finds it tougher to lower costs on managers, line cooks, and hosts. Success means "better or same service levels. Better or same food quality. Better or same cleanliness. Lower labor percentage. Same or higher sales." At the same time, Bandy argues against cutting labor strictly for short-term gain. "Know the cycles of the business and plan appropriately. Don't cut highly-paid people from the schedule who are productive. It makes more sense to cut lower-paid people who aren't productive."

Cutting too much labor due to a poor grasp of the numbers is dangerous. Indeed, the failure to schedule enough labor is a common problem. Says Norman, "This results in poor customer service, poor speed of service, and unhappy clients who may not come back as often, if at all." Over the long term, this can lead to significant lost sales.

"Make sure that the labor deployed matches the sales coming in," advises Martinez. "Define the business periods where labor is idle, and reduce the headcount during these periods." The process is as simple as "cutting it in the places where you have too much."

Operators who let managers know what labor cost ought to be on each shift "are the ones that really drill down and hit or beat that goal," says Mabel. "Stop any manager with a good bonus plan and they will tell you, 'We have to hit a 28%' or 'a 23%' or whatever their system dictates. But what they don't understand is that to get there they have to have an 11% on Saturday dinner shift with a line out the door, and can tolerate a 40% on Monday night when things are slow and they are on minimum staffing requirement."

Cross-training is also valuable. Teach staff to multitask or, even better, look for staffers who can, Bires advises. "For example, a dishwasher who can also do basic prep and maybe can fill in on the back of cooking line allows for leaner staffing." In the front of house, he continues, "make sure that servers are willing to bus their tables as they have time, and run food during slow periods. This cuts down on bus/expos."

GM's should host during slow times, Bires adds. "Be open to using modern software like ordering/inventory programs, online accounting, and POS software. We have definitely cut our administrative/booking costs radically over the past five years." "The most effective system that we are utilizing, at this point, to reduce labor is to cross-train individuals to work multiple positions within the restaurant," reports Brian McDonough of Synergy Consultants, who has worked in human resources for restaurants for the past 24 years.

Having a bus person who can jump in the kitchen and help when needed, McDonough advises, a greeter who is fully trained to expedite food when needed, "or even a server who is fully trained to bartend or bar-back as needed allows for a vast freedom of scheduling -- and therefore a reduction in the day's labor."

McDonough maintains that the cost of additional training is offset by the substantial reduction in turnover as the position becomes more dynamic, interesting and profitable for the staff member. "This also creates a substantial team environment where asking for help by one employee, no matter what position he is in at the time, becomes absolutely normal and common."

Flexible scheduling is also valuable. To keep the best people in place, Martinez suggests, make sure that you are providing the employees the shifts they need "so they don't end up leaving, thus creating a gap in the labor needed to run the restaurant."

"One thing I introduced in hospitality was the four-day-on, three-day-off roster with sliding days off," recalls Thomas. For example, during week one, days off would be Monday to Wednesday. On week two, days off Tuesday to Thursday, and so on. "What this meant was each member of staff was able to have at least one weekend day off for four weeks straight."

Keep Your Eye on the Future

Viewing the entire kitchen operation, with employees as one of many facets, is important. "Where wages are very high," says Thomas, "operators will need to adapt in order to maximize the productive output of their kitchens to minimize staffing required."

The nature of the labor-cost issue will change with time, Norman predicts. "Robotics may well play into the labor situation over time, and that means cutting schedules. However, it brings higher wages into play as a possibility for positions that demand a personal touch, both in front of house and back of house."

Honing labor cost will also evolve in the years to come through the application of a more analytical labor-management system "and the application of anything that can reduce the reliance on labor," says Martinez. "Some may call this automation, but the reality is that some of it may not be automation in its truest sense -- like customer order terminals and on-line ordering and payment systems."

Retaining productive, well-trained staff will remain "job one," Bandy concludes. "Don't do that and your sales and profits will suffer. That's where it gets very simple in the restaurant business."

HOW TO MEASURE LABOR PRODUCTIVITY

No single measure can be used to evaluate labor productivity; management must employ multiple measures collectively. Therefore, additional measures are needed to properly analyze labor costs. The additional information needed is readily available as it is compiled on a daily or weekly basis. These measures are:

• Covers per labor hour
• Labor cost per cover
• Labor cost per labor hour

Where do you start? Each time payroll is processed, total labor hours by job category are tallied. Management will compare actual hours worked to those originally scheduled and look for variances. If hours worked are greater than scheduled hours, they will investigate to determine the job category where the variance occurred.

Employee schedules are determined not by revenue, but by customer counts, aka "covers." The "covers per labor hour" is perhaps the most "inflation-proof" indicator of labor productivity compiled by a foodservice operation because it is not distorted by the way sales are affected by price increases and discounts. Although some drops in customer counts occur in the long run when prices are increased, covers per labor hour remains the most effective indicator of employee productivity. The number of covers per labor hour is calculated for each job category as well as for the entire payroll by dividing total labor hours by the customer count.

The "labor cost per labor hour" is another productivity index. It is calculated by dividing total payroll by total labor hours. When calculated by respective employee job categories, one can readily see the wage differentials between jobs. This information can assist management in establishing wage ranges for each job category.

The third index of productivity is the "labor cost per cover." This tells us how much labor is used to serve each customer that comes into the operation. The total payroll is divided by the number of customers. Analysis of this index by job category will show a very wide spread between categories like hostess/cashiers, servers and cooks. The averages in each job category are controlled by the number of employees, the average hourly wages, and the number of hours worked. Check out this example:

Assume:

• Total Payroll Cost = $1,400
• Total Labor Hours = 200
• Total Covers Served = 1,500

Therefore:

• Covers per Labor Hour (1,500/200) = 7.5
• Labor Cost per Labor Hour ($1,400/200) = $7
• Labor Cost per Cover ($1,400/1,500) = 93 cents

REDUCE YOUR LABOR AS A PERCENTAGE OF SALES

Matthew Mabel, a former restaurant operator and the founder of Surrender, a bar and restaurant consulting business in Dallas, Texas, calls it "smart business" to work on reducing labor as a percentage of sales. "The easiest way to do this is by raising sales. I have seen restaurants that go into contortions to cut out a quarter point of labor at a time when they are not even thinking about how to sell more to the guests that are in their dining room or bring more guests across the threshold of their front door into their units."

Since energy, effort and resources are finite, Mabel points out, "The best business people work on the things that will give them the greatest return. So which operator is better: the owner that is cutting 15 minutes off a $2.13 (the minimum federal tip credit wage, which might be higher in your state) wait shift, or the owner that is working on culture, marketing, menu offerings, branding, service, and protecting himself from competition?"

How much can an operator shave from his labor budget? "Once they get serious about it," says Mabel, "the average I have seen is 1% to 2%, which is huge."

ADDITIONAL RESOURCES...

How to Create the Ideal Labor Budget

Learn how to significantly improve your scheduling and labor budgeting practices using tools you may already have - such as a POS system for tracking time and attendance - but may not be taking advantage of. Receive practical, proven methods to reduce overtime, eliminate early clock-ins, schedule staff based on guest counts, create an ideal labor budget unique to your restaurant and other ways to maximize the utilization of your staff and lower your labor cost.

Labor Scheduling Template