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Controlling Labor Costs in a Restaurant

There are two costs that stand out in the restaurant industry.  Food and labor comprise more than 45% of the typical expenses of the restaurant.  No other expense comes close to these two costs.  This article is dedicated to controlling the labor costs in your food service operation.

No two restaurants are alike.  So there is no definitive formula.  You have to use information that is available and exercise reasonable expectations of the outcome.  For fast food, the skills are different than an upper end restaurant.  In the nicer eateries, labor costs are driven by the knowledge level of the staff.  There are Executive Chefs, Sous-Chefs, Line Chefs, and Pastry Chefs.  These are not minimum wage folks; they have formal education to substantiate their knowledge.

So getting back to the issue at hand, how do you control the costs of labor?  Well, remember the mathematical formula, it is time multiplied by labor rate equals the total cost.  If you have higher skilled folks prepping and serving food, then it doesn’t take long for the costs to get out of control.  So you have to control both elements of the formula.  So here are the essential aspects to control:

 Type of labor needed 

  • Highly skilled
  • Certification required
  •  Basic labor

Time management of labor

  •   Appropriate start and ending time
  •   Pulling from the best labor pools to meet this goal
  •   Diversity of work for the labor pool

Now let’s get into the details to gain a full understanding of how to control labor costs in the restaurant industry. 

The type of food and the quality of the food you serve determines the level of knowledge of your labor pool.  If you are serving food in a country club style restaurant, then the labor pool has to be highly trained.  From chefs with culinary degrees to line staff certified in food service, all are needed to fulfill the expectations of the customer you serve.  Even the service staff has to be experienced and knowledgeable about the way the product is served.  If the customer asks what type of glaze on the meat is served, the waiter/waitress has to be able to answer the customer.  In this type of restaurant environment with multiple staff members, the key is the mix of labor talent to keep costs down.  You don’t want the line cook waiting tables, it is not cost effective.  So in this environment control the mix of talent and manage the time issue based on the restaurant’s history and events on the calendar. 

Plan out the labor mix for the restaurant, have the events coordinator inform you of upcoming events.  You should know of these events six to eight weeks out so staff is informed of their future obligations. 

As you move down the food service/quality level into the national sit down restaurants, the labor formula shifts towards fewer degreed chefs and more certified and basic labor staff.  Again, here control the amount of labor expended based on the typical work week.  Obviously, you need maximum labor on Friday and Saturday night.  Monday’s staffing needs will be significantly different.  Here, these types of restaurants place a higher value on college age and young adults to meet the needs of the customers.  It’s very physical and the labor rate per hour has to be low.  There is very little margin in the product served to the customer.  As a manager, plan to spend some time educating new hires, and this will cost money too.  But it is to be expected in this class of restaurants.

As we move further down the restaurant levels into the fast food systems, labor relies more on low cost, unskilled workers.  Here you can expect to spend a lot more time training new staff.  Furthermore, the emphasis shifts towards time management and not so much on the cost of the skills needed.  Time management at this level is achieved by using:

1.      More at home Moms seeking work during school hours
2.      College and high school workers
3.      Individuals seeking part time work only

Limit their time to the main hours of need; lunch time is from 10:30 to 2:00.  Very few customers will walk into the restaurant after 2 PM.  Send the labor pool home as soon as possible.  Bring in the high school staff at 4:30 and have them work until 8.  Teach the staff various job duties so they can handle diversified responsibilities and substitute during absenteeism.  Here you are controlling the volume of time to keep costs down.

In most fast food environments, total labor costs including the benefits paid (includes the payroll taxes) should not exceed 29% of the total revenue.  If you exceed 29%, then this eats into the profit margin and once you exceed 35 – 37% of revenue, I don’t see how you can make any profit.  So manage the amount of hours in the restaurant to keep the costs down.

In summation, a restaurant owner has to manage both the level of skills needed and the amount of time for staffing needs.  The higher end restaurants have to have higher skilled staff, so you control costs by the mix of staff.  For the mid-range establishments, reduce the higher skilled staff and focus on more low end cost help.  For your fast food and sandwich shops, costs are controlled by the amount of staff hours you use.  This is not an issue of skills, but the emphasis is on the amount of hours you pay.  Act on Knowledge.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you. If interested in my services as an accountant/consultant; click on My Services in the footer of this article.

 

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About David J Hoare (405 Articles)
I spent 12 Years as a Certified Public Accountant, Over 20 Years of Practice in Accounting and Consulting, Controller in Management of Closely Held Operations, Masters of Science in Accounting, Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns

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