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. 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.
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. You have to control both elements of the formula. Here are the essential aspects to control:
Type of labor needed
- 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. 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. 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.
Do you want to learn how to get returns like this?
Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.
There are four key principles used with value investing. Each is required. They are:
- Risk Reduction – Buy only high quality stocks;
- Intrinsic Value – The underlying assets and operations are of good quality and performance;
- Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
- Patience – Allow time to work for the investor.
If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above.
Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:
- Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
- Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
- Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.
Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:
- Lessons about value investing and the principles involved;
- Free webinars from the author following up the lessons;
- Charts, graphs, tutorials, templates and resources to use when you create your own pool;
- Access to existing pools and their respective data models along with buy/sell triggers;
- Follow along with the investment fund and its weekly updates;
- White papers addressing financial principles and proper interpretation methods; AND
- Some simple good advice.