How to Achieve Optimal Labor Costs

Eric StoberOperations & Management

This is the third post in our series from 7shifts, staff scheduling made for restaurants. Learn how 7shifts and Bypass can help quickly create schedules, clock in directly on Bypass POS and leverage sales and labor insights. 

Labor costs comprise a large portion of a restaurant’s total operating costs and are a major factor in a restaurant’s profitability. Add in new overtime regulations (such as those in New York City or Seattle) and increases in the minimum wage, which all add up to make labor cost control a serious undertaking. In fact, according to BDO, a restaurant industry consulting firm, labor costs have increased 0.8 percent to an average 30.5 percent of total sales in 2016.

In quick service and fast casual restaurants the need to control costs are even more extreme. To offset lower average transaction values, operators now regularly push the envelope and get labor costs as low as 20 percent of total revenue. It‘s a delicate balance, and one that often requires tough decisions.

While you can push the envelope to lower labor costs, you don’t want to sacrifice customer service or adequate shift coverage. But if you go more than 30 percent, you’re likely to have idle staff and a blown budget, which will affect your short- and long-term profitability.

However, with some strategic planning and the right know-how, restaurants can find the sweet spot for their labor costs and make smart adjustments to keep them optimized.

What is optimal labor?

Your optimal labor is the minimum number of shifts needed to hit your labor target while maintaining appropriate service coverage. You want to calculate your labor cost in relation to your total sales. So if your restaurant makes $20,000 in sales in a week and you spend $5,000 on labor after taxes and benefits, then your labor cost is 25 percent.

Your labor cost should typically be between 20 and 30 percent of your total revenue, and the optimal labor cost varies depending on the restaurant, the type of service and food. Chron puts the typical labor cost for fast casual restaurants at 25 percent.

Here are three action-based tips on how to find your optimal labor to maximize your profits while maintaining quality.

Know your prime cost

The first step to calculating your optimal labor cost is to find your “prime cost.” Your prime cost is the cost of all saleable goods, such as food, beverage or dining products, added to your labor costs.

Your prime cost should typically be around 60 percent of your total sales, according to Randy White, CEO of the White-Hutchison Leisure & Learning Group. Why is this important to know? Imagine that the price of one of your raw inputs has gone up, driving up your food costs. At that point, you might want to consider switching to a different product, a cheaper substitute or make adjustments in areas such as labor to create an offset. A centralized point-of-sale solution can help with food cost analysis so nothing goes unseen.

Optimal labor cost is not an isolated number, but must be achieved in balance with your other costs. For example, do you go for the fresh house-made pasta, which is low food-cost but high labor-cost, or the grilled ribeye, which is high food-cost but low labor-cost? The options are limitless, but comprehensive knowledge of all of your costs can help you make informed decisions so everything is within balance.

Tweak your team structures

A little research goes a long way to help reduce your labor costs while staying competitive and offering great service.

You should regularly check your staff’s wages and benefits against the market to find opportunities for cost reductions.

First, review each of your roles on websites such as Glassdoor or Payscale to see if you’re paying your employees above or below the market standard. If you’re not, consider re-evaluating your wages—this will have the dual impact of rewarding your staff, but also reducing staff turnover, which will further decrease labor costs.

Second, consider replacing automatic pay raises with merit-based increases based on revenue-driving performances. A commission-based pay structure, where an employee earns a portion of each table turned in order to spur up-sells, can be an appealing option for employees that desire its income potential and have the skills to excel at their position.

Third, consider switching a few roles from full time to part time (under 30 hours a week) when natural turnover or attrition happens. Doing so will offer you the flexibility to bring in on-demand staff when your restaurant gets busy but avoid ‘carrying’ idle labor for lulls.

If you have more part-time workers, you run less risk of scheduling overtime, which can be costly and blow your chance of achieving optimal labor. Restaurant scheduling software such as 7shifts can notify managers when an employee is about to hit overtime, giving you ample time to adjust the schedule to avoid it. In addition, scheduling tools made for restaurants—like 7shifts —can integrate with your POS to help you build your schedule around your optimal labor goals.

Take advantage of self-service

One way to achieve optimal labor costs is to re-balance where labor costs are allocated between front of house (FOH) and back of house (BOH) and use technology to streamline processes. To do this, consider turning to smart POS systems such as Bypass, which offers self-service kiosks in its ordering ecosystem for customers to order for themselves in quick service or fast casual restaurants.

More and more restaurants are turning to self-service as a way to reduce their FOH labor costs while not impeding on customer service. While your labor cost may not decrease at first, as customers warm up to self-service you can begin to put more machines in your establishment and reduce the amount of labor scheduled. It’s also important to remember that implementing kiosks should not be seen as a way of replacing FOH staff (and the cost of implementing kiosks may be higher than FOH staff depending on local wages). Any implementation of self-service will lead to a corresponding increase in BOH labor required, however the trade-off is that this labor is more efficient and can be ‘stretched’ further before needing to add more shifts.

Achieving optimal labor costs is a game of balance and insight. The first step is to understand what defines optimal labor for you and then start to take the steps to work towards it. While this is not an overnight process, making iterative improvements over the course of months can have a major impact on your profitability over the course of months or years. If you put in the work, you’ll be surprised by the progress you can make on your restaurants’ profitability.

For more from our friends at 7shifts, learn how to cut labor costs with holistic systems along with 5 ways fast casual chains can slash bloated labor costs.