Effectively Managing Labor Cost Increases In Your Restaurant

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When labor costs escalate, fire alarms shriek loudly within every restaurant owners’ head – not surprising when you work in an industry where the number one expense is labor, accounting for about 33% of the total operational costs. It’s easy to see why the panic spreads frantically when time and again the restaurant world is inundated with stories of closings and despair since the first phase of the minimum wage hike hit various states across the country. Now more than ever, owner/operators are desperate to know how it’s possible to stay afloat when most of them feel like they’re on the Titanic heading straight for an iceberg. I’ll let you in on a little secret: It is possible to manage these increases both elegantly and gracefully if you do your homework. Wage hikes will inevitably prompt changes from an operational standpoint so it’s essential to know what types of numbers you’ll need to fill any gaps before you make changes. In order to find the best possible route for your restaurant, while still keeping your guest, team and profit on an even keel, you’ve got to do the math. More than solely taking into account the increase in minimum wage, you will also want to consider the increase in payroll taxes and insurances. Once you factor all of this together, you can then plug the numbers to see how much money you would lose if you made no changes to what you are currently doing. Once you know the dollar figure, you can start to determine where you are going to re-coup your hard earned cash. Nail the math and you’ll avoid that iceberg.

Now let’s talk options. You’ve got: adding a surcharge to the bill, elevating your menu pricing – either slightly across the board or more significantly on top-sellers – (which we talked about here and here), decreasing portions or quality, and finally decreasing hours or cutting shifts. Right off the bat I can pick two of these out which I firmly believe, should you choose them, will drive you straight into the very iceberg we’re trying to dodge. I only say this because as you know we like to use the Decision Making Triangle here at RSI, and applying that logic leaves me with an isosceles triangle for two of these choices; not the equilateral triangle we’re looking for. By the way if you don’t remember your geometry classes from middle school, the isosceles triangle is a bit wonky and lopsided. I digress; now let me ask you this: If you decide that quality control should go down the drain, or think it would be okay to charge the same amount for a portion large enough to fill a mouse, do you truly think your guests will remain loyal? While it may sound like the path of least resistance, I can guarantee your guests will notice. Secondly, and again along the lines of loyalty and quality, will you be able to retain a well-rounded staff if you cut their hours or schedule shifts when you’re fully aware there’s barely enough of a team to make it through service? It’s simply not good for profit, nor does it fall in line with the values I’m sure you set when you started chasing your dream in the first place.

Surcharging and increased menu pricing are where I believe you have slightly more wiggle room to meet you guest, team AND profit needs. Adding a surcharge to the bill may or may not make up for the lost revenue due to increased payroll costs – you must determine approximately how much the surcharge will bring in based on its percentage as well as the guest check average. Then, if you do decide to go this direction, there are specific metrics you need to keep an eye on to determine if the surcharge is having a positive or negative effect on your profit. You will want to closely watch your guest counts to verify the impact of your decision. Keep in mind that surcharges would also be subject to sales tax just like everything else on the bill. As far as increasing menu prices are concerned, you will want to make sure that you have a solid way to track margins over time (such as a 12 week trend report) so you can see the dollar impact that the price increase(s) has/have had to your bottom line. Just remember, before you make any decision on how to combat deficits from the wage increases… do the math.