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Controlling Restaurant Costs In A Tight Labor Market

Posted by Dave

Labor markets continue to tighten. "Applications have been below 300,000, a historically low level, for 64 weeks, the longest such streak since 1973" (US News & World Report). For the restaurant industry, this is one of four major considerations when managing labor costs. This 'perfect storm' of conditions only happens 2 or 3 three times in a typical career, so if you are feeling the pressure, it is to be expected.

The four horseman challenging everyone today are:

  1. Low unemployment
  2. Reduced skills in the remaining labor pool
  3. Minimum wage increases
  4. Overtime rule changes affecting salaried employees

Let's discuss the first two of these challenges. We will touch on the others in later blogs.

Restaurant Labor Issues

The US economy has moved into the final stages of its 7 year growth phase. As of May 26, we have had a run of 64 weeks where new unemployment claims have been under 300,000, the longest since 1973. We have been in this stage of the cycle for a long time, and we are feeling the effects of late growth stage reality.

  1. Unemployment is low, and would be lower if people who had exited the job market had stayed on the side lines. People re-entering the job market have reduced the pressure on wages, but it won't last forever. Eventually, everyone who wants to work will have a job, and wage pressure will intensify.
  2. The skill level of the people available today is lower, on average, than the skills you could expect a new hire to bring three years ago. To get higher skills, you will have to pay higher wages, or invest in training.
  3. The new people you hire will have a significant impact on your customer satisfaction going forward. So, they better serve your customers well.

These conditions set up an interesting set of choices. Do you hire unskilled lower-paid people and train them up to a level that let's them serve your customers, or do you hire the best staff away from your competition and pay a wage premium? Do you invest in technology and try to eliminate labor hours?

The best answer may depend on the type of restaurant you operate. Here are some things to think about as you navigate these trecherous waters.

Labor Issues, Per Restaurant Type

In quick service, low check average locations the margins probably do not allow the operator to pay much in the way of wage premiums. Expectations for service in these environments are often lower than in higher ticket locations. When you stop by a hot dog stand, you don't expect great service. For these locations, hiring and training may be the best choice.

For fast casual, expectations for service are elevated. These locations do not typically have tips, so the wages are dictated by minimum wage laws and market realities. Quality of food and speed, are at the heart of the popularity of fast casual. For these locations, investments in technology that help customers get their orders processed faster, and elimination labor hours maybe the way to go.

For casual dining, tips are how most front of house personnel get compensated. Back of house personnel wages are defined by minimum wage laws and market competition. Overall, a more complicated situation. The amount of customer service expected here is much higher than counter service locations. For these locations, the best approach may be a combination of technology and training in the front of house combined with paying a premium in the back of house to maintain high food quality.

Finally, for fine dining, the customer expects the best of everything. After all they are paying $20 - $80 per plate of food. The pressure to maintain high standards is always present in these locations. The best hostesses, the best servers and the best cooks and chefs are what defines the best of fine dining. For many positions, the use of technology to reduce labor hours is not a positive change in the eye of the customer. They feel they are paying for personal attention. The loyal fine dining customer is willing to pay for that service. For these locations, the premium in wages is more easily passed on through the menu prices.

Summary

Controlling labor costs is never easy in the restaurant industry. The current economic conditions makes it even harder. The approaches that were successful 5 years ago will not work as well today. The good news is this phase will not last forever, all cycles move on to the next phase eventually. In the meantime, your market share, margins and profits are at risk. Making the wrong decisions in this climate could cost you for years to come.

If you don't please your customers, you lose market share and it will take a long time to earn that share back later.

If you pay too much for labor, your margins and profits suffer and you may lose your competitive advantage.

Look over the horizon and unemployment will increase, making it easier to find skilled servers and cooks. Plan for this eventuality and you just may find yourself in a great position for the next economic phase.


Thoughts?

Any restaurant labor issues I missed?

Agree or disagree with my thoughts?

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About Mirus:

Mirus Restaurant Solutions is a multi-unit restaurant reporting software used by operations, finance, IT, and marketing.

For more information, please visit www.mirus.com

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