How operators can address rising labor costs
Up, up and away.
On July 1, 22 states and cities across the U.S. raised their minimum wages.
New Jersey’s minimum wage soared from $8.85 an hour to $10. Chicago jumped from $12 to $13 and San Francisco crashed through the $15 barrier with hourly base pay that now sits at $15.59.
The summertime wage hikes represent the latest wave of increases sweeping the nation as income inequality intensifies as a hot-button topic.
And don’t expect a respite. Last February, for instance, new Illinois Governor JB Pritzker signed legislation making Illinois the first state in the Midwest to phase in a $15 minimum wage. Currently at $8.50, Illinois’ minimum wage will increase upwards of $1 each January until hitting $15 on New Year’s Day 2025.
“States and municipalities are saying [to the federal government] that if you’re not going to act, then we will,” says Samantha Summers, communications director for the Employment Policies Institute, a non-profit organization that focuses on issues affecting entry-level employment.
The federal minimum wage has sat at $7.25 for the last decade, though the U.S. House approved a bill, H.R. 582, in July that would push the federal minimum to $15. Though that legislation is unlikely to reach a vote in the Senate, its House passage underscores the accelerating momentum for higher minimum wages. (Of note, the National Restaurant Association has voice strong opposition to the bill and championed “a common-sense approach to [the] minimum wage.”)
The wage hikes, of course, represent an added concern for restaurant operators already besieged by escalating expenses related to municipal fees, healthcare, real estate and more. With labor costs already draining many balance sheets, some operators speak of “impossible” math that challenges their long-term viability, while others question if the restaurant game is one still worth playing.
Fortunately, these wage hikes don’t appear overnight. Most legislation is passed upwards of a year in advance, which provides restaurant leadership time to craft a plan – difficult and contentious as that process might be – that enables them to comply with the law and pursue solvency. Here are eight different steps restaurants might take:
1: Change the menu
The most direct way to counter rising costs is to charge more; yet, raising menu prices is something many operators loathe to do. Higher menu prices or adding surcharges to delivery orders or credit card transactions can draw the ire of customers – and that discontent can spread quickly in the digital age.
Still, operators might pursue other menu changes, such as removing items that carry expensive ingredients or those demanding additional prep time.
“Take a look at operational complexity,” suggests Danny Bendas, managing partner with Synergy Restaurant Consultants. “Do you have a rightsized menu and are you limiting the complexity and skill necessary to execute that menu? That alone can save dollars.”
The more versatile employees are, the more a restaurant can optimize its labor for maximum value. When a dishwasher can also bus tables or a bartender can play server or hostess, operators can reassign employees and optimize their workforce.
“If current employees can do more, then they should be able to better contribute to the effectiveness and productivity of the operation,” Summers says.
3: Cut labor dollars
Pizzerias might simply try to get by with fewer workers, perhaps by nixing overtime or sending workers home if business slows. This can be tricky, though, as it can stretch remaining employees and threaten customer service.
Rather than thinking solely of slicing labor hours, Bendas urges operators to think in terms of labor dollars. Tasks like shredding cheese, for example, can be performed by more entry-level employees as opposed to more costly, seasoned team members. Operators might also investigate staggering employees in and out times so staff is running near capacity during peak demand but leaner during traditionally slow periods.
“Get the right people performing the right tasks at the right times,” Bendas says.
Technology like in-store kiosks, online ordering and kitchen robots that produce dough balls promise to improve operations and output while lowering labor costs. Though buying such equipment likely requires a potentially sizable outlay of capital and a shift to existing operations, its impact on labor costs can be significant.
“You might be able to cut your staff of 20 in half,” Summers says.
5: Focus on reducing turnover
The more restaurants can keep capable employees in the fold, the better, says Joshua Ostrega, co-founder of WorkJam, a leading digital workplace solutions provider that aims to help companies create a more knowledgeable, engaged and productive workforce. Initiatives to reduce turnover might include an earnest review of employees’ overall compensation, perks and culture. A restaurant with more flexible scheduling that allows employees to achieve better work-life balance or ownership that rewards staff for hitting milestones, for instance, can boost engagement and employee loyalty.
“Lowering the turnover rate and getting your more experienced, engaged employees to stick around is one way to combat these rising wages,” Ostrega says.
6: Investigate expenses
With labor gobbling up more capital, restaurants might take stock of all their expenses. Can the restaurant renegotiate its lease? Have utility costs run awry? Would it make sense to change operating hours? Savings in one area – or a few – can help operators address surging labor costs.
7: Drive revenue
Pizzerias cannot only cut their way to prosperity. Building revenue is another potential antidote. From developing more enhanced catering programs and more aggressively pursuing school lunch contracts to creating a high-margin cocktail program, Bendas urges operators to consider ways they can increase revenue while staying within brand.
8: Dig into the data
Bendas champions sales per manhour as an important gauge of restaurant productivity. In particular, he suggests analyzing labor scheduling in a graph format, where you can visually see labor respective to sales.
“It’s an ongoing process of understanding where you are in real time so you’re making sound decisions,” Bendas says. “If you don’t manage these ins and outs, you can really get yourself into trouble.”
Chicago-based writer Daniel P. Smith has covered business issues and best practices for a variety of trade publications, newspapers, and magazines.