I want to bust a myth about restaurant labor cost. The myth says there is one labor target percentage that every restaurant should use, and they should use it every day, every week, every month, every year.
Not only is that wrong, it’s ridiculous. See, what happens is independent operators go searching for data that will tell them what their labor cost should be. You read blogs, you read the National Restaurant Association’s newsletters, you go search expert articles – you do all these things and then come up with a number. Usually it’s around 34 percent.
Well, where’d those numbers come from? Way back when I was searching for that data as an operator, I came across a National Restaurant Association publication that said the average restaurant runs about a 29.9 percent labor cost without taxes, benefits and insurance, and about 34 percent with taxes, benefits and insurance included. Well, the owner of the restaurant I was running wanted all the managers to shoot for this 34 percent labor cost. Why? Because some association offered it as an average? Is your restaurant average? Do you have the same style of restaurant, the same type of service, same product quality, do you have server assistants, do you have bussers, do you have food runners? What you offer compared to the restaurant across town is very different. So how can use a national average to run your business? You can’t. You’re not average.
So, how do you find your target labor cost? The most important thing is to understand prime cost: total cost of goods sold plus total labor costs including taxes, benefits and insurance. Do me a favor, read that again to make sure you are getting the formula.
Here at TheRestaurantExpert.com, we say if you do $850,000 a year in gross sales, you should be shooting for a 55 percent TOTAL prime cost or lower. If you do under $850,000, that target prime cost goes up to 60 percent.
It doesn’t matter how you get to that 55 percent prime cost. You could run a higher food cost and lower labor cost, or higher labor cost and lower food cost. Heck, they could be the exact same!
To figure out what your target labor cost should be, first, you have to have a budget. With an annual budget, let’s say your target labor cost for the year was 28.89 percent raw labor cost, excluding taxes, benefits and insurance. The target labor cost is higher when you add those items in, but the reason why I say use the raw labor cost is it’s what managers can control day to day.
The 28.89 percent labor cost is a real example of a barbecue concept I worked with. They offer quick-serve and catering. When I first started working them, they were doing about $3 million in volume. One month they were projecting they would do $165,000, another they projected $420,000, and a third month they projected sales would be $224,000. Now, we’re shooting for a 28.89 percent labor cost. If I use that target in April when my sales are low, it’d be impossible. I’d have a manager that’s being yelled at every single day, “Why is your labor cost so high? Why is your labor cost so high? Why is it so high?” Because it’s a false number. Without a budget, that percentage is just a number picked out of the air. When sales are low, the manager salaries don’t change. That means when sales are lower, it reduces the amount of money available for labor, which then also means when managers take the money off the top, whatever is left over is for hourly employees. In this case, there’s not enough left over for the hourly employees.
Independent restaurants tend to solve this with something called minimum staffing levels. They put one manager on, one cook on, or whatever the minimum is they think they can get away with. If your restaurant is that seasonal and your numbers vary this much, you have to find a different solution to control labor cost and still serve your guests. In this example, the target for this lower sales month is 32.56 percent not 28.89 percent. Now look at the month when it’s $420,000 in sales, almost tripling what our sales were in the slower month. That target becomes 19.53 percent. Wait a second, we’re shooting for a 28.89 percent labor cost and this month is 19.53 percent? How do you do that? Well, remember the manager salaries? They get paid the same amount and then all of a sudden, because you’ve got higher sales, you’ve got more money for hourly employees.
At some point you reach maximum efficiencies and maximum staffing levels. You can’t add another cook, you can’t add another server, you can’t add another host, you can’t add any more employees. You’ve got enough money. But you’ve got a restaurant that’s only so big. See, this is when your customers actually manage your efficiencies for you. Managers don’t. There’s just a steady line of people. You’re not going to use all the cash for salaries. When you have a month that’s somewhere in the middle, the target is 27.61 raw labor costs. It would be a few points higher in a California or New York restaurant based on taxes and workers’ comp, but for your management team, their raw labor target is 27.61 percent.
The goal is to have a 12-month budget to get the target for the year and month by month. In fact, you cannot run your restaurant properly without a budget and know what labor cost you should be shooting for each month.
Now, let’s take that one step further. If we have our target and we use a system I teach called the labor allotment system, which basically takes what you did last week, your forecasted sales, your budget target that you get from our budget, you can tell each manager how many hours and how many dollars they have to spend on their next week’s schedule to be on budget. Go into the week on budget instead of bringing your staff in, praying you’re busy and then having to start cutting when you’re already over budget.
It will also vary over the week, higher on slow days that require labor for activities such as prep, but lower on that slamming Friday night when you’re maxed on staff and sales. As long as you use the hours you’ve been allocated the way you need to run your business, no matter what day of the week, you now have the correct labor target each day.
Now, with this system in place, owners and general managers, when you work with your management team, you’re not trying to shoot for some arbitrary number that’s impossible to hit one day to the next. Instead, you have the perfect number for your restaurant based on your monthly budget, your weekly targets, each day now has its own labor target. You have power in your business.
If you truly want to control your labor cost, you must have a budget. You must be using the labor allotment system and ultimately scheduling for the needs of the business on budget. Your profitability will explode. You will not hurt guest satisfaction. You will not cut your service levels down to where you can’t handle your guests. You’ll stay true to your core values. You’ll make money. The employees will be happy. There’s nothing but upsides.
