Because you cannot overcome a minimum wage increase with labor cuts alone!
Let me start off by saying this is not a political soapbox article. I don’t care what side of the political fence you live on, my goal is to teach you the one thing you need to learn to survive the minimum wage increase that is gaining momentum all across the U.S.
If you are in a city or state that has not seen large increases, please let me be perfectly clear, it’s not a matter of if you will see these kinds of minimum wage increases, it’s a matter of when. For example, who could forget when the Seattle Municipal Wage Law went into effect in 2014, raising minimum wages to $15 for all working at the Seattle-Tacoma International Airport, and then Seattle Washington to follow suit by January 1, 2017. The State of California is set to reach $15 an hour minimum wage by the end of 2022, with some cities already approving the increase to be in place by 2018 like Los Angeles and San Francisco California. The State of New York has a phased plan of $15 minimum wage in New York City by the end of 2018, and the rest of the State will phase in on different schedules with the last county by the end of 2021. Washington D.C. approved a minimum wage of $15 to be fully in effect by the end of 2020. On top of these increases, many cities all across the country have passed laws that increase minimum wages to $12 and $13 an hour.
With that said, there is no better time to prepare for these increases than now!
Many restaurant owners think the solution to this increase in labor costs is to cut labor. I hate to break it to you, but there are not enough labor controls any restaurant owner can put in place to limit the impact of increasing minimum wages on the business. The solution has to run across all parts of the business. In short, you need to understand, calculate and then attack your prime cost.
What is prime cost? Prime cost is your total of cost of goods sold, which includes food, beverage, draft beer, bottle beer, wine and liquor costs, plus your total labor cost, to include taxes, benefits and insurance. You might have heard it referred to as the controllable expenses. I break it down to food, beverage and labor costs.
To figure out your prime cost, a restaurant owner has to start with a budget template for the next 12 months of operation. Although budget is a dreaded word, the budgeting process is really quite simple:
- Start with gathering some important information such as gross sales, cost of goods sold (COGS), labor by position and all operating expenses for the past 12 months.
- Next determine if you are expecting sales to go up, down or remain the same for the next 12 months.
- Split your gross sales up by sales category and determine what your COGS percentage is by sales category.
- Split labor up by position by labor cost percentage for hourly employees and dollar amount for salaried positions.
- When you build your budget template going forward for all variable line items, its sales multiplied by the percentage and for fixed expenses, it’s the total for the year divided by 12 to come up with the monthly fixed cost.
Once your budget template is finished, and you identify your prime cost, what should it be?
The industry benchmark for restaurant prime cost has been an average 65 percent for a full-service restaurant and 60 percent for a quick-service restaurant. However, our margins have been shrinking with higher food costs and increased administrative costs such as health care and insurance. Plus, I have never believed in being average, so I have been driving restaurants that do at least $850,000 a year in gross sales to a prime cost target of 55 percent or lower. This means for a restaurant doing $1,000,000 a year in gross sales running at a 65 percent prime cost, I am saying with the right systems in place there is room to lower the prime cost by 10 points, netting restaurant owners $100,000 bottom-line profitability.
It’s been my experience that most independent restaurant owners are running at least 10 points above a healthy prime cost. In most cases, if changes aren’t made, restaurant owners are going to be taking profits right out of their own pockets to meet the minimum wage hikes, or they’re going to be closing their doors.
Here is where I lose most restaurant owners, where I tell you it’s going to take work. You have to overhaul your business. No one will admit they would rather lose their restaurant than put in the work necessary to keep it running profitably, but I meet them every day. I get it. It’s hard. Getting your management team on board is hard.
Consider this question: Wouldn’t you rather make changes to your operation than give away your profits, or worse, have to close your restaurant?
If you answer yes to this question, go through the steps above to determine your current prime cost and identify how many points you have to cut to hit a target that is right for your style of restaurant. If you take a proactive approach and attack your prime cost, especially if you can get ahead of increasing minimum wages, you will get through this, and you will come out a cleaner, meaner, fighting restaurant.