How To Manage Restaurant Labor Costs to Drive Unit-Level Profit

Managing restaurant labor costs is a crucial aspect of running a successful restaurant. Labor costs include wages, benefits, and other team member expenses making them both the biggest expense and, because of rising minimum wages, staff shortages, and a rising turnover rate, the hardest to control. It follows that finding ways to control these costs can help to improve restaurant profitability.

Across all restaurant types, labor cost runs about 33% of sales. Often, the labor target percentages are based on industry averages. This is misguided if it is assumed restaurant will be profitable in this setting. Each restaurant is its own average, varying widely based on the type of restaurant. There is no such thing as an average restaurant, so it doesn’t make sense to use an industry average.

Breaking Down the Restaurant Labor Budget

In fact, your labor budget should never be set on predetermined percentages. Again, every restaurant has its own average, which means every restaurant has its own budget. Your goal should be to have the lowest labor budget without sacrificing the experience of your customer.

Labor hours are predicated on the unique characteristics of the restaurant, including layout, kitchen line and seating. These typically dictate the labor hours it will take to provide the level of service your guests expect.

For every dollar in income, generally, about .32 cents goes to food and beverage, .33 cents to labor, and .16 cents to operating expenses. Another .13 cents goes to rent, property taxes and administration. Usually, only .05-.07 cents go to profit. With that low margin for profit, managing labor costs becomes the key to profitability.

Breaking Down Labor Costs By the Dollar:
After all of your Restaurant's expenses, actual profits can be small. This makes it even more important to keep costs under control. This image illustrates how the cost categories divide up. Note that profit is the smallest portion.

If the labor hours it takes to effectively service your guest does not allow you to generate an adequate profit, you will need to either increase productivity or raise your prices.

5 Tips for Managing Restaurant Labor Costs

Managing restaurant labor costs is an ongoing process that requires careful planning and attention. Some strategies for managing restaurant labor costs include:

Set clear job duties and responsibilities. Clearly defining the roles and responsibilities of each team member can help to ensure that tasks are completed efficiently and effectively. This can help to minimize the need for additional staff and reduce labor costs.
Use scheduling software. Scheduling software can help to optimize staffing levels and reduce the need for overtime. It can also help to track team member hours and manage payroll more accurately.
Train and cross-train team members effectively. Providing thorough training can help to improve team member efficiency and productivity, which can lead to cost savings. Just as the investment in manager training aids in retention, investing in team member training can also help to reduce turnover, which can be costly in terms of both time and money.
Review pricing. Regularly reviewing menu prices can help to ensure that they are aligned with the cost of labor and other expenses. If menu prices are too low, increasing them to cover labor costs may be necessary.
Monitor team member performance. Regularly monitoring team member performance can help to identify areas for improvement and opportunities for cost savings. This can include tracking metrics such as sales per team member, customer satisfaction, and food waste. Checking in with team members at regular intervals also allows them to set goals for their growth in their position. A team member that plans to grow in a position plans to stay in a position.

Guide Labor Investments using SPLH or CPLH

One effective way to manage labor costs is using SPLH (Sales Per Labor Hour) and CPLH (Cost Per Labor Hour) metrics. These metrics provide valuable insight into your restaurant’s labor performance and can help you make informed decisions to reduce costs and improve your bottom line.

What is SPLH and CPLH?

SPLH is a metric that measures the amount of sales generated per hour of labor. It is calculated by dividing total sales by total labor hours for a given period of time. This metric is useful for determining the productivity of your restaurant’s staff and helps you identify areas where you can reduce labor costs.
CPLH is a metric that measures labor cost as a percentage of total sales. It is calculated by dividing total labor costs by total sales for a given period. This metric provides a clear picture of how much of your revenue is being spent on labor and helps you identify areas where you can improve efficiency and reduce costs.

Managing Labor Cost Carefully Drives Profit

Again, managing labor costs is an ongoing process that requires careful planning and attention by implementing strategies such as setting clear job duties, using scheduling software, providing effective training, reviewing menu pricing, monitoring team member performance, and implementing cost-saving measures, restaurant owners and managers can effectively control labor costs and improve profitability.

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