Restaurant labor costs are typically the highest costs of owning a restaurant. Restaurateurs commonly aim to keep labor costs between 20% and 30% of gross revenue. However, a full-service, white-tablecloth restaurant will likely have a higher labor cost percentage than a casual dining restaurant, since they employ more staff to provide a higher level of service.
So how do you control restaurant labor costs? Well, there’s no sure-fire, 100% correct way to go about managing labor costs in a restaurant because every bar, restaurant, and coffee shop is different, and that means that each unique place has a unique restaurant labor cost situation that will need to be managed differently.
That said, here are a few basic tips and tricks for both calculating and managing restaurant labor costs.
Group Your Restaurant Labor Costs for Greater Clarity
Dividing staff into groups shows you which positions cost the most. Assign front-of-house staff such as servers, hosts, and bartenders to one group. Kitchen staff such as cooks and dishwashers are another natural group, as are management staff. You can also divide your staff by whether they’re paid by hourly wage or salary.
Restaurants should aim to keep labor costs between 20% and 30% of gross revenue.
Once you have your staff all divvied up, you can compare what each team costs you and see if you can tinker with the combination of staff you schedule during each shift to bring your restaurant’s labor costs down. If bartenders are significantly more expensive than servers, try replacing a bartender with two servers. If the job still gets done and the night goes off without a hitch, you’ve found a way to reduce your labor costs already.
Understand Your Prime Cost With a Restaurant Labor Cost Formula
Warning: there’s a little math coming up, but it’s absolutely nothing that you can’t handle. While calculating something called prime cost might sound scary and daunting, it’s easier than you might think, and it will tell you a ton about your restaurant’s labor costs.
Your prime cost is the sum of your labor costs plus your cost of goods sold, or COGS for short. COGS = the cost to create each food and beverage item on your menu. A restaurant’s prime cost should ideally be 60% or less of total sales and represents the bulk of controllable expenses. To calculate your prime cost, list all hourly wages, salaried labor, payroll tax, and benefits, and add the sum of your labor costs.
Congrats! You’ve just mastered the central way that most calculate restaurant labor costs.
Download our Restaurant Expense Tracker to help keep track of your monthly and weekly costs.
Move Beyond Asking Just “What Percentage of Sales Should Labor Be In a Restaurant?”
Calculating labor as a percentage of sales can be useful. But determining staff productivity solely on the basis of labor as a percentage of sales doesn’t give you the detail needed to identify areas for improvement. For example, let’s say company policy is for labor as a percentage of sales to be 20% or less. This week it’s running at 27%.
But that doesn’t break down different job categories, e.g., servers, cooks, bussers, etc., making it impossible to determine which categories may be contributing to the issue. It also doesn’t tell you what time of the day, week, or meal period where the greatest variances may be occurring. In order to truly identify where labor costs are creeping up, there’s no getting around the necessity of having a complete and detailed picture.
Looking at labor costs this way also doesn’t account for holidays or other special events that might warrant more staff time. The biggest thing to remember about restaurant labor costs is that they’re just one part of a whole and sometimes they’re just a symptom of another issue. Rather than rushing to reduce labor costs, try to figure out what’s really going on and fix the problem itself rather than putting a reduced labor costs bandaid on it.
Save on Restaurant Labor Costs With Training and Thoughtful Scheduling
Use labor scheduling and time and attendance systems to ensure you have top-level visibility and can identify which employees might go into overtime before it is too late. These systems can also point out if your employees tend to clock in early or dilly dally around before actually getting to work if you pair the system with a quick inspection of how your staff start their shifts. Try turning your data into offer visual reports such as graphs that are an effective way to quickly evaluate multiple sets of data at one time—and crucially, identify outliers.
Invest in training your staff and they’re less likely to leave, and be more productive while they work because valued employees that are put on a path to professional growth aren’t going to ditch you for any other restaurant that doesn’t offer those things and, sadly, too many don’t.
Use labor scheduling and time and attendance systems to ensure you have top-level visibility and can identify which employees might go into overtime before it is too late.
Average Labor Costs By Restaurant Type
Ok, now that you’ve covered all of the basics, it’s time to take a look at some restaurant labor cost averages based on the various restaurant types. Now that you know how individualized labor costs are at each individual restaurant, you can keep that thought in mind as you peruse these averages to get a sense (just a sense) of whether or not you’re in the right ballpark:
- Fast food restaurants: 25%. As Chron explains, “certain fast food restaurants can achieve labor costs as low as 25 percent,” but that doesn’t mean that labor costs can’t (or shouldn’t) run higher. If you think about it, it makes sense. Food moves faster, profit margins are higher, and the labor is fairly unspecialized which means it costs less to deploy.
- Table service restaurants: 30%-40%. Where specific restaurants fall on this range depends on “the menu and extensiveness of service,” Chron notes. “Food costs (including beverages) for the restaurant industry run typically from the 28 percent to 35 percent range, depending upon the style of restaurant and the mix of sales.”
- Fine dining: Varies, but tends towards the higher end of the 30%-40% scale or beyond. As Restaurant Business notes, “a fine dining restaurant with many components on the plate and breads, pastries, pastas, and other products made in-house will have a much higher labor cost than a steakhouse selling high-end but relatively simple-to-prepare food like steak, baked potato, and thaw-and-serve flourless chocolate cake.”
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