How many readers out there have high wage costs in their businesses? It’s probably a rhetorical question really, because high wage costs are one of the more common problems we have to deal with in our clients’ businesses. If your profitability is lower than it should be wage costs are one of the first things we would look at if you asked for our help.
There are no real benchmarks for wage costs
Unfortunately there is no magic figure I can quote to give you for a benchmark as to what your wage cost should be — this depends on the nature of your business and a number of other variables including the systems of production and service you use and the rates you pay your staff.
A pub can have wage costs as low as 15% and we have seen fine dining restaurants with wage costs as high as 65% (shortly before they folded — funny about that). In the ‘standard restaurant model’ we use as a teaching aid the wage costs are 33% of total revenue. This would break down to 19% of revenue for front of house and 14% of revenue for the kitchen. Note that these figures include on-costs: super, payroll tax, annual leave accrual, sick leave accrual, long service leave accrual. These are all part of the cost of employing people.
Cutting rosters can seriously damage you business
The normal reaction of a manager or business owner faced with high wage costs is to take the red pencil to the roster. This seems like a reasonable response at first but in reality this is not where the problem usually lies. We normally have to delve a little deeper. Reducing operational staff can do positive damage to your business by cutting staffing to the point where you can no longer deliver effective food and service. I have actually cured wage cost issues by adding good sales staff to the foh roster, so the staff have time to sell.
More money in the door helps
The first thing we have to consider is your income. Are you bringing enough money into your business for the number of labour hours you are using? After all, a wage percentage is the result of dividing your income by your wage cost. We can reduce your wage percentage two ways: a) by increasing your income, or b) by decreasing your wages.
A number of the businesses we deal with do not charge enough for their goods and services when we consider the labour needed to produce them. In other words they are doing too much work for too little income.
Change your system rather than put up your prices
Obviously we could just recommend that they put up their prices, but we would probably price the business right out of the market. The other answer is to look for ways that they can alter their system so as to require less labour. Changing from table service to a buffet and walk to the bar system is an example of this, or changing from table service to a cook-your-own-meat on the charcoal grill concept is another. How can we deliver the same feeling of value for money to our customers without all the work is the style of thinking.
Selling and merchandising
Failing this, the next question is how can we increase income through effective selling and merchandising? If we can get the service staff to increase the customer average sale we have a major opportunity to increase income without increasing wage costs proportionally. In other words make the staff more productive — not necessarily by making them work harder but by making them work more effectively as sales staff, not just as customer service workers. There is an easy way to do this (visual display and merchandising), or the hard way by getting your staff to suggestive sell (which requires really good recruitment, training and leadership).
Productive and non-productive labour
We’ve also learned to examine another issue — the ratio between productive and non-productive labour in the business. Productive labour is the labour you use in your business to actually produce your food or serve your customers. Non-productive labour is all the labour you use doing paperwork, dealing with suppliers, recruiting staff, training etc. In fact any labour that is used for any other purpose other than directly producing for or dealing with a customer we consider to be non-productive labour.
Imagine if you react to a wage cost problem by cutting your productive labour when the problem lies in your use of non productive labour? You can quite easily kill your business this way and yet this is the most common response to high wage costs we encounter.
Staff turnover is really expensive
If we find that a business has high non-productive labour costs the first thing we examine is their staff turnover. If this is significant then we know that a huge number of labour hours is going to be used in the system recruiting and training a never ending parade of people. This is one of the insidious aspects of staff turnover. It doesn’t show in your accounts under a separate heading — it is lumped in with all your other labour and can inflate your wage costs quite considerably.
Assess new sub-contractors and technology
After we have finished with staff turnover we examine all the administration tasks the staff are doing. Can we find ways to reduce the time taken? Can we automate such tasks as rostering, ordering, accounting, marketing, etc? Can we take advantage of new technology to reduce labour? We normally have to appraise the cost effectiveness of modern point-of-sale cash register systems, back office accounting and stock systems, email marketing, spreadsheet vs manual control systems, automatic kitchen equipment, etc at this point in our investigation.
In summary we’ve learnt that wage cost control is a complex subject that is unlikely to be managed well with a roster, a red pen and a gung ho attitude. It starts with supervisors who know what they are doing and it requires well informed managers and business owners to watch over them and provide proper guidance where necessary. The average business we look at has the capacity for a 5%+ reduction in wage cost without too much trauma. 5% of the turnover of most hospitality businesses is a very sizeable figure and one that is well worth chasing.
The staff you have on your floor are probably the least of your problems . . .