Restaurants have two main variable costs- cost of goods sold, and cost of labor. These directly scale up and down based on sales. In order to effectively manage a restaurant, labor costs must be carefully managed. This white paper will delve into the tools and methodology a restaurant owner or manager can use to effectively manage their labor by the use of data analytics.
What Does “Data Driven” mean?
A data driven approach is one that starts from data and derives a conclusion, rather than starting from a conclusion and trying to make the data fit a predetermined outcome. Sometimes the conclusions from the data will match a manager’s instinct, sometimes it may differ. To commit to a data driven approach is to always follow the conclusions derived from data and eliminate personal bias from the equitation.
To effectively utilize a data-driven approach to manage a restaurant, a manager must know what data they are looking for, how to get the data from their POS system, and how to interpret what it is telling them.
Data and Metrics
This white paper will focus on four key metrics-
- Sales dollars per labor hour
- Net and Cumulative Margin
- Sales Summary
- Sales Forecast
Sales Dollars per Labor Hour
This is the key weapon in effective labor management; It tells you how much money your store is taking in for every hour of labor worked and serves as an indication of your labor forces overall efficiency. Sales dollars per labor hour normalizes for different labor costs so can be used to compare different stores in a franchise to each other without worrying about differences in average labor costs between different markets.
In the above example, higher values indicate that the store is making more money per labor hour, so is more efficient.
Net and Cumulative Margin
There are multiple ways to look at margin. For this white paper, we are going to focus on two values, net margin and cumulative margin.
Net margin is simply the margin per time period when accounting for fixed cost overhead, cost of labor, cost of goods, and any other relevant costs factored in. If you are looking at your net margin over the course of a day, some hours will show a positive margin and some may show a negative margin.
Cumulative margin takes the results from a net margin report over time so that you get a better feel overall for if the report is showing that you are making more money then you are losing.
You can combine net and cumulative margin into a single report for ease of analysis.
A sales summary is a straightforward analysis of sales totals over time.
A sales forecast will look like a sales summary and is based on historic sales trends, current events, and many other factors. The better the forecast model, the more useful it is for planning.
Understanding a Sales Per Labor Hour Report
In an ideal world, your sales dollar per labor would be the same throughout the day, but realistically there will be peaks and valleys due to variations in sales and step costs around capacity. For example, if one cook can produce 60 entrees per hour, then you will need two or more cooks to produce any value greater than 60, but unless your sales exactly matches your capacity you will be introducing unavoidable inefficiencies into the system.
As a manager, you want your labor efficiency to be as close to 100% as possible- that your labor output exactly matches your sales needs- but since that often isn’t possible you must instead strive to minimize the discrepancies through careful forecasting and management of the labor force.
The graph above shows the changes in labor efficiency from 1 to 3 cooks as the demand increases. With each additional cook – at 110% and 210% on the horizontal axis respectively- you will see the step cost for the extra worker and the resulting loss of efficiency in labor.
Another way to look at the same data is in labor cost per entrée, where lower numbers are better.
This is based on an average labor cost of $10/hour and a capacity per cook of 60 entrées per hour; The exact numbers are unimportant and your numbers will vary based on many factors, but the data shown is valid regardless; Your per-item labor costs are higher the less efficient your labor management efforts are.
These examples have been fairly straightforward and are not indicative of any problems with labor management. However, when you also factor in how sales matches to capacity you can begin to see where careful labor management practices can save money.
The following example re-illustrates the above scenario combining sales with capacity and is predicated upon ensuring there is no unnecessary excess capacity. Basically, your sales vs capacity numbers should ideally follow a similar pattern where sales and step costs regularly intersect.
An overstaffed kitchen, however, may look more like the example below, where the capacity line deviates from the sales line.
These examples have all been focused on kitchen staff, but the same is true for almost all positions in a restaurant- cooks, cashiers, bussers, runners, dishwashers – they all have a set amount of capacity for their jobs. Effective labor management focuses on ensuring that your capacity for each of these is linearly scaling with sales.
It is possible to create charts like the ones above for each staffed position and managing them separately. However, that shouldn’t be part of the day-to-day labor management activities and should instead be reserved for fine-tuning or troubleshooting issues within a specific position. It is much more efficient to manage day-to-day efforts at a higher level, which is where a “Sales Dollar per Labor Hour” report comes in to play. It allows you to frame the data at a high level so you can tell at a glance if things are healthy or not.
The below example shows the dinner hours are substantially more profitable than the lunch rush, and the afternoon sees a sales slump.
If we compare this to the sales summary for the same day, you can see the Sales Dollar per Labor Hour follows the same pattern as the sales summary. The example restaurant is selling $5,500 per day of product- again, your specific store numbers will vary based on numerous other factors.
However, it is imperative to understand that while the Sales Dollar per Labor Hour chart will be heavily influenced by sales (which is variable), it is also influenced by how many people are working at any given time.
The impact of that is easily seen on a margin report. After accounting for fixed costs, credit card processing fees, labor, and cost of goods sold- show a 1.6 percent margin, which is very unhealthy (Industry standard is considered 3 – 5% margin.
Given the condition of these reports, the restaurant would be better off not opening until 6pm- they are operating at a net loss until 8pm because of the high operating cost and slow sales prior to the dinner rush.
While simply increasing sales would be nice, the Sales Dollar per Labor Hour Report shows we have actionable items that are within the control of the manager to address to improve the margin.
The peak of the graph shows a range of $35 to $75 in sales per labor hour, which is a pretty substantial variation. In essence, the total labor pool – servers, cashiers, bussers, cooks, dishwashers, etc- can support $75 of sales per labor hour worked. The valleys in the graph below show where the restaurant is overstaffed, and some tweaks to the schedule to bring up the low points by reducing staff during those times can make a substantial difference. This example shows 103 man-hours per day.
By using the sales dollar per labor report as a guide, strategically removing 11 hours per day of shift time greatly reduced the volatility of the chart.
However, this change does not just make the report look nicer, it has a substantial impact on margin.
Reducing those 11 shift hours per day changed the daily margin from 1.6% to a much healthier 4.6%, and the store went from needing to shut down pre-dinner operations to minimize loss to being profitable most of the day.
Although this example is fairly extreme, every dollar saved on labor goes straight to the bottom line. In these examples, the difference is nearly $5,000 extra per month in profit for the store.
How does Sales-Dollars per Labor-Hour compare to Labor Percent?
Many restaurants have traditionally managed labor as a percentage of sales- for example, trying to keep labor costs in a range of 20% to 30% of sales. In essence, this is functionally the same as managing labor as labor-dollars per sales-dollar. If a store’s labor percentage target is 25%, then the goal would be to staff so that twenty-five cents is spent on labor for every dollar of product sold.
One of the big draw backs to managing labor through a labor percentage or labor dollars per sales dollar report is that these types of reports do not normalize for differences in cost of labor. Within a single location, this can cause distortions when analyzing front-of-house versus back-of-house labor because of potential differences in the hourly cost per employee for the different types of positions. The same is true when analyzing shifts with different average pay mixes- day versus night shift, weekend versus weekday, holiday versus normal. Changes in labor rates can hide potential issues because of the intrinsic shift in base labor costs or appear to indicate problems because of the shift in labor percentage when the change is just the result of wage differential.
Focusing on labor percentage makes it very easy for inefficiencies to creep into operations without being noticed by management.
These problems are exacerbated when moving to multi-location, multi-concept, and franchise analytics. The labor costs in a high cost of living area will be substantially different from lower cost areas, which will cause stores in high cost of living areas to operate with much higher labor percentages than those in lower cost areas. That does not mean that the stores with higher labor percentages are poorly run, just that their labor costs are higher. The higher cost of labor may be because the store is overstaffed versus the other area, the employees could be overpaid, or the cost of living necessitates a higher starting wage. Without additional data, very little meaningful conclusions can be drawn from a labor percentage alone.
Conversely, if a store can average $60 per labor hour, that number should be obtainable and consistent regardless of the differences in labor costs across locations, shifts, or labor type.
Examples of Labor Percentage versus Sales Dollars per Labor Hour
This example will look at numbers from three stores, both as labor percentage and then sales dollars per labor hour.
- Store 1 is in an area with an average hourly wage of $11 and operates at operates at 28% labor overhead.
- Store 2 is in an area with a much higher cost of living and an average hourly wage of $14 and operates at 31% labor overhead.
- Store 3 is in a very rural area with a low cost of living and an average hourly wage of $9 and operates at 27% labor overhead.
Based solely on the labor percentage, it appears Store 3 is efficiently run than either store 1 or store 2. Due to the differences in average wages between the three stores, it may be expected that Store 2 will operate at a higher labor percentage and store 1 or 3, and likewise store 3 will operate at a lower percentage of labor overhead because of the lower hourly wage.
However, by looking at sales dollars per labor hour, a much different picture is painted.
Store 3 is only generating $36 per labor hour, compared to $41 per labor hour for store 1 and $45 for store 2. Despite the fact that Store 3 operates at the lowest labor percentage, it may be overstaffing. If Store 3 was as efficient per labor hour as Store 2, it would operate at a labor overhead of only 21%.
Some stores may choose to adjust their labor overhead percentage by changing menu pricing. While an increase in price would certainly lower the percentage of labor overhead, that would only be the case if the increase in price did not negatively impact sales, which will depend heavily on competitive pressures, customer demographics, restaurant concept, and other factors that impact the fungibility of the restaurant offerings in a given area. Price sensitivity is a complex subject that is beyond the scope of this white paper.
Adjusting menu item pricing to hit a desired target labor percentage is essentially “backing in” to a value instead of managing labor separately and distinctly from pricing. Ideally, pricing should be set based on market forces to maximize gross income, and labor managed to increase net margin.
Managing Sales Dollar per Labor Hour Throughout the Day
The effective manager will use sales dollar per labor hour as one of their key metrics they manage with. This is not a report that should be checked once a week, or even just once a day, it should be monitored vigilantly throughout the day. If the sales dollar per labor hour starts dropping, a manager may need to consider sending employees home early or delay other employee start times to keep efficiencies up. Be aware that some localities may have labor laws that may impact this, such as requirements for minimum shift times for hourly employees.
Ideally, however, if your labor forecast is accurate than any labor management changes during the day caused by variations should be due to external factors- rain, traffic accidents, or other factors that cannot be predicted.
Forecasting Labor from Sales
In order to forecast an ideal labor schedule, you must first start with a good hourly sales forecast and an understanding of your minimal operating staff.
Consider the following projection:
From the sales dollar per labor hour report, we know the store can support potentially as high as $75 of sales per labor hour, so you can divide the sales forecast by your target sales dollar per labor hour value and round up to get your raw minimal staffing requirements.
This is a raw value, because there are some additional factors that have to be accounted for. For example, you may require a minimum staff of 4 employees at any given time to meet operational requirements, and your 10pm time requires three additional clean-up crew for closing. The net result may end up closer to the following:
Because of the 4-person minimum requirement to operate, there is a noticeable loss of labor efficiency at 10am, 3pm, 4pm, and 10pm.
Also of note is the margin impact; 10am to 12pm are virtually break even, and the rest of the day is profitable, with a total net margin of nearly 6.5%.
While overstaffing is an easy metric to see, it is also important to keep in mind the penalty from understaffing, especially if the site is chronically understaffed.
Generally understaffing will show up in reduced capacity and therefore higher wait times, depressing sales in the immediate time frame, and reduced customer satisfaction, which will reduce sales over time as customers stop coming to an understaffed store.
You can only produce and deliver what you are staffed to produce and deliver.
In the example below, any place the capacity line is below the entrees sold line, you will be asking your staff to deliver more than they are capable of doing which will depress actual sales.
In order to wring more capacity out of a position, you will need to look at time and efficiency of the laborer to determine if optimizations can be made in their workspace, station layout, or responsibilities, all of which are beyond the scope of this whitepaper. For the purposes of this document, capacity is a hard limit that cannot be altered.
The result is that production capacity will act as a hard barrier to your sales; If you can only produce 60 entrees per-hour per-cook, you cannot sell 80 or 90 entrees per hour with a single cook.
Understaffing will happen from time to time- employees will call in sick last minute or not show up at all, and if the manager is not able to quickly source available labor to make up for the loss of capacity then it will negatively impact operations.
Identifying the Ideal Target Sales Dollars per Labor Hour Value
The target value for sales dollars per labor hour will depend on many factors. A fast food or fast casual experience will have different labor requirements than a family style sit down or buffets. Likewise, a premier dining experience will have a different set of values for the ideal “target” for sales dollars per labor hour than a lower cost experience. As a manager or owner, you must determine what value is appropriate for your circumstances.
If you have access to reports that contain comparative information for this from aggregated data sources, this can help, although if it does not normalize for type of service, restaurant concept, average per-plate pricing, and customer demographic data the results may be of limited value.
The best way to generate a specific target value for your organization is to look at your sales and labor data and find the high-water mark; It could be $75 of sales per labor hour, or $55 of sales per labor hour, or virtually any other value. When you have identified that mark, that should be your initial target value because you know your staff are capable of hitting that value.
Improvements past that will require careful analysis of your employee’s work processes and procedures to determine where additional efficiencies can be identified, but that is outside the scope of this whitepaper.
Careful labor management can make a significant impact to profitability in a store, and an effective manager can utilize a sales dollar per labor hour report to improve their store performance my maximining their labor efficiency. Although this report can be created manually, some point-of-sale systems- such as Nimble- already include tools for managing labor through a sale-dollar per labor-hour report.