Labor Costs Are Making Restaurants More Expensive. Here’s What Diners Should Know.
Dave Foss is a co-founder of Maverick Theory, a creative hospitality group that represents some of the most sought-after hospitality talent in the world. Foss oversees the consultation division at Maverick Theory that focuses on concept creation and development, food and beverage programs, restaurant operations, and facilitating professional connections that allow businesses to bloom in the hospitality realm. Foss is also a co-owner of LaLou wine bar in Prospect Heights, Brooklyn with restaurateur Joe Campanale.
You may have noticed recently that when you go to a restaurant, the bill is more expensive. The appetizers are a few bucks more and so are the entrees, and that glass of wine definitely used to be cheaper. But why? Why are things more expensive when you go out to eat? Sure, everyone knows about inflation, everyone knows that the price of goods has gone up. But that’s not what’s killing restaurants right now.
So what is truly hurting the bottom line? Labor. Not just labor, but payroll as a whole.
The Math No Longer Makes Sense
When you talk about labor, you have your physical labor and the amount of dollars you’re paying for your staff. But that also includes costs like payroll tax and insurance, among other things. Five years ago, a good goal for a restaurant was for its labor costs to be 30–35 percent of its gross sales. So if you grossed $1 million at your restaurant, you were spending $300,000 on payroll. Today, that benchmark has moved. Most restaurants are operating closer to 40–45 percent on labor, with some as high as 60 percent. So a much larger portion of gross sales is spent on labor.
What does that mean for the overall net profit margin? The national average that a restaurant will net is about 5 percent. So if you grossed $1 million, that net is $50,000. That’s an average, so there are a lot of restaurants that don’t make any money, and there are a lot that will net 18–20 percent or more. (I have a client in rural America who nets 22 percent. That’s great! But that’s a unicorn.)
So if your net is 5 percent and all of a sudden one of your expenses goes up by 10 percent, the math on that no longer makes sense. So what do you do? You raise prices.
People get upset when it costs more to dine out. But if the prices don’t go up, restaurants will close — people quickly forget that restaurants have to make money to stay in business. And the reality is that a lot of operators aren’t making money because all these other costs have gone up and payroll is higher than ever. Even for higher-volume restaurants that are always packed, you might assume they’re making a ton of money, but with bigger staffs and higher operational costs, they’re not making as much money as you might think.
Why Have Labor Costs Gone Up?
When the pandemic hit, everyone was out of work. The restaurant industry in particular lost a lot of people, many of whom just left the industry completely. Which maybe isn’t surprising: Industry working conditions aren’t always the best, you work long hours, the pay isn’t great. Once everything started to reopen, though, the restaurants were really busy. We needed to attract people back to the industry and the way to do that was not only by raising wages, but also offering perks.
At the same time you have this exodus from the industry, you have a new generation entering the workforce with different expectations. Their idea of what they’re supposed to be paid is very different from people who entered the workforce 10 years ago. There are expectations of higher pay, benefits, and work-life balance, which in many restaurants is unheard of. This all costs more money.
Minimum wage has also gone up. Most people in the restaurant industry are not paying minimum wage to their back-of-house (BOH) employees, who include porters, dishwashers, line cooks, and chefs, who are typically the lowest-paid employees because they don’t earn tips. (This is compared to front-of-house (FOH) employees — servers, bartenders, hosts, runners, anyone who speaks or interacts with guests — who might be paid a lower wage but make a lot more money because they get tips.) At our restaurant, we pay BOH staff between $4 and $10 more than minimum wage an hour. When people can go to McDonald’s and make more than minimum wage, there’s no way around it. In order to attract talent and people who are good, you have to pay more. And all of a sudden you have this expense that is higher.
Because of all these factors, you’ve now got this higher payroll, you are paying more money to make sure you have the talent, to make sure you have enough people. And this isn’t just New York City or L.A. This is Daytona, Fla., Fort Hood, Texas, Anchorage, Alaska; operators are paying more in almost every market, and the smaller the market, the harder it is.
Beyond Raising Menu Prices
But raising prices only goes so far — you can only charge so much for a burger before people start complaining — so how else are restaurants coping?
Smaller Portions
Some operators are shrinking portion sizes of things but keeping the same price. I’ve talked to a lot of restaurateurs who cut an ounce off of that burger, which might not seem like a lot. But if you’re doing 1,000 burgers a week, it’ll drop your cost. This goes for by-the-glass wine servings as well. Maybe that 5-ounce pour is now 4 ounces.
Fees
Another thing I’ve seen a lot of is fees. Some restaurants are charging a 20 percent service fee — separate from gratuity — to help cover paying staff a more livable wage, or to ensure that they can offer all employees health care. So you tip another 20 percent on top of that bill and that’s 40–50 percent more for that meal.
I’m also starting to see a big push for cash discounts or a fee for credit cards. Credit card fees are anywhere between 2.8 and 3.1 percent right now, and they’re typically paid by the operator. That means if you do $1 million dollars of business, you’re paying $28,000–$31,000 out of pocket. To offset those fees, some operators in certain states have added another 2.85 percent to the check or offer a cash discount.
Cutting Staff
The other thing that restaurants have started to do is cut staff. I’ve heard a lot of people lately saying the service hasn’t been as good at their favorite restaurants, that it seems like they’re always running around. This might be because a restaurant is truly short-staffed, or it might be because they’re trying to cut back so they can make enough money to stay in business. Instead of running with four servers on a Friday night, a restaurant might cut a server. So if the business is just as busy, those three servers will make more money, which helps with retention, and the business has cut off that extra piece of labor.
Switching to Counter Service
In some places, restaurants are cutting servers completely and going to a counter service model. These still feel and look like restaurants, but you order from the bartender or you order at a counter, and then you sit and everything is brought to you. There are already some really great examples of this — Birdie’s in Austin comes to mind — with really well-thought-out food and wine programs, and I think we’ll see more in the near future.
Smaller Menus
I also think in the coming years you’re gonna see smaller, more streamlined menus. To execute a 50–60 item menu you need a decent amount of people for all the different stations. Smaller, hyper-focused menus are easier to execute, require fewer ingredients, and can be much simpler to prepare. There will still be places that do what they do with more intricate items, especially at the higher end. But there will be plenty of spots that are celebrated for dishes that are not complex (think oeufs mayo that we’re seeing everywhere right now). Those dishes are fairly easy to execute and they’re high-margin. So I think you will see more things like that.
*Image retrieved from zorandim75 via stock.adobe.com
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