Where Oh Where Has My Margin Gone?
The Changing Labor Environment and How It Affects Restaurants
People outside the restaurant industry are often surprised by how small restaurant profit margins actually are. To say margins are razor-thin would be an understatement, as the average profit margin of a restaurant is 3-5% of total revenue. Labor expenses are a restaurant’s largest expense and the external forces on labor are keeping many restaurateurs up at night.
Labor-related issues will be the biggest challenges facing the restaurant industry in 2016 and beyond. Restaurants will need to rethink their business models to handle the changes that are coming. Here are four items that we are advising our clients to watch carefully:
Tightening of the Job Market - Finding top talent is becoming increasingly difficult for restaurant operators. With the improved economy, the growth of the restaurant industry and the continued low labor participation rate, finding quality staff is challenging. According to federal data, the restaurant industry alone added 40,000 jobs, or 16% of all workers to the US economy in February 2016. With increased competition for talent, the cost of recruiting and hiring new employees has become more and more expensive. Moving forward, employee retention will be a cost saving imperative and restaurants must work to slow the revolving door of employee turnover. Conversely, working short staffed has its own costs associated with overtime pay, poor product quality and customer service.
Higher Minimum Wages – Minimum wage increases disproportionately affect restaurants as the food service industry employs close to half of all the people in minimum wage jobs. It is therefore no wonder that operators are worried about where the minimum wage issue is going. Many states and municipalities – such as California, Seattle and most recently New York City and New York State – have passed accelerated, higher minimum wage laws that are forcing operators to rethink their labor and compensation models.
New Regulations Governing Hourly Employees – Paid sick leave, spread-of-hours rules and healthcare insurance are additional changes to the landscape that operators must prepare for now and in the near future. Ensure that you are fully versed in all the laws and regulations that affect your restaurant, so you can plan for any economic impact of these in advance. If you need help in understanding these very important rules, get it. Not planning can put your restaurant at risk for a lawsuit.
Changes to the Federal Overtime Laws – The U.S. Department of Labor is working towards changes in defining who is an “exempt” vs. “non-exempt” employee. This will have a major impact throughout the restaurant industry. Traditionally, salaried employees - such as restaurant and bar managers, chefs and sous chefs - perform manual tasks throughout their day while managing their staff. New regulations may re-categorize these positions as “non-exempt” based on the job functions and entitle them to overtime pay if their salaries are below a certain amount. Should this happen, operators will be required to rewrite their manager job functions and descriptions due to the potential economic impact of these changes.
With these big labor challenges, it will be crucial for operators to become more and more efficient to preserve their bottom lines – especially for smaller mom & pop operators. As discussed in Between the Lines - Operational Challenges That Can Make or Break Your Restaurant:
“Restaurant success depends on many things, but it can all boil down to
one question: Where does the money go? Having a handle on your
operations is a key to answering this question. Have processes and
procedures to reduce economic drains, train your staff to follow them and
hold them accountable.”
Not adapting and hiding your head in the sand will lead to poor management and poor fiscal controls – which can make those margins evaporate faster than a sauté pan of boiling water.
Don’t know where to begin? Do you know how to put policies and procedures in place to be as successful as possible? www.4qconsult.com can develop customized operational guidelines to meet your needs.
All original content copyright Noelle E. Ifshin, 2016-2017.
Noelle E. Ifshin, President, 4Q Consulting, LLC
244 5th Avenue, Suite 1430, NY, NY 10001