LFTL - How to Fix Low Margins (Spoiler: It’s Always Labor)
Welcome to this month's Lessons from the Line, where we confront a challenge that looms large over every restaurant's financial health: the relentless pressure of labor costs. In an industry defined by razor-thin margins, where a few percentage points can mean the difference between thriving and failing, labor expenses often represent the single largest variable cost. Mismanagement in this area isn't just inefficient; it's a direct threat to profitability.
This issue of LFTL provides a crucial roadmap for navigating this complex landscape. To guide us, we're joined by Harmony’s very own Vice President David Wiseman, not just an expert but a successful operator in his own right many times over.
One of Harmony’s areas of expertise? Helping clients proactively address labor challenges, optimize staffing strategies, and ultimately, safeguard their bottom line.
Read on for some useful insight from Dave.
From your experience, what are the most common missteps restaurant owners make when it comes to managing labor costs, and why do these mistakes so often lead to financial losses?
Labor is such a nuanced issue – many people (rightly) feel a strong attachment to their staff. It’s very easy from our perspective to just look at the numbers and make recommendations that are driven solely by the financials and miss the nuances. So we work really hard to find a common ground based on the operator’s goals for themselves and their business. The most common misstep is operators not taking an organized approach – with clear goals, benchmarks, strategy and the discipline to operationalize a plan.
What’s clear from working with clients is that solving a labor problem is like getting in great shape – the concepts are simple but it’s the grind: the attention to detail and discipline that make it happen. I get really irked when I get ads by the “consultants” that offer a silver bullet on my Insta (my feed is SUPER exciting) because it’s the work in the trenches making it happen where the gains come. Which is why we are there on a weekly basis helping to get those results.
How crucial is accurate sales forecasting for effective labor management? Can you provide specific examples of how precise projections can translate into significant cost savings?
Having accurate sales forecasting (and good books!), based upon historical averages, is the bedrock of labor management. Many, many clients have seen gains leading to sustained profitability by using those projections to craft schedules and budgets - it just provides a clear picture of what you can afford to spend. Accuracy plays a key role in your question as well because cutting labor can be emotionally taxing. We occasionally see operators marking up sales forecasts to make the labor number work. That is a recipe for feeling good in the short term but is a stressful road to hoe over the medium to long-term.
Many restaurants struggle with the balance between staffing adequately to provide excellent service and avoiding overstaffing that eats into profits. What are your top strategies for finding this balance, particularly during fluctuating business hours or seasonal changes?
Labor can be complex but the math isn't - if you get a dollar from a customer you can only spend 30-40 cents of it on labor. For restaurants that are consistently profitable it CAN be a choice whether to prioritize a higher labor spend over profits but it should be a conscious choice. For unprofitable restaurants labor changes are often a necessity.
We always view our role as complementary to the operations team, providing guidance and structure, but we understand that we are one voice in the room. As a good rule of thumb, we advocate for creating a labor schedule where the goal is to be profitable or break-even every month. The labor spend to get there is the labor floor or the minimum labor spend. Given seasonal variation it’s not uncommon for restaurants to lose significant sums in January, February and make that up in March / April but they don’t realize they just worked for 4 months to get to zero! So approaching budgeting with a wider lens (strategic budget) sets the stage for the weekly work to implement those goals (tactical budgeting).
What are some effective strategies for reducing labor costs without compromising employee morale or service quality? Are there creative solutions, such as cross-training or flexible scheduling, that you've seen work well?
The balance is achieved through planning, preparation and communication. Evaluating your PMix is critical because most restaurants operate to some extent on the Pareto Principle - meaning that 20% of inputs drive 80% of outputs. In a restaurant context this means that 20% of the menu drives 80% of sales - so are there items that could generate a labor saving if they were eliminated? Can we easily cross-utilize elements of our popular dishes?
Another important thing is understanding the compounding effects of small changes. Adjusting in or out times by 15 minutes is the equivalent of getting a week and half of labor savings and can lead to a 3% reduction in overall labor. Cross-training and flexible scheduling are great ways to increase optionality in labor scheduling and are highly recommended.
In situations where layoffs become necessary, what is the most responsible and strategic approach to minimizing the impact on both the business and the affected employees?
First off, communication is key. At a minimum, identify the culture and tone setters and make them a part of the conversation. We advocate for a measure twice, cut once approach. Create a strategic plan based on good data and don’t hesitate to make the cuts even if they are uncomfortable or a bit more than you think is needed at the time. People respond to leadership and it’s better for morale to make one decisive change that generates stability than being in an environment where it seems you are dying a death of 1,000 (labor) cuts.
Mountain of insight, that guy! If you don't already work with us you can of course have direct access to Dave and Harmony's entire team of peerless experts by clicking below to schedule a free discovery call.