3 tips to minimize the effects of minimum wage increases

3 tips to minimize the effects of minimum wage increases

By Simon Bocca, COO, Fourth

Beyond the usual parties, ball droppings and optimistic resolutions, this year’s turning of the calendar brings a special challenge to restaurant operators: mandatory higher minimum wage rates go into effect in 18 states and almost two dozen municipalities.

When combined with the financial commitments necessitated by other regulatory requirements, such as the Affordable Care Act, Secure Scheduling and mandatory paid sick and parental leaves, along with heavy restaurant competition that keeps a lid on menu prices, restaurant operators will need all the help that they can get to minimize the effects of these minimum wage increases and protect their profitability.

For restaurant operators, there are three fundamental ways to keep costs low, despite rising wages: improve workforce productivity, reduce waste, fraud and abuse and increase menu profitability.

1.  Improve workforce productivity. The rising labor cost mandates put pressure on restaurant operators to deliver increased sales while reducing overall worker hours. While this dilemma forces restaurants to consider reducing their service offering in a bid to cut workload and costs, this would not be a smart move against a backdrop of increased competition for guests, for whom good service is often a key differentiator. The combination of increasing sales while reducing worker hours means that the productivity of the labor force—the sales each employee generates per labor hour—must be scrutinized more than ever before.
Through the use of technology, data and more attentive management, restaurant operators will need to more precisely match labor to demand to minimize any downtime, ensuring they have enough staff to meet demand without overstaffing. In addition, cost per employee and profit per employee are important measures to start tracking and managing more closely. Restaurants should review their staff capabilities, and implement training where appropriate, to ensure the workforce is optimized for performance.
2. Reduce waste, fraudandabuse. Levels of restaurant waste, fraud and abuse that might be normally tolerated become intolerable as margins are pressured by increasing labor costs due to mandatory minimum wage bumps. Over-ordering, over-portioning, wastage through sloppy prepping and inaccurate inventory tracking are notorious problems in the restaurant business – and all translate into a smaller bottom line. From our experience, this means margins are reduced by one-to-six percent.
To decrease waste in their businesses, restaurant operators need to better understand exactly what food is being wasted and why. For example, one dish might be consistently not finished by customers, suggesting the portion size could be too large, or perhaps a certain ingredient is regularly being thrown away because it’s going past its use-by-date, indicating that too much is being ordered. Chefs could also be wasting ingredients at the point of prep. Once operators collect and analyze this type of data, they can identify the issues and where savings are possible. With tighter inventory control supported by the right technologies, restaurant operators can achieve, on average, a two percent increase in gross profits.

3. Increase menu profitability. Another critical step restaurant operators can take is menu engineering. This is the process of creating a menu for the business while, at the same time, taking into account the potential costs, waste, sales and profitability. When done correctly, menu engineering provides a business-critical understanding of profit and cost levels, ensuring that chefs create dishes that are profitable as well as popular.
Understanding these ‘cash cows’ is difficult in a multi-site operation, where data is pulled from many different areas, including vendor invoices, POS data, sales data, staff hours and so forth. Restaurant operators need to understand many factors to achieve menu improvements. Which items are the best sellers, and which items deliver the most profit? How have increases in ingredient prices impacted the menu? Unless they have the technology in place to combine these data sources to create a true and accurate picture, operators will not be able to identify properly the areas where savings and improvements can be made. 

Factors like food preparation time are important as longer prep times increase labor costs and reduce margins. Similarly, food ingredients should have multiple uses across menu items. By examining menus and how they are performing, and using ‘what if’ scenarios to assess potential impacts, restaurant operators are often surprised at the results and able to adapt menus quickly to create their ideal ‘profitable and popular’ dishes.
Mandatory increases in minimum wages that were set in motion along with the revelry of the new year, no doubt, present an operational challenge for restaurant operators, given the heavy reliance on a relatively low-wage workforce. The perfect storm of growing regulatory, wage and food price impacts, not to mention restaurant over-building that has intensified competition, dampens the mood for restaurant operators even as economic growth and the sales environment is beginning to show some signs of improvement. 

Despite these challenges, all hope should not be lost, as there are many operational and technological improvements of which far too few restaurant operators have taken advantage. By doing so, workforce staffing can be optimized, waste can be reduced and menus can be adjusted, improving profitability across the board and countering the effects of the minimum wage increases.

Topics: Operations Management

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