Rising Labor Costs Drive New Thinking for Restaurants

The restaurant sector is competitive. Changing customer behavior and the relative ease of new entrants drive a flurry of activity intent on improving competitive positioning.

And then there’s the cost of labor.

Record low unemployment, industry annual turnover rates exceeding 120 percent, and rapidly increasing statutory wage rates are changing store economics at a breakneck pace. To keep stores in the black, achieve corporate financial objectives and keep franchisees in business, restaurants have no choice but to dig deep into their cost structures. Restaurant executives are finding that the success of keeping growth initiatives funded and their own professional trajectories intact is now closely tied to their ability to navigate the changing labor environment.

What can restaurant executives do to counter rising labor costs? 

This new dynamic can be challenging for leaders. With greater visibility within organizations and higher levels of scrutiny, the pressure to right same-store economics is extreme. And most restaurants are flailing.

According to restaurant industry analysis published by the accounting firm BDO, rising labor costs reduced operating margins by 80 basis points in 2017, coming off a 70-point decline in 2016. The cumulative impact is lost profits valued at 1.5 percent of revenue over just two years. When leaders are asked about their priorities, the response is consistent: The new labor environment must be accepted and factored into all aspects of growth planning and operational management.

Restaurants are struggling with this issue because their approach is typically initiative based. Creating enduring change requires a holistic approach that brings together broad initiatives, addresses root causes, and develops the organizational capability to continually address changing needs.

Using Data Analytics

It’s easy to feel crushed by the weight of questionable metrics or frustrated by the inability to capture the right information. To succeed, restaurants need the right data to help make critical business decisions about labor: who, how many and when. 

It takes new thinking about data analytics and lean process design—with lasting capabilities to put them into action. 

Restaurant labor and workforce planning significantly impacts the bottom line and is an extremely complex function to get right. But it pays. Optimizing a workforce that best aligns with forecasted market demand and real-world constraints can be one of the most measurable improvements to financial performance.

Workforce planning is a business challenge that has too many drivers, constraints and interrelated data sources to evaluate alternatives without the help of technology. Leveraging optimization is key to understanding the impact of tradeoffs between customer experience, capacity and financial performance.

Metrics and financial incentives are often in competition with one another, resulting in unintended behaviors and outcomes. Effective labor modeling can incorporate multiple objectives across different impacted groups. Getting this right means balancing the needs of employee, customer and company and leads to higher performance and satisfaction among all stakeholders.

Developing Lean Process Optimization

Variation in processes can lead to wasteful inefficiencies and unpredictable quality. Routine processes are efficient, repeatable and predictable, allowing employees to focus on the important things such as exceeding customer expectations, reducing waste and improving efficiency.

Improvements begin with defining the problem to be solved and the desired outcomes, based on customer requirements and enterprise expectations. Effective process optimization helps identify the extent to which processes vary between stores, the root cause of variations, and where best practices can be shared companywide.

Once an organization has determined the need for process transformation, it frequently rushes to tools and techniques to drive the change. However, there is meaningful value in taking a comprehensive approach to address the three factors critical to a successful transformation:

  • Accountability: A clear measurement strategy and effective oversight mechanism to ensure quality work and decision making.
  • Culture: A unified organization-wide culture of respect and continuous improvement that drives customer-centric value.
  • Tools and techniques: Teams with a common understanding of the tools and concepts needed to lead basic improvement activities and innovation efforts.
Establishing an Enduring Capability

The right operating model ensures enduring capabilities. The model, supported by organizational structure, processes and tools, drives organizational execution and learning that is not tied to individuals or specific initiatives. Governance provides guardrails for the essential plan/design/build, test, deploy and measure lifecycle and then ensures that outcomes meet the original intent. 

An enduring capability rooted in a strong operating model has the power to shape action and inform thinking as an organization continually changes with its objectives and environment.

Solving the profitability challenges driven by rising labor costs is best done by thinking broadly and building the knowledge and tools to address new problems as they surface. Applying best practices and new thinking in data analytics and lean process design will expedite results. However, building an enduring capability to do so is the key to driving long-term value and securing a competitive position.