While torrents of price hikes continue to rain down on restaurants, and consumer spending simultaneously is drenched by the depressing economy, foodservice operators also are getting pelted on the labor side of their businesses.
Among the issues forming dark clouds over their operations are:
Wages. The federal minimum wage will jump to $6.55 an hour this July, but already 31 states have higher threshold wages. San Francisco and Santa Fe, N.M., have the highest hourly rates, $9.36 and $10.50, respectively. The federal minimum will jump again in July 2009 to $7.25.
Assuming no more state or local wage changes before then, only eight states and the two cities still will have higher minimum wages, though in several states the minimum wage will continue to rise annually with the rate of inflation.
Expensive health insurance. Costs for employee coverage continue to go up, rising 7 percent in the overall marketplace last year, according to the Hay Group, an international human resources research firm.
Another study, by the University of Minnesota, found that employers pay 76 percent of health care premiums, while their employees pick up the balance.
Seeking to defend against sudden spikes, larger restaurant companies are often quick to update their plans and put them out to bid to stay ahead of rising health costs.
“When all those different costs go up, we look every place for where we can more effectively manage our expenses,” says Don Cervantes, vice president of compensation and benefits for Calabasas Hills, Calif.-based The Cheesecake Factory, whose 140-unit chain has almost 10,000 of its employees enrolled in a health care plan offered by a large insurer.
Mandated health care. San Francisco businesses with more than 20 employees are required to set aside minimum amounts of cash for health care for employees who work at least 10 hours a week—$1.17 to $1.76 per hour. A federal court ordered businesses to begin paying into a municipal fund this year, even as the city waits for the 9th U.S. Circuit Court of Appeals to decide the Golden Gate Restaurant Association’s lawsuit challenging the mandate.
Dwindling tips. Customers, concerned about unemployment and falling home prices, also appear to be tipping less, some observers say.
About 60 percent of servers who participated in an informal, online survey reported a decline in tips, according to
Labor costs
| FAMILY DINING | 32.5% |
| QUICK SERVICE | 28.6% |
| CASUAL DINING | 33.5% |
| FINE DINING | 34.5% |
“Even business clientele are more conservative on the gratuities, so it’s not just the casual diners,” says Paz, who also consults on service for the industry.
The jury appears to still be out on whether falling tips will impact operators in the 43 states that allow employers of tipped personnel to pay them subminimum rates that are differentials of workers’ tip incomes. Restaurants in those states would need to make up any shortfalls if servers’ tips don’t cover the full minimum wage.
Other operators have been deducting related portions of credit card processing fees from employees’ tips as another way to offset wage hikes.
The Outback Steakhouse chain’s parent, OSI Restaurant Partners, whose multiband system includes 1,200 restaurants in 26 states, backed down from a plan this year to deduct the proportion of card fees stemming from employees’ tips after an outcry by servers and customers.
Of course, when labor costs are being squeezed, operators seek relief by raising menu prices. Prices are up in San Francisco, and some restaurateurs there are adding surcharges to their tabs to help pay the mandated health care costs.
Raising prices also is expected to be the main strategy to deal with wage hikes. A recent study by the Chain Restaurant Compensation Association and the Hay Group noted that 48 percent of CRCA members plan to raise menu prices to absorb higher wages.
But others argue there are better ways to control labor costs than trying to extract more money from recession-fearing customers or employees. The best shelter in bad economic times, as well as good ones, is strong employee retention and smart scheduling that balances labor costs with incoming sales, veteran operators and industry watchers say.
“Usually when labor is high, it’s a scheduling problem and a turnover problem,” says Roger Fields, a former New York restaurateur and now a San Francisco-based consultant and author of the book “Restaurant Success by the Numbers.”
When a business is slow but overstaffed, it loses money, and when it’s busy but understaffed, it can also lose money because of poor customer service, Fields observes.
“A real key, and it takes a while to get the hang of it, is staffing for efficiency, to have the ultimate level of staff when busy and not overstaffed when slow,” he says.
Some operators have turned to software programs to schedule employees more effectively.
Qdoba Mexican Grill, the 426-unit fast-casual chain based in Wheat Ridge, Colo., is more efficient in scheduling because its managers use a customized software program, says Mike Speck, vice president of human resources and training.
Store managers can forecast sales periods and match up their staffing needs to anticipated sales volumes, he explains. That ensures each unit has enough people on the clock when needed.
“For us it’s about building and scheduling the right people at the right time,” Speck says. “If you do that you can control labor in its simplest form.”
The other simple answer to control labor is controlling turnover, Speck and other operators say.
They find that the biggest drain on labor is the industry’s notoriously high turnover, which is known to range typically between 100 percent and 200 percent annually. Restaurants that turn over an entire staff once or even twice a year are throwing money away, retention experts warn.
Those that can hold on to workers will see automatic savings through less product waste and training costs and through improved employee productivity and customer satisfaction, those same advisers stress.
“Replacing positions is the biggest waste of dollars,” Speck says. “A store that has high turnover will have costs. You are constantly working with people who have less experience, less talent. It’s more frustration.”
Employee turnover is also correlated to customer satisfaction, he adds. The higher the turnover, the lower the satisfaction and the lower the sales.
Qdoba’s turnover for hourly workers is 76 percent, below the industry’s average, and the chain has been able to score 34 consecutive quarters of positive same-store sales, Speck says.
Burgerville, the 39-unit quick-service chain based in Vancouver, Wash., has a low hourly average annual turnover rate of 54 percent thanks, in part, to a caring, respectful work environment, says Jack Graves, chief cultural officer for Burgerville’s parent company, The Holland Inc.
Employee perks also play a roll, he says. While some operators bemoan mandated health coverage and rising insurance costs, Burgerville pays up to 95 percent of employees’ health insurance premiums.
The average cost to hourly works is $15 a month. Approximately 64 percent of hourly employees sign up for the health care coverage.
Burgerville’s average annual turnover was 128 percent in 2005, the year before it began the health care program. Although paying for premiums increased Burgerville’s labor cost, the program is paying for itself in lower turnover and training costs, Graves says.
“Instead of training 1,200 people a year, we’re training 540 to 550,” he says. “Instead of turning over a crew every nine months, we now have people who have sticking around for 18 months.”
Tenured employees are more productive, Graves adds. Those stores that have a high number of employees participating in the health care plan report higher sales figures.
Operators have to be proactive when it comes to labor costs, he says.
“We treat [the health care plan] as an investment in our business and our people,” he says. “We insist we get positive results. Any program has to pay for itself.”