In an earlier post about Profitability, we touched on the importance of controlling Labor and Cost of Goods. In this post, we'll look more closely at how Labor costs are increasing, and why, which has a direct effect on both the profit of a restaurant, and ultimately how much the consumer pays to eat there.
First, it should be noted that the Federal minimum wage increased on January 1st to $9.65/hour. In addition, Minneapolis employers with more than 100 employees must pay their employees at least $10.00/hour in wages, and tips do not count against this hourly wage. Minneapolis will institute an increase in the minimum wage each of the next four years, to $15/hour by 2022.
Most restaurants divide up their hourly staff into two departments: employees who work in the Front of the House (Servers, Bartenders and their Assistants), and employees who work in the Back of the House (Cooks and Dishwashers, primarily). In full service restaurants, the hours of each of these teams tend to run about even for most of the year, meaning the FOH utilizes about the same number of man hours as the BOH.
Typically, the FOH staff is compensated by the restaurant at the minimum wage rate, and the BOH staff is compensated at a higher rate. However, FOH wages are supplemented with tips paid by customers, which average about 12 - 18% of the average guest check. This supplemental compensation brings the average hourly wage for FOH staff to a level that is higher than the average hourly wage of the BOH staff.
To ascertain how much higher, we can look at Social Security and Medicare payroll taxes, which are taxed at an even rate on wages and claimed tips for the first $118k - $127k earned. For our data set, the FOH paid 40% more in Social Security and Medicare payroll taxes than the BOH staff in 2017. So it's safe to assume that the average FOH wage was about 40% higher than the average BOH wage last year.
However, in 2016, the difference in payroll taxes paid by FOH staff versus BOH staff was 70%. In an environment where the minimum wage is increasing, why would the gap in FOH wages and BOH wages decrease?
A few factors:
In 2017, the average FOH wage increased from $9.00/hour to $9.50/hour, an increase of 5.6%. In Minneapolis, for large employers, the minimum wage increased again in 2018 to $10.00/hour, another increase of 5.3%. In two years, FOH staff in Minneapolis have received a total increase of 11%.
In early 2016, the average BOH wage was $12.48/hour. In late 2017, the average BOH wage for our Minneapolis data set was $14.67/hour, an increase of about 18%. This increase is likely attributable to BOH employees seeking a higher wage as the minimum wage increased, or more likely, seeing the opportunity to demand a higher wage in a high demand / low supply environment for Line Cooks and Dishwashers.
Many restaurants have raised prices or implemented Service Charges to combat the rise in both FOH and BOH wages. This increases the guest check average, which in turn increases the amount of tips that are given to FOH staff, as the tip percentage left by customers has largely remained the same percentage of the total check amount. This will, in turn, drive up wages for the BOH, if the trend from 2016 to 2017 continues.
What happens now? As restaurant owners experience a decline in profits from the increase in variable Labor costs, what will they do to produce the profit that they promised their investors, banks and landlords? Well, it's simple math, they have to either reduce costs or increase revenue. Reducing costs will require a change in the cost structure (reduce Labor hours, eliminate salaried positions or other fixed costs). Increasing the the revenue stream may require a change to the way customers experience the restaurant (implement Service Charges and eliminate tips, raise menu prices, or some combination of both), which will require a long-term strategy of educating the consumer.
We have started to draw up theoretical financials to compare each of these scenarios for our clients. If your restaurant is in need of a pro forma to work out the possibilities, please reach out to us.