How to reduce wage costs

A common problem we see in hospitality businesses is high wage costs.

The target figure for wage costs depends on the style of your business, methods of production, the level of service delivered and the productivity of your staff.

The benchmark we refer to in our workshops is 33% of revenue. This would be split into 19% for front of house wages (including reservations and admin staff) and 14% of revenue for the kitchen. These figures also include employment on-costs such as superannuation, leave entitlements, work cover insurance premiums and payroll tax.

The common reaction from a manager under pressure to reduce wage costs is to cut the number of hours on the roster. It might seem logical at first, but this knee jerk response may do more harm than good if staff levels are reduced to the point where customers suffer. How many times have you been to a restaurant or a café that seems understaffed, so you decide not to order more food or drinks because you can’t find staff member to save yourself? They key point – if you slash the roster, you might be shooting yourself in the foot.

The primary consideration is: Are you generating enough income from the sale of food and drinks to justify the amount you are spending on labour?

Wage costs are expressed as a percentage of revenue. So, to reduce your wages, the two broad options available are to increase your revenue or decrease the amount spent on wages.

You could put your prices up but doing that puts you at risk of pricing yourself out of the market. However, there are plenty of ways to increase revenue through more effective selling techniques, menu engineering and product merchandising. When customer facing staff can increase check average (customer average spend), an increase in revenue, without any proportional increase in labour cost is possible.

A look at your systems of production and service could also present some easy wins. Could the food and drink items you sell be produced in a way which is better, faster, cheaper or more efficient? On the production side, think pre picked herbs, pre-portioned proteins, or pre-batched cocktails. On the service side, think hybrid self-service models and the use of technology such as QR code ordering and payment systems that can both save on labour and free people up to focus on more revenue generating activities. The question to ask is: how can we continue to provide a positive perception of value to our customers without as much work?

The next issue to consider is the ratio of productive and non-productive labour in your business. Productive labour is comprised of the time employees take to produce your food and drinks or serve your customers. Non-productive labour is comprised of the time employees take to do things such as marketing, processing reservations, dealing with suppliers, recruiting, onboarding and staff training etc.

If you try to address a wage cost problem by cutting the number of staff rostered to serve, sell to and satisfy your customers (productive labour), when the problem exists in non-productive labour, you can do serious damage to your business. Unfortunately, this is how many less experienced managers respond.

The first thing we check when we notice unusually high wages in a business is staff turnover. If staff turnover is high, we know that in inordinate amount of labour hours will be used in the recruitment and training of replacement staff. The causes of high staff turnover can be traced directly back to the core issues of poor recruitment, poor or no training, and undisciplined leadership communication.

Tight wage control won’t be achieved by just slashing the roster. It requires shift leaders who know how to keep their teams productive, and well-trained managers to provide coaching when needed. In many of the businesses we look at, it’s possible to get a 5% reduction in wage costs when the effort of managers and team leaders is focused on generating more revenue and making people more productive. How much would that be worth to you?


Chris Lambert