Mitigating Rising Labour Costs
A number of provinces have recently increased their minimum wage. As the hospitality sector tends to be very labour intensive, there is no denying that minimum wage increases will impact the bottom line of hospitality businesses—a bottom line which already reflects very thin margins. Increases in the minimum wage also tend to create a bump up effect on the rest of the payroll (i.e., employees being paid higher than minimum wage) as employers are pressured to maintain the structure of their overall compensation strategy. Furthermore, labour costs are influenced by factors other than wages. For example, the new health tax scheduled to start in BC in January 2019, will increase operating expenses for eligible employers even further.
When faced with rising labour costs, it’s natural for operators to considering defraying these costs by raising prices or reducing staffing levels. In some cases, these two strategies are an appropriate solution. However, there are other options for mitigating rising labour costs that could be considered:
* Review your menu and reconsider items with higher ingredient costs.
* Streamline the number of items on your menu and evaluate the ROI of items that are more labour intensive to prepare; do they bring in enough additional revenue to justify the additional labour costs?
* Implement menu price adjustments in small increments and over time. Just as your business struggles to adjust to sudden cost increases, so your customers will struggle to adjust to sudden and larger incremental increases in menu costs. Price adjustments may also be more palatable if they are part of a seasonal menu adjustment or overall menu change.
* Only adjust prices on certain items as raising prices across the board may not be well-received by your customers. We all have expectations regarding the cost of items such as a burger, beer or standard cocktail, so price increases on these types of items should be avoided if possible.
* Consider raising prices for items that are unique to your business as customers typically have less resistance paying a higher price for something they consider unique or special.
* Don’t cut service. While this strategy might save some dollars in the short-term, you’ll lose customers in the longer term, especially given today’s highly competitive food and beverage environment. Remember, in the hospitality/service industry it’s your employees who create customer loyalty and help distinguish your business from others.
* If you do increase menu prices, consider tactics for offsetting these increases. Is there something else that you can do or provide that will bring in revenue or add value to the customer experience?
* Take a good hard look at your productivity and efficiency levels. Can they be improved? Do you have standards of operation in place that support efficiency (i.e., is it taking your employees 15 minutes to do something that should take 5 minutes because supplies are poorly organized)? Are staff generating overtime hours and costs due to staffing shortages and does this present an opportunity for more effective scheduling?
* Make an effort to retain your long-term employees who are often more efficient and productive. There are costs associated with recruiting and training new employees, so you can reduce these costs if you can reduce your turnover rate. Determine both your turnover rate and costs. Then you can figure out how much you’ll save by keeping your existing employees.
While increasing labour and other operational costs will likely have an impact on your bottom line and may restrict your ability to grow or re-invest in your business, hospitality operators have the opportunity to apply innovative solutions, such as the ones described above, to help offset new expenses.
Christine Willow, CMR, RPR, is a Partner at Chemistry Consulting Group. She can be reached at C.Willow@ChemistryConsulting.ca.