How restaurants can reduce labour cost and pour in more profitability

Running a restaurant business may not be as glamorous as it seems. Owners experience many challenges, including economic uncertainty, competition, demographic shifts in target markets, changes in employee work habits, and ensuring adequate cash flow. Although the restaurant industry in India is one of the biggest employment generators, labour costs account for one of the highest expenses, amounting to approximately 45 percent of the total operating costs and in some cases, it may be as high as 75 percent.

This, coupled with the capital-intensive nature of the industry, running a restaurant is a very costly affair. It thus becomes imperative for the owners to control their labour costs by adopting several means. Industry experts suggest that restaurants should aim to keep labour costs between 20 percent and 30 percent of gross revenue.

Also Read: “Restaurants to re-employ 1 million people by 2021,” report

Cross-training: Today most veterans are coming up with the model of hiring multi-skilled employees to cut down the labour costs. “Now, multi-skill employees are in high demand, which is appearing as an absolute solution to reduce labour cost. The option of multi-skilled employees are not only going to profit the restaurant industry but also will increase the capability of the employee as well,”  said Pradeep Pruthi, Managing Director of My Bar, Punjabi Bagh who also feels that multi-skilling assures efficiency in planning and scheduling workers and allows to make changes to the production schedule.

If an employee is trained to perform multiple tasks, he/she can take care of unforeseen and sudden vacancies in the restaurant. Adding more to it, Naveen Chaudhary, Founder, and CEO, Cafe After hours commented that multi-skilled workers are not threatened by obsolescence when new technology changes the method of production, as workers used to learning new skills consistently can adapt to changes in production.  

Controlling attrition rate: Employee satisfaction improves morale in a business, which leads to increases in productivity and employee retention rates. The high attrition rate is one of the primary reasons behind the towering restaurant labor costs. Cross-training thus comes in handy while putting efforts into controlling the attrition rate of a restaurant. 

Talking from the perspective of an employee, Sanjay, the franchisee owner of BBQ Company in Noida said, “Cross-training will reduce the risk of insecurity in jobs, better work satisfaction as they get to learn new skills, more growth opportunities and better incentives leading lesser attrition rates for us. Overall it is a win-win situation for both restaurants and employees.”

Tough competition, late working hours, and foraying for growth opportunities elsewhere are the biggest driving factors behind this phenomenon. Hence, providing better growth opportunities, incentives, giving employee loyalty programs, and improving work culture can go a long way in controlling the attrition rate.

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More imperative for cloud kitchens: With the onset of the pandemic and its aftermaths, the sector has seen huge spurge and has been forced to pivot to an online version i.e. Cloud kitchen/Dark Kitchen/virtual kitchen. 

With the onset of the cloud kitchens, the sector has seen more favorable unit economics, but the overall cost of customer acquisitions has become high as aggregators take a big share out of the restaurant’s pocket, sometimes as high as the food cost percentage itself.

“Nonetheless, the Cloud kitchen sector has seen a huge growth with incumbents’ restaurants pivoting to take advantage of the sector and also new entrants enjoying practically- zero entry barriers,” commented Loveneet Singh, Owner of Outlet Buddy. 

With such market forces at play, streamlining the cost of labour becomes most important. Hence, whether owning a fine-dining, cloud kitchen, or a QSR, one must analyze each aspect and take appropriate steps to manage the labour cost so that the expenses do not bleed a restaurant dry.