How to forecast restaurant labor costs

In an industry where margins are razor-thin and competition is fierce, mastering labor costs is critical to a restaurant’s success. For decision-makers at the helm of large-chain restaurants, these costs represent the balance between stellar service and profitability, between growth and stagnation.

Adding to the complexity is the high variability of labor costs. Everything from internal challenges like high employee turnover, operational inefficiency, rising wage and benefits costs, and over or under-staffing shifts to external factors like seasonality, local events, changing labor laws, and even the weather can dramatically impact a restaurant’s profitability.

With so many variables in play, forecasting labor costs becomes both an art and a science. But, equipped with the right insights, tools, and expertise, it’s a challenge that’s wholly surmountable. Dive in as we look at the methods, strategies, and tech solutions that can steer your restaurant chain to predictable and, even more importantly, optimized labor costs.

4 techniques for labor forecasting

Accurate restaurant labor forecasting can mean the difference between seamless operations and logistical nightmares. When done effectively, restaurant leaders can optimize staffing, reduce costs, and ensure they meet customer demand with efficiency. Let’s look at the four leading techniques industry leaders can leverage for precise labor forecasting.

This approach involves a deep analysis of the market, including research on broader trends affecting the industry nationally, statewide, and at the local level. It also encompasses the analysis of consumer behaviors and competitor strategies. By understanding the broader market and external factors like seasonal demands, local events, and overall economic conditions, restaurants can anticipate fluctuations in demand and adjust their staffing levels to match.

Organizations like the National Restaurant Association provide extensive research on the restaurant industry, both at the national and state level. But even more important is gaining knowledge of your specific market. This is particularly true if you are opening a new restaurant, expanding into a new market, or occupy a niche within the industry. Networking with fellow restauranteurs in your area can help you find out when other restaurants are busiest, how they schedule their staff to meet demand, and what local or seasonal factors affect traffic.

Gazing backward can often provide a clearer path forward. Historical analysis revolves around studying past performance and labor data to identify patterns and predict future trends. Decision-makers can make more informed predictions by examining previous staffing levels during peak and off-peak seasons, holidays, promotional periods, and other events. Ideally, when equipped with this knowledge, you’re able to ensure you are neither under or overstaffed at any given time.

Some historical data points to consider are what time of day typically has the highest and lowest traffic, during which seasons business slows down or speeds up, how local events affect customer flow and more.

The Delphi Method relies on input from multiple decision-makers and managers. Restaurants using this method for labor forecasting would have various leaders answer anonymous surveys about labor needs in the future. The final scheduling decisions would then be made based on their collective responses.

Input could be gathered from restaurant managers, head chefs, shift leaders, and more — it’s entirely up to you to determine who on your staff has the insight and perspective to help you accurately forecast your labor needs. Often, your leaders’ experience on the ground, combined with their understanding of upcoming local events or promotions, can prove invaluable. It also provides a platform to evaluate your current processes and gather feedback on ways you could improve operational efficiencies.

The advanced quantitative method combines statistical models with computer-based analytics to make labor forecasting more accurate and dynamic. Although this method also draws on historical data, advanced quantitative methods provide a more holistic view by factoring in market conditions, economic fluctuations, sales records, and both labor demand and supply data.

This in-depth and comprehensive method employs rigorous statistical and mathematical evaluations via specialized software, such as Fourth’s Hospitality AI Forecasting engine. Its analytical rigor makes this forecasting method particularly well-suited for large-scale entities like

major restaurant chains. Operating across diverse markets with complex dynamics, these enterprises benefit from the method’s ability to parse vast data repositories, offering nuanced insights into future labor requirements.

How to calculate labor costs

With accurate forecasting, it’s possible to determine the future labor needs for your restaurant with relative certainty. Equally critical is understanding the financial implications for your restaurant. Let’s delve into two different approaches to calculating labor costs and what they signify for restaurant chains.

Labor as a percentage of sales

This metric shows the relationship between your labor expenses and your revenue. A rising percentage might signal inefficiencies in scheduling, productivity, or even hiring. By keeping a keen eye on this ratio, restaurants can swiftly adapt strategies to ensure labor costs are aligned with revenue generation. Here’s how you do it:

1. Determine your restaurant’s total labor cost (salaries, wages, benefits, and any other compensations given to employees over a specific period of time)
2. Determine total sales (total revenue generated before any taxes or other deductions from all sales during the same period of time)
3. Divide total labor costs by total sales and multiply by 100 to get your labor as a percentage of sales. The formula looks like this: (labor cost / total sales) x 100

Labor as a percentage of total operating costs

This ratio contrasts labor costs against all operational expenditures. It’s a vital tool for C-level executives to understand the weight of labor in the grand scheme of daily operations. A

disproportionate ratio could indicate the need to adjust other operating expenses or re-evaluate labor management practices. Here’s how you do it:

1. Determine your restaurant’s total labor cost (salaries, wages, benefits, and any other compensations given to employees over a specific period of time)
2. Determine total operating costs (all expenses required to run the restaurant, excluding non-operating costs like interest on loans. Include rent, utilities, marketing expenses, supplies, and of course, labor)
3. Divide total labor costs by total operating costs and multiply by 100 to get your labor as a percentage of sales. The formula looks like this: (labor cost / operating cost) x 100

Labor cost metrics act as a financial barometer. By monitoring and analyzing labor costs, leaders can identify inefficiencies, make informed staffing decisions, and optimize profit margins. For large-chain restaurants, where even the slightest percentage shifts can equate to significant monetary values, understanding and acting upon these figures can be the linchpin for long-term success.

Benchmarking restaurant labor metrics

Determining optimal labor costs is a delicate balance, but when done right, it can lead to profitability and smooth operations. By comparing your restaurant’s metrics to established industry standards, you can gauge performance, spot opportunities for improvement, and take the necessary action to ensure your restaurant is outperforming your competition.

Restaurant labor cost percentage

While the general guideline for restaurant labor costs hovers around 28-33% of total revenue, the actual percentage will vary based on the type of restaurant. For instance, fine dining restaurants prioritize exceptional service, thus allocating a larger portion of their revenue to labor. According to accounting firm BDO, the average labor cost in the restaurant industry is 31.6%. However, you can see in the chart below how labor cost percentages shift across different types of restaurants.

^{Source: BDO}

Restaurant prime cost

In addition to labor cost percentages, a restaurant’s prime cost is a telling indicator of its financial health. Prime cost is a foundational metric in the restaurant industry, representing the sum of direct labor and food costs. To calculate prime cost, simply add the total labor expenses (salaries, wages, benefits, etc.) and the total cost of goods sold (ingredients and beverages). This metric offers a comprehensive snapshot of a restaurant’s most variable expenses and is essential for profitability analysis.

Prime costs should generally be close to or less than 60% of your total revenue. As with labor cost percentages, this will vary based on the type of restaurant. Full-service restaurants typically have a slightly higher prime cost (60 to 65%), whereas quick-service restaurants may get closer to 55%. Because labor usually makes up a significant portion of the total prime cost, efficiently managing and forecasting labor can help restaurant managers optimize their prime costs, setting the stage for a more profitable operation.

^{Source: The Fork CPAs}

Turn predictions into profits

So, what’s the bottom line? Labor is more than just a line item in your budget. It’s critical to the financial well-being of your restaurant. Gaining a clear understanding of your labor costs and accurately forecasting to meet demand can mean the difference between operating a thriving restaurant and struggling to keep your doors open.

Leveraging the predictive intelligence provided by advanced tools like AI forecasting paves the way for smarter decisions, ensuring you’re always a step ahead. At Fourth, we’re proud to offer state-of-the-art AI Forecasting built for restaurants and created from the largest repository of data in the industry — collected from serving more than 100,000 locations globally and 14 of the

top 20 restaurant chains. Put the power of machine learning to work for you and fuel your restaurant’s profitability and operational efficiency.

When every hour of every shift matters, Fourth helps you conquer the day.