Priced out: The struggles facing operators in wake of increasing NLW

This year, there’s been a 11.5% surge in the annual minimum wage, once the increases for lower age workers are added into the mix. It’s left the industry shocked, and understandably raising ever more concerns about the hefty financial load weighing on our sector with the associated risk for the industry. 

For those of us, myself included, still grappling with the aftermath of our coronavirus loans, life just got tougher. As I’ve been sharing with many, we took out loans of £150k per pub during the pandemic. Initially, a base +5% interest rate seemed manageable with such low base rates, but now our rate has doubled to 10% and the burden has significantly intensified. We’re still in the process of paying off the loan and now each pub requires an extra £40k before we even begin to make headway. 

Even with payroll at 30% of sales for a business generating £1.5 million in turnover, the minimum wage hike is tacking on an additional £50k to our expenses, and our profit, if we don’t act. What used to be a substantial but manageable variable cost for labour is increasingly becoming the toughest and most challenging line on the P&L. 

My job as a restaurant owner and software supplier is to figure out the best way to manage my business going forward. Really, there are only two options: put up prices or drive further efficiencies. The reality is we will have to do both. As we see month-on-month food prices dropping, and the price of electricity seemingly stabilising, we might hope that we can slightly raise prices and convert most of that increase to our bottom line. The question is how we much we dare increase prices when already the customer has a degree of cheque shock! 

The remainder of the cost savings will have to come through further efficiencies. For us, the biggest debate will be how we can drive food efficiencies. We aren’t big enough to have a central kitchen, a smart efficiency which other businesses have enacted very well, but we can start to make dishes for both businesses and buy in where we can find a good enough quality product. I think over the next year many businesses will need to look much more seriously at this.  

We really don’t like restricting opening hours. For us, availability is key, and we will lose business overall if we shut early in the week or in the afternoons. We have worked hard to get our team numbers down on those very quiet days, so we just about scrape through to zero profit on the day.   

After these kinds of measures, it does come back to labour efficiency, and I still think there is a lot that, as an industry, we can do. The real challenge is how much effort and energy we can, and should, put into labour efficiency.  

 Giving someone a budget and telling them to deliver is not really management, just as the blunt instrument of a labour percentage is no longer acceptable. We are going to have to embrace several things we have chosen to avoid – proper slack-based budgets, good shift planning, and identification of slack tasks are just a few.   

The hard yards in labour management are upon us again! 

Closing restaurants and rooms in January

We have had several debates about whether we close our restaurants and bedrooms for a few days in January. This is a big decision for us, as our philosophy is to be open all the time. It’s important that our customers know they can always turn up, so of course this isn’t an action that we have decided to take lightly.  

We’ve weighed up the pros and cons, so I thought I would try and set out our logic: 

Let’s start by trying to calculate our P&L. Daily sales would be, say, £1,000 max, with a GP of around £700 (probably less when sales are low). Staff costs for the day, for three team members for 12 hours, are £540, and energy costs for the day are £150.  

Already, we’re at zero profit before we count variable consumables, operating costs and so on, which I think amount to around £600 a week, and therefore truly variable costs are around £80 on these quiet days. I doubt we will even get to £1,000 for the day or manage to restrict it to one person front of house. Our breakeven sales are probably around £1,200. The maths is easy – closing is the right financial option. 

Closing for this period also presents an opportunity to tackle some of the difficult tasks to schedule in a normal week. Our list includes: reflooring the bar; repainting and re-tiling the toilets; stripping out the kitchen and doing a full deep clean; putting in new windows and cleaning and polishing hard floors. All of which, are hard to do when we are open. 

We are choosing to let the staff either take holiday or come in to help make the site look amazing – a real winter clean. I hope it will be fun, and will energise the team, making them even more proud of the business they are part of. 

Rather than closing both sites for the same period, we have decided to close one Monday to Thursday on one week, and the other Monday to Thursday the next, as we are only ten minutes apart. This way, we are still available to those who are wanting to go out, even if it comes with an extra few minutes in the car.  

Beyond all of this, the point of this article is to remind operators to calculate their daily marginal profit. It is a vital calculation that can help you make a decision in one of three directions. Either reduce your cost base so that you can make money on quieter days, grow sales to get over your break-even, or close. 

We can’t afford to invest all of our Christmas profit in January losses. Closing in January is the best decision for our business, and likely many others.  

Maintaining better habits in hospitality 

Two weeks ago, I wrote about changing behavioural habits in the industry. Operators have their sights set on growing productivity and engagement amongst their teams with an urgency that hasn’t necessarily been there historically. As well as this, we are all looking at performing operational tasks more effectively. We want to do things quicker and better.  

Of course, we have always strived for happy and busy teams in our businesses. But if we take the ongoing battle with retention and increasing labour costs and add that to the promotion of the more balanced ways of working Gen Z are attracted to, many old school operators have had to rethink the behavioural habits they teach and maintain in their restaurants and bars, for managers as well as team members. 

In an ideal world, we want to foster an environment where staff know and perform best practices, which in turn creates a more engaging and positive place to work.  

I also spoke about the difficulty of establishing behavioural change compared to process change, as the latter is made easier at the hands of technology. Your teams, however, cannot be programmed to maintain the best working practices that systems make easy to identify and implement. Often, we have the tools to make better decisions, but we are not in the habit of using them consistently and to their full advantage.  

There is, however, a case to be made about using process change to enforce best practice habits. I have heard many managers say: “Let’s get labour cracked once and for all.” Sadly, it never seems to happen. There is slow move back to people writing rotas to suit themselves rather than the business. There is a slow move back to the costs being just a bit off, then a bit more off, until we finally sum up the energy to re-embed the habit – again.   

So, the real question is, how do we reinforce positive habit change? 

The answer is, by turning it into a process. Take the habit of writing a shift planner as an example. It’s the most important document of the day; it records what everyone is doing, helps them to stay busy and focused, and drives team behaviour as well as customer service. But, as a discipline, it is scarcely ever trained, and never really enforced.  

It seems to me that the only way for vital activities like this to not end up in the ‘too difficult’ box, is to turn them into a measured and automated process. 

Embedding processes is an ongoing effort. We need to be regularly monitoring the adoption of these new processes; we need to make sure they remain relevant and effective, and we need to recognise and reward people who adhere to them.  

Software makes all of these things possible. That’s the great advantage of it. Once you commit to excellence, it will become a part of your business.