The government is introducing the minimum living wage of £7.20 per hour (25 year olds and over) in April this year. Operators will have to find a way of absorbing this increased cost – and other rising payroll costs, too. If held unchecked, they could rise by 45 per cent by 2020. In the first of six articles, Peter Nannestad, of Hospitality Business Improvement Management (HBIM), outlines the approach that should be taken. Over the next six issues, he will cover the use of the 12 economic tools together with six possible solutions to tackle the looming increase in payroll costs.
The increase in the National Minimum Wage, now called the National Living Wage, is not the only whammy to hit the hospitality industry – indeed all employers – this year. It is all part of the Chancellor’s aim to make the UK a higher wage economy and one less reliant on government handouts. Hospitality, as an industry in which the national minimum wage is widely paid, will have to live with it.
Of course, a higher wage economy also means a higher priced economy unless savings can be made by operators to compensate for the increase in payroll. Most industries are highly reluctant to increase the price of their products to cover increased costs and this is certainly true of the hospitality industry where competition is extremely fierce. In the restaurant industry, where the competition is fiercest, there is thus a natural reluctance to hike menu prices to cover the Chancellor’s new impositions. Nor is there any possibility that the Treasury will accede to industry requests to reduce the rate of VAT from 20 to 5% on serviced accommodation which would help reduce prices if passed on in full (or in most part) – an unlikely scenario.
So what are the additional costs employers have to face this year?
- Increase in the National Living Wage of 25-year-olds and over from £6.70 to £7.20 in 2016 and incremental rises in subsequent years to £9 an hour by 2020.
- Additional pension contributions by the employer and employee which will be 1 per cent of gross wages for each party (employer maximum 3%, employee maximum 3 per cent introduced over three years).
- Additional payment of employers’ national insurance contributions (at present 13.8 per cent of employee wages, above a minimum payment of £151) because of the increase in wages.
- Indirect increases by way of keeping differentials between levels of job skills.
- From April 2017 a 0.5 per cent Apprenticeship Levy will apply to the largest employers.
In total, the overall wage increase with a few exceptions (businesses with a large number of employees under 25 years old) in 2016 will be between 10-15 per cent. An annual wage bill of £400,000 will increase by between £40,000 and £60,000 and by 2020 that increase could rise by circa 45 per cent – £180,000. Because of the size of their operation hotels of up to 50 bedrooms will find the challenge particularly difficult to cope with. j
It is highly unlikely that the competitive market place will allow all these wage increases to be passed on in full though there is no doubt that operators will be testing the market gradually to see how resistant customers are to higher prices, so the only alternative is to reduce operational costs.
Issue 1
In this first article, two of the 12 economic levers discussed are:-
- Weekly wage forecasting
- Food menu costing
Weekly Wage Forecasting
Prevention is better than cure. To find at the end of the week that departmental wages are over-spent is of little use. The figure becomes historic and it is too late to implement any solution.
Wage forecasting is the planning for the number of hours to be worked and paid for in the following week. This is simple by definition but challenging to put into practice.
Wages are the biggest single cost item for any catering enterprise and it’s imperative that it is kept under tight control. The cost of full-time and part-time staff will already be known and accepted but the ad hoc hiring of part-time or casual staff, for example, needs to be fully justified. Are staff shifts brought in too early for events? An hour less for ten people on a six hour shift at £10 per hour would save £60 – small beer but twice a week for 50 weeks would add up to £6,000. It’s on figures like this that cumulatively add up to significant savings. Even the workload of full-time and part-time staff should be closely examined to make sure that there is no employee fat in the system.
So, first, let’s define what wage percentage can be paid out to ensure that there will not be an overspend on wages.
Room rates
Departmental wages are calculated as a percentage of their departmental net revenue. For a hotel, room rates will include the cost reception, housekeeping and the night porter. The total payroll cost of these three areas of the business must not exceed 25 per cent of net room revenue.
A guideline to help with this calculation is:
- Reception 12 per cent
- Housekeeping 8 per cent
- Night porter 5 per cent
The split can be adjusted depending on the type of property/business.
Food
Food wages must not exceed 35 per cent of net food revenue.
- Food production (kitchen) 23 per cent
- Food service 12 per cent
The percentage can be altered, as long as they do not exceed 35 per cent of net food revenue in total.
Beverage
Beverage wages cannot exceed 16 per cent of net beverage revenue.
Management
Management wages (these include the general manager and bookkeeper salaries) must not exceed 5 per cent of total net revenue.
With these percentages in mind, it is important that forecasts are carried out four days before the start of the week in question. This gives time for management team to put together and correct the rosters.
Potential solutions
The Weekly Wage Forecasting tool will help ensure wage costs are kept within budget.
Wage Reduction
Reduce reception staff by one on the early shift by introducing self-checkout or payment on arrival. Guests are asked to settle the night before to aim for an early departure. Alternatively, the night porter slips the customer’s paid bill under the bedroom door (reception previously having taken a copy of guest’s credit card when checking in.) Estimated saving £12,000 to £15,000 a year. Many hotels have already introduced this system.
Food Costings
In my experience, not many head chefs can accurately calculate food cost percentages on their individual dishes, yet correct costings are absolutely vital for full control of this vital area. For most commercial enterprises, a true food costing, if properly carried out, would show that they are operating at between 30-35 per cent of net revenues – a high figure given today’s economic environment. A more realistic figure would be 28 per cent (including staff meals) – which is the figure that most operators should aim for. This can normally be achieved by tighter control of purchasing. All dishes should be correctly coasted and reviewed each month. If the operation is already operating at that level, the key requirement will be to maintain it and, ultimately, to reduce it by a percentage point or two without affecting food quality. Hotels with banqueting revenue should be able to achieve a 26 per cent food cost.
The savings that can be made if strict food cost control is introduced can be significant.
Example
Food turnover (net of VAT) £500,000
Example 33 per cent food cost £166,666
Reduction to 28 per cent food cost £140,000
Savings (straight to bottom line) £26,666
Correct costing procedure can be Googled. However should further information of this procedure be needed, please do not hesitate to contact me on info@hbim.co.uk (there will be no cost for this).[/fusion_text][/fullwidth][fullwidth background_color=” background_image=” background_parallax=”none” enable_mobile=”no” parallax_speed=”0.3″ background_repeat=”no-repeat” background_position=”left top” video_url=” video_aspect_ratio=”16:9″ video_webm=” video_mp4=” video_ogv=” video_preview_image=” overlay_color=” overlay_opacity=”0.5″ video_mute=”yes” video_loop=”yes” fade=”no” border_size=”0px” border_color=” border_style=”solid” padding_top=” padding_bottom=” padding_left=” padding_right=” hundred_percent=”no” equal_height_columns=”no” hide_on_mobile=”no” menu_anchor=” class=” id=”][one_third last=”no” spacing=”yes” center_content=”no” hide_on_mobile=”no” background_color=” background_image=” background_repeat=”no-repeat” background_position=”left top” hover_type=”none” link=” border_position=”all” border_size=”0px” border_color=” border_style=” padding=” margin_top=” margin_bottom=” animation_type=” animation_direction=” animation_speed=”0.1″ animation_offset=” class=” id=”][imageframe lightbox=”no” lightbox_image=” style_type=”none” hover_type=”none” bordercolor=” bordersize=”0px” borderradius=”0″ stylecolor=” align=”none” link=”http://ehotelier.staging.wpengine.com/product/how-to-buy-and-manage-your-own-hotel-digital/” linktarget=”_self” animation_type=”0″ animation_direction=”down” animation_speed=”0.1″ animation_offset=” hide_on_mobile=”no” class=” id=”] 
[/imageframe][fusion_code]W2FkZF90b19jYXJ0IGlkPSIxMzg4NzIiXQ==[/fusion_code][/one_third][two_third last=”yes” spacing=”yes” center_content=”no” hide_on_mobile=”no” background_color=” background_image=” background_repeat=”no-repeat” background_position=”left top” hover_type=”none” link=” border_position=”all” border_size=”0px” border_color=” border_style=” padding=” margin_top=” margin_bottom=” animation_type=” animation_direction=” animation_speed=”0.1″ animation_offset=” class=” id=”][fusion_text]About the author
Peter Nannestad, managing director of Hospitality Business Improvement Management (HBIM), is co-author with Miles Quest of How to Buy and Manage Your Own Hotel which fully covers the 12 economic levers that are outlined in these articles.[/fusion_text][/two_third][/fullwidth]
