Why 23% Labor Cost Matters To Limited Service Operators

If you’ve heard me speak at conventions, the number in the title is no big surprise. After years of benchmarking thousands of P&L’s, and measuring Labor Cost vs GOP, we have found a strong correlation between the two values. Labor Cost % is your total payroll divided by your revenue compared to your Gross Operating Profit divided by your revenue.

“It is not enough to do your best; you must know what to do, and then do your best.”

– W Edward Deming

 

First, a little ground work. In math there is a calculation known as R2 or R squared, known as the Coefficient of Determination. I know, great name, right. The R2 value is used to measure how much a number impacts another number. For instance, how much does what I spend effect my bank balance. Well that would be an R2 of 1.00, as every dollar spend reduces my balance by the same amount. So a perfect direct correlation would be 1.00. Okay, so back to our story. If we charted Revenue vs Profit we would find an R2 of around .83. So think of it this way, if we were comparing 2 hotels, the one that made more in revenue would make more in profit 83% of the time. That’s easy enough to believe. You would expect to make more profit if you made more revenue, right? When we look at Payroll Cost we find an 2 of around .73. So if we looked at 2 hotels, the one who had the higher Labor Cost Percent of Revenue (or Ratio to Sales) would have the lower GOP Percentage 75%of the time. Labor cost is almost as accurate a predictor of profitability as revenue.

This gives you a great way to measure how well you are controlling your labor, and driving your profits. 98% of all hotels whose labor cost was below 17% posted GOP’s better than 35%. 91% of hotels with labor cost between 17% and 20% had GOP’s of 35% or better. The trend continues on a pretty straight line. When reach hotels above 23% they are only 23.3% likely to achieve a GOP above 23%. The odds are even worse once you get above 27% Labor Cost. Take a look at the chart below.

What’s Your Birthday?

If you look at the chart you will see that only once, out of 738 hotels, does someone run a labor cost higher than 27%, and still achieve a GOP above 35% (The arrow). This means that you have a 1 in 369 chance of pulling this off. The next time you are on a plane, or at a theater, ask the person next to when their birthday is, there is a 1 in 365 chance it will be the same as yours. So… there is a better chance you will find someone randomly sitting next to you has the same birthday than you will break 35% GOP with a Labor Cost over 27%.

Check out what your Labor Cost is running on the dashboard here on VOA. Look in the Personal Profit Improvement Plan for more information about Labor Cost and how to control it. Email us or your Brand Representative to get some specific recommendations.

You know what they say about death and taxes being the only two guarantees in life. This isn’t a guarantee, but it is pretty darn close, 75%. How many things in your life happen 3 out of every 4 times?

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