Industry Update
Opinion Article18 August 2021

Labor Shortages and Increasing Labor Costs Post-COVID-19: How Future Hospitality Businesses are Going to Thrive?

By Fred DeMicco, Executive Director and Professor in the School of Hotel and Restaurant Management at Northern Arizona University and Luyi Liu, MBA student at Northern Arizona University

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Abstract

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After tens of thousands of hotels and restaurants were suffering from shutting down due to the pandemic, the hospitality industry is finally beginning to rebound. However, the rebound is not proceeding smoothly as the revenue lost during the pandemic can never be recovered and the hospitality industry cannot find enough workers post-COVID. Even worse, restaurants, theme parks, hotels, and tourist attractions are finding themselves squeezed from multiple sides: rising costs, worker shortages, unpredictable supplies of some foods, and in some cases, demand is so overwhelming that it is difficult to avoid customer dissatisfaction1. (Chen et al. 2021). At this point, it is necessary and important for hospitality business operators to find ways to overcome these challenges, especially to find out how to deal with the labor shortage and increasing labor costs, to better recover from the pandemic.

Background of labor shortage and increasing labor cost due to COVID-19

After COVID-19 forced restaurants, hotels, and bars to shut last year, data from hiring sites indicate relatively high numbers of workers pivoting away from the sector: On Job case, a digital job board and social network for hourly workers, searches for restaurant and food-service jobs in April were 35% lower than in the same period in 20192. (Chen et al. 2021). Millions of hospitality workers were laid off during the pandemic, which pushed many hospitality workers to find new kinds of jobs in some other industries. Studies have found that once the hospitality workers were laid off due to the outbreak of COVID last year, especially those entry-level workers, most of them are not willing to go back to their original job again. This leads to the labor shortage in the hospitality industry these days.

Along with the labor shortage phenomenon, here’s another interesting thing happening in today’s labor market: you may get the job that you had applied for in the past few years as companies are getting back in touch with previous applicants nowadays. Sounds surprising, right? But it really happened. Several persons from different industries recently received phone calls from a manager of a Cheesecake Factory, saying that they received their applications and wondered whether they are interested in having an interview for the role they’ve applied. Most of the applicants denied this inquiry as they already got a job in the other companies and are no longer interested in working for that Cheesecake Factory. The reason why that manager was calling those previous candidates is because the company has increased its outreach to all potential candidates through various third-party job board databases and its own talent network database, as restaurants and dining places reopen to full capacity and their staffing level is increasing.4(Chen, 2021). Hospitality businesses are trying to reach out to previous applicants and hire them to fill out those vacant positions, which reflected that the huge impact of labor shortage on the hospitality industry.

The main reasons behind this phenomenon are the low labor wages and high employee turnover rate. Labor wages for those entry-level jobs in the hospitality industry were relatively low, comparing to the other industry. And as a matter of fact, the employee turnover rate in the hospitality industry is high, “according to the Bureau of Labor Statistics, the Food and Hospitality sector has an annual turnover rate of 73.8%. In other words, more than 6% of staff will leave their job every month.”3 (Blair, n.d.). From Figure 1 we can see that the average quit rate of accommodation and food services, leisure and hospitality are both higher than the U.S. average standard, while the average weekly earnings of accommodation and food services, leisure and hospitality are both lower than the U.S. average standard.

Figure 1

Moreover, from Figure 2 we can figure out that the quitting rate of food service and accommodation workers has increased after the occurrence of the pandemic, it reached to 5.7% in May 2021. On the other hand, the average hourly wages for hotel and food-service employees have increased as well after the breakout of the pandemic, reached to $15.14/hour.

Figure 2

The occurrence of labor shortage gradually leads to the increasing labor cost, as operators of hospitality businesses realize that without increasing the minimum pay for the workers, the labor shortage problem in their business will get worse. Nevertheless, another new problem comes up: how will those hospitality businesses generate enough profits to support their operations with the increasing labor cost? According to the Wall Street Journal, “hiring woes could cost the region up to 10% of its annual $6.9 billion tourist economy.” (Chen et al. 2021). So, it is urgent for operators of hospitality business to figure out efficient ways to overcome these severe problems while also have the ability to generate enough profits to support their operations.

Pros and Cons of labor shortage and increasing labor cost

For hoteliers and restaurant owners, or even those employers, one of the most significant advantages of labor shortage and increasing labor cost is to screen more qualified workers. Even though fewer workers are willing to work in the hospitality industry, this is a great time for hospitality businesses to hire more qualified workers, as they are selecting the best from those quality candidates who are willing to work in the hospitality industry at this special time. Meanwhile, for those employees who still have the passion to work for the hospitality industry, one advantage for them is that they will have more job opportunities and will have a higher possibility to get a job due to the labor shortage. And if they were offered a job, they would have had better wages and benefits than those previous staff, as a result of the increasing labor cost. Yet, just as every coin has two sides, there are also some disadvantages of labor shortage and increasing labor costs. For the employers, the main disadvantage is that it will take them more time to recover the operation since the hiring and screening process is becoming harder and need to be paid more attention to. Besides, as the labor cost goes up continuously, they have to find out some efficient ways to avoid losing profits but still grow their operations.

How restaurants can better deal with this problem and drive/thrive their operation

The main idea behind labor shortage and increasing labor cost is that operators of hospitality businesses and those employers want to maintain their employees and attract more qualified workers, so for those who cannot afford the increasing labor cost, they can provide their employees with more flexibility instead, such as having shorter shifts, more flexible schedules, better benefits, as long as not harming their ability to generate enough profits. Among these options, providing employees with flexible working schedules is more popular, as “research shows that the average Generation Y worker is uninterested in a job for life, instead, they are seeking flexibility and work-life balance.”3(Blair, n.d.).

Besides those possible solutions above, hospitality businesses could employ some other creative operating concepts such as below:

New operating model: ghost kitchen and virtual restaurant

According to the Restaurant Online Ordering Statistics, 60% of U.S. consumers order delivery or takeout once a week, and 87% of Americans who use third-party food delivery services agree that it makes their lives easier5. (Resendes, 2020). To get more specific – research shows working with a third-party delivery system raises sales (on average) up to 20%.6 (“Guide to”, 2020). It costs less and saves lots of money if start up a new business in a virtual way. This can also bring customers more convenience. Statistics also showed that the number of people using food delivery apps will rise by 25% in 2020, and since COVID-19, 51% of consumers have downloaded at least one new food-purchasing app. It is also predicted that the ghost kitchen market will swell to more than $1 trillion within the next year7. So, it is a good time for operators of hospitality businesses to employ virtual ghost kitchens at this point.

A ghost (Virtual) kitchen is where virtual brands are produced without a brick-and-mortar location and their facilities that are made solely for producing virtual brands6. (“Guide to”, 2020). Some advantages of ghost kitchens are that you can spend less money on your equipment and can start selling products faster than the other real kitchens. Besides, products can be tested before they are committed to a food truck or a real store. And if you already had an existing restaurant, ghost kitchen could also help to expand the delivery range of your business. On the other hand, ghost kitchens may lose some businesses due to location constraints.

For a restaurant, if it is not able to afford the increasing labor cost, it can transfer its operation into a “virtual restaurant”, which is “a food service business that serves customers exclusively by delivery based on phone orders or online food ordering”9. Lots of people thought ghost kitchens are exactly the same as virtual restaurants, which, however, is a misunderstood. Unlike a ghost kitchen, virtual restaurants do not rent from third parties, they have their own established physical store or food trucks, and use their existing kitchens to create additional, delivery-exclusive menus5. (“Guide to”, 2020). This type of restaurant can even use a shared kitchen with another business to cook their own food. Sometimes these are partnerships and other times the restaurant itself wants to experiment with a new flavor, so they will build a second menu only available online and cook the food in the same kitchen10.

Employing more robotics and AI on site

Employing more robotics and AI on site could be another choice to overcome the increasing labor cost.
  • In the kitchen, smart ovens could be used, which can cook ingredients automatically and then switch to a “holding” mode. This could help save lots of labor, also save the current employee’s time. More than that, a food prep bot can also be employed as it can help with food preparation and deliver the food to the chef once it is well-prepared.
  • As the Delta Variant spreads out very fast all around the world, voice ordering is another great option in this post-COVID time as people are still concern about their health and may not want to have many direct connections with others while dining outside. Voice ordering can be applied both at home and in the store. This is a great option to employ, especially when your restaurant is at a busy time. Servers may be too busy to go to your table and take your order manually, at this point, you can just speak out what you want by talking to a voice-ordering device or just give a phone order, which will deliver your request to the cooks in the kitchen directly. Voice ordering can also be used at a self-order kiosk, and once you are going to order, it will take your order by recognizing your speaking conversation, without you touching anything. And it is common in the drive-thru, customers can just place their orders by talking to a voice-assistant-enabled order taker12. (Sebes, 2018).
  • To avoid the labor shortage and better apply the flexible schedule concept, operators of hospitality businesses could install scheduling software and get it connected with a cloud-based POS, which can help determine which of your staff tends to do the most up-selling and give those team members priority for high-volume shifts12. (Sebes, 2018).

Convenient and High-tech delivery concepts

Having tech-advanced delivery concepts will also help operators save money on labor. Operators could consider having pick-up lockers, which are coded and facing the exterior of the restaurant, to improve its delivery process. This pick-up locker can be used along with an app, which customers can download ahead of time and receive their order updates from it. Once the food ordered is done, it goes directly to the lockers from the kitchen, and customers will receive the notification on an app, know which locker does their food located, and then pick their food up by scanning the QR code on the specific locker the app shows.

Another convenient food delivery concept is Automat, which can help deal with the labor shortage problem, simple foods and drinks are served by vending machines only. In the 19th century, the world's first automat was opened as a type of fast-food restaurant in Berlin, Germany. Automat was always considered as a type of restaurant, however, nowadays, it should no more be just considered as a restaurant, rather, it can be employed in any existing restaurant as a convenient way of food delivery to their customers. An automat works simply: you just simply fed your money into a glass-enclosed kiosk, removed a steaming plate of freshly made food15, and then enjoy! (Strauss, 2021). It is both convenient for operators and customers, which also helps save the serving time and customers’ waiting time, makes the service more efficient.

Conclusion

The high turnover rate has consistently been a problem in the hospitality industry. As the labor shortage is becoming a significant problem and increasing labor cost is growing as a trend in the hospitality, restaurants and the other hospitality business should be alert to these challenges and be well prepared, find out efficient solutions or adopt new operating concepts to thrive their business in this special time. As the increasing labor cost is going to be a long-term trend in the hospitality industry, operators and employers should come up with creative ways to maintain their current employees and attract more employees, without harming the profit of the operation. Considering switching your current business to a new operating model, such as a ghost (virtual) kitchen or a virtual restaurant, will help save a lot of money; employing more AI and robotics in store to take place of some of the labor you need, to overcome the problem of labor shortage; adapting convenient and high-tech delivery concepts in your operation is also a good way to help you overcome the labor shortage and increasing labor cost problems. Operators of hospitality businesses should always keep in mind that customer experience matters, focusing more on how to cater to customers’ needs and concerns nowadays, how to provide them with more convenient and better service will help you to succeed.

References

  1. Chen T., Haddon H., Weber L. (2021). Hospitality Firms Face a Squeeze. Wall Street Journal, CCLXXVII (148), A1, A13.
  2. Chen T., Haddon H., Weber L. (2021). Many Choose to Move on From Restaurant Jobs. Wall Street Journal, CCLXXVIII (11), B1-B2.
  3. What Can Be Done to Decrease Hospitality Turnover? Retrieved from: https://www.speakap.com/en/blog/decrease-hospitality-turnover#:~:text=According%20to%20the%20Bureau%20of,leave%20their%20jobs%20every%20month.
  4. Chen T. (2021). Good News: You Might Get That Job You Applied for in 2017. Wall Street Journal, CCLXXVIII (17), A1, A6.
  5. 26 Online Ordering Statistics Every Restaurateur Should Know in 2021. Retrieved from: https://upserve.com/restaurant-insider/online-ordering-statistics/
  6. Guide to Ghost Kitchens (2020): All You Need to Know. Retrieved from: https://roaminghunger.com/blog/15623/ghost-kitchens-everything-you-must-know
  7. DIGITAL FOOD ORDERING STATISTICS EVERY RESTAURANT AND HOTEL SHOULD KNOW. Retrieved from: https://tacitcorporation.com/digital-food-ordering-statistics/
  8. How Online Ordering is Changing the Restaurant Business. Retrieved from: https://www.bizswoop.com/how-online-ordering-is-changing-the-restaurant-business/
  9. Virtual Restaurant. Retrieved from: https://en.wikipedia.org/wiki/Virtual_restaurant
  10. What is a Virtual Restaurant (VR)? Retrieved from: https://driver-support.grubhub.com/hc/en-us/articles/360041929052-What-is-a-Virtual-Restaurant-VR-#:~:text=A%20Virtual%20Restaurant%20is%20a,and%20are%20only%20for%20delivery.&text=These%20may%20also%20be%20known,Kitchens%2C%20Shared%20Kitchens%2C%20etc.
  11. Albrecht C., (2020), Report: 80 Percent of Restaurant Jobs Could be Taken Over by Robots. [Online image]. Retrieved from https://thespoon.tech/report-80-percent-of-restaurant-jobs-could-be-taken-over-by-robots/
  12. Sebes C, (2018). How Artificial Intelligence is Reshaping the Restaurant World. Retrieved from: https://www.qsrmagazine.com/outside-insights/how-artificial-intelligence-reshaping-restaurant-world
  13. 3 Voice Technology for Online Food Ordering and Restaurants. Retrieved from: https://www.tvisha.com/blog/voice-ordering-for-restaurants
  14. Johnson G. (2018). Bypass, APEX, MLBAM & DNC Launch Industry First Food Pickup Lockers at Cincinnati Reds. Retrieved from: https://www.bypassmobile.com/news/bypass-launches-industry-first-food-pickup-technology-at-cincinnati-reds-in-partnership-with-mlb-advanced-media-apex/
  15. Strauss B., (2021). The Rise and Fall of the Automat. Retrieved from: https://www.thoughtco.com/the-rise-and-fall-of-the-automat-4152992
  16. Stenberg C., (2018). Bamn! Automat New York City. https://videoresearch.com/content/bamn-automat-new-york

Fred DeMicco

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Luyi Liu

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