What a minimum-wage hike could cost restaurants

Restaurant brands’ response to President Obama’s call for a raise in the federal minimum wage thus far has been muted, but industry watchers said the proposal would likely cause labor pains for foodservice companies if it becomes law.

In his Feb. 12 State of the Union address, President Obama suggested the federal rate move from $7.25 per hour to $9 per hour. The federal minimum wage was raised to $7.25 in 2009, while the federal tipped minimum wage for servers has remained at $2.13 since 1991. Currently, 19 states have their minimum wages set at both federal levels, while the remaining 31 states and District of Columbia are a patchwork of their own minimum rates, including 10 states that tie their minimum wages to inflation, as the president has proposed for the federal rates.

Several public restaurant companies have reported earnings since the president's address, but leaders of those companies did not directly comment on the proposal during their conference calls and instead voiced concerns over other macroeconomic challenges.

Officials for Darden Restaurants Inc., Bloomin’ Brands Inc., CEC Entertainment Inc. and Denny’s Corp. all pointed to rising gasoline prices and the expiration of the payroll tax holiday as more immediate threats to their sales and traffic this year. One chief executive, John Miller of Denny’s, did mention the president’s proposal, but only to say, “We’re also keeping our eye on the minimum-wage discussions going on in Washington.”

But while individual restaurant companies so far are mum on a minimum-wage increase that currently is just a proposal, at least one securities analyst has released research on what a raise in the federal rates could do to the labor costs of several large chains.

According to projections from Sharon Zackfia of William Blair & Company, brands with a higher percentage of franchised units in their total store counts, as well as those located mainly in high-wage states, would feel less pressure on their labor line — and thus less pressure to raise prices aggressively — if the wage hike goes through.

In a recent research note, Zackfia estimated that if the proposed measure takes effect, the rate of inflation to labor costs could rise an average of 18 percent for the eight restaurant companies her company covers: BJ’s Restaurants Inc., Bloomin’ Brands Inc., The Cheesecake Factory Inc., Chipotle Mexican Grill Inc., Dunkin’ Brands Group Inc., Panera Bread Co., Sonic Corp. and Starbucks Corp.

“We estimate the overall unit-level labor pressure resulting from a minimum-wage hike could range from as high as roughly 21 percent for Sonic to as low as 14 percent for BJ’s, assuming a $9 federal minimum wage," she wrote, noting that the estimate also considered a comparable 50-cent increase to the minimum tipped server wage that was not part of Obama's proposal.

The outsized effect Sonic could feel from a minimum wage hike has less to do with its ownership model than with location, Zackfia wrote. Only 12 percent of Sonic’s more than 3,500 locations are company-owned, she noted, but more than 45 percent of them are in Texas, where the minimum wage and minimum tipped wage are both at the lowest possible levels.

“While we are encouraged by Sonic’s inflection into consistently positive same-store sales trends over the past 18 months,” she wrote, “we view the company’s ability to digest the proposed increase in minimum wages with concern, given QSR’s value proposition and the potential for such an increase to crimp franchisee profitability.”

Zackfia suggested that Sonic would have to take the highest estimated menu price increase, at 6 percent cumulatively by 2015, to maintain its company-owned restaurant-level margins should the proposed minimum-wage increases take effect.

If franchise operators’ margins are pressured further, their willingness to expand could recede, Zackfia noted, adding that Sonic’s store count has largely stayed flat since 2009.

By contrast, she wrote, Dunkin’ Brands likely would experience the least direct impact because of its virtually 100-percent-franchised business model and the fact that nearly half its restaurants are located in states whose minimum wages exceed the federal rate. Nearly 15 percent of Dunkin’ Donuts locations are in Massachusetts, which has an $8 minimum wage, she noted.

“Overall, we view the risk as relatively low as it relates to Dunkin’s franchisees’ appetite to continue to expand,” she wrote, “as other factors, such as falling coffee prices and the implementation of flat systemwide pricing, should more than offset the impact of the potential for higher minimum wages as the concept pushes west.”

Starbucks likely would face very little risk as well from increased minimum wages, Zackfia found, estimating that an approximate cumulative price increase of 3 percent by 2015 could offset projected labor-cost pressure.

As with Starbucks, “we view the increases as relatively manageable for Chipotle and Panera,” she added, speculating that the fast-casual chains could protect margins with cumulative price increases of 3 percent and 4 percent, respectively.

In casual dining, assuming a 50-cent increase in the minimum tipped wage for servers, an estimated 4-percent cumulative price increase likely would offset projected inflation on the labor line for BJ’s, Bloomin’ Brands and The Cheesecake Factory, Zackfia wrote. By comparison, she noted, BJ’s typically has averaged an approximate annual price increase of 3 percent, The Cheesecake Factory has of 2 percent, and Bloomin’ Brands has between 1 percent and 2 percent.

Industry associations raise objections

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Because the proposal is not yet in the legislative phase, industry advocates have not begun to lobby actively against a raise in the federal minimum wage, but they nonetheless have identified the proposed hike as another challenge to profitability if it comes to be.

In an email to Nation’s Restaurant News, International Franchise Association chief executive Steve Caldeira said raising the minimum wage would be another incremental cost restaurant franchisees would have to absorb, in addition to challenges like tax increases enacted in this January’s “fiscal cliff” deal, high energy and commodity prices, and ongoing difficulties in accessing growth capital.

“When you put this in the aggregate, clearly it affects the ability of small business owners to invest more into their businesses,” Caldeira wrote. “The president is ignoring the real problem, which is how to create more jobs in this country, and is choosing to play politics with an issue that will lead to fewer opportunities on the supply side in the form of employment.”

Caldeira added that IFA members would like to see the nation’s political focus on issues like comprehensive tax reform and immigration reform, “two issues that both the White House and business community agree will help grow the economy and create the jobs this country so urgently needs.”

In a “Minimum Wage Fact Sheet” distributed to its members, the National Restaurant Association stated that it “strongly believes a mandatory wage hike is not the way to help working Americans” and that “strong economic evidence suggests that increasing the minimum wage results in fewer jobs being created.”

The NRA also noted in its brief that only 27 percent of minimum-wage earners in the restaurant industry are classified as the head of their household, and the vast majority of those employees are young and single and work part-time. The average household income of restaurant employees earning the federal minimum wage is slightly more than $62,500, the NRA found.

The association said a Wage Task Force, chaired by the immediate past chair of the NRA, Roz Mallet, had been preparing for a proposal such as President Obama’s and soon will convene a coalition of more than 80 trade associations across several industries to lobby against a raise in the federal minimum wage.

Contact Mark Brandau at mark.brandau@penton.com.
Follow him on Twitter: @Mark_from_NRN