Restaurant operators must plan for minimum wage hikes, other costs

The pressure is mounting around the country to raise the minimum wage, which would have a profound impact on the restaurant industry. That, combined with higher costs for beef and transportation, means restaurant owners need to start thinking now about how increased overall costs may affect their businesses heading into 2015, and what they should do to plan ahead.

First, let’s look at wage numbers. Right now, an $8-per-hour minimum wage, full-time worker costs operators $16,000 per year. The proposed move to a minimum wage of $10 an hour would raise most entry-level salaries by about $2 an hour, resulting in a pre-tax cost increase of $4,000 a year for employers.

There is also the potentially high cost of turnover in training new employees and maintaining consumer acceptance, which directly impacts repeat purchase behavior and brand profitability.

Therefore, smart restaurant owners are keenly aware that developing and maintaining good employees is critical to their financial success, and that paying a competitive lower-level wage, even if it’s significantly higher, will be the right thing to do.

Most restaurants pay minimum wage only for entry-level workers and then provide an annual hourly increase over time. There is a strong incentive for employers to increase wage rates to keep good employees, so they don’t leave for better pay elsewhere.

So as you prepare for the possibility of a higher minimum wage, here are five points to consider:

1. It’s important to have the right levels of staffing every hour the restaurant is open.

Restaurant businesses have heavy and light periods of customer traffic, for breakfast, lunch or dinner, depending on the concept design. Well-managed businesses track the average number of customers per hour and know the number of customers that can be handled by one good employee.  

To manage customer satisfaction and also control costs, it is important to properly staff the restaurant to insure good service during peak hours and not over-staff during slow hours. This means the most efficient scheduling involves many two- to four-hour part-time shifts and not all eight-hour shifts.

Does your restaurant plan to absorb costs or raise menu prices? Join the conversation in the comments below.

2. Understand that if the minimum wage is raised, there will be an impact on other non-management salaries.

An increase in the minimum wage won’t only affect those who are at that level — typically new employees or part-timers — but potentially all non-management staff, each of whom started at the minimum before receiving increases over time.

Workers who are making more than the minimum will also expect their wage to be increased by an equivalent amount to keep them "in pace" with the entry-level folks.

Absorbing the loss vs. raising prices

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3. For restaurants with tight profit margins, the prospect of this wage increase is very serious.

A typical restaurant doing $1 million in revenue per year will typically have a non-management payroll of approximately $240,000.  So a $2-per-hour wage increase, from $8 to $10, would cost this restaurant about $60,000 a year in higher payroll.

This loss in profit would be significant for a typical restaurant chain making 10- to 15-percent profit. And for restaurants operating below this profit rate, of which there are many, they might even be forced out of business.

Indeed, tens of thousands of layoffs might occur if the wage increase to $10 an hour actually occurs, according to Trinity University economist David MacPherson, as reported by the National Restaurant Association. So this is a very serious issue for which a restaurant must plan to take corrective actions.

4. What to do? You can absorb the loss, or raise your prices.

In dealing with these higher costs, there are only two choices - absorb the financial loss, or increase menu prices and hope that you don’t lose sales to the competition in the process.

The one bright spot in this conundrum is that all the competitors in your market will be faced with the same problem. They too must either absorb the loss or raise prices as well, or face the possibility of overall financial failure.

5. So if you realize you may have to raise prices, be smart about it, and start your contingency planning now.

The solution comes down to an understanding of menu mix and item price management, where you fully understand the price sensitivity of literally every menu item on a store-by-store basis and better yet, know which items trade with which, given a change in price.
 
This requires an exceptional store-by-store database and the statistical ability to apply multiple regression mathematics to information such as point-of-sale item data, site and location characteristics, trade area demographics and competition, and overall market economics.

The key is to start planning now. Do the homework required to have contingency plans in place if wages go up, and you need to make up a significant amount of profit margin. This type of planning requires months of work, not weeks, so it’s time to start now.