Article

How would a $15 minimum wage impact the restaurant industry?

May 25, 2021 · Authored by David Foster, Foster and Associates Restaurant and Hospitality Consultants

At first glance, many – if not most – restaurant operators may feel that a $15 per hour minimum wage would be a death blow to the restaurant industry. It is indisputable that the biggest challenge facing the restaurant industry today has evolved from the coronavirus into hiring and retaining staff. Every single client of mine has or continues to have difficulty in recruiting and hiring for all positions; resulting in many of them operating short-staffed. Even in states and cities that are allowing full occupancy for restaurants and bars, many have not been able to take advantage of this because they simply do not have enough team members. Some restaurants are closing up to two days a week because of staffing shortages, costing thousands in missed revenue. Before examining the $15 minimum wage issue, let’s examine why restaurants are experiencing challenges retaining staff.
So … why is it so hard for restaurants to hire and retain staff? Here are the primary reasons:

• Unemployment benefits: When a potential employee can make more by staying at home than by working in your restaurant, a lot of them are going to stay home. The extended Federal Unemployment Benefit of an extra $300 per week is set to expire in September of 2021, but at least until then, this remains a challenge to hiring restaurant staff.
• A taste of a different industry: When COVID-19 began a little over a year ago, our industry was virtually shut down. Some operators were able to get PPP loans so they could keep paying staff, but others had to lay off many, if not most of their employees. Two events came about from this. Firstly, employees that were laid off were able to draw unemployment that wasn’t much less, if any less, than what they were earning. Secondly, many of these employees migrated to other industries in order to continue working to support their families. Once out of the restaurant industry, many workers discovered that they could work for companies that offered a more predictable schedule, benefits that they had not received in their restaurant jobs and higher wages. Even as the restaurant industry recovered, many ex-restaurant employees had no desire to return.
• Industry perception: Unfortunately, the restaurant industry does not have an excellent “rep” when it comes to being an employer. Why?
  – Wages are typically low
  – Benefits such as healthcare, paid vacations, 401Ks, set schedules and desirable hours are rare
  – While many restaurants do promote from within, independent restaurants don't always have the opportunity to help their employees achieve their career path goals
  – While those of us in the industry know better, the majority of people equate restaurant jobs to be for students and/or entry-level workers that are 'unskilled'.
• Working conditions: Most restaurant operators will concede that we expect a lot from our employees and these workers do not always have the best work situations. Weekends, nights, long hours, changeable schedules, “on call” status with no guarantee if or when they will work, lack of benefits and low wages all plague our recruitment efforts.

The restaurant industry is at a major crossroads.

If we are to continue to grow, we must address the most valuable resource needed to do so – great employees. How do we recruit, hire and retain these people? We must become a competitive employer by offering the same or better wages and benefits than other industries we compete with.

What would be the impact to the restaurant industry if we paid $15 per hour?

Let’s come back to the $15 per hour wage and talk about this for a moment. The obvious impact is that labor costs would increase. And that is about the only negative impact. Could we sustain that wage? Not without menu changes, price increases, improved productivity and implementation of labor saving technology. But it can be done.

Let’s flip the coin and look at the positive impact if we chose to pay a $15 per hour wage. Remember all of the reasons I listed above about why potential employees aren’t attracted to our industry? Well, a higher wage would go a long way towards overcoming the biggest of those objections – pay. If we combined the higher wage with a positive work culture and a few added benefits, we would become a much more desirable employer to work for and in turn, be able to hire – and retain – a great staff.

For the restaurant industry, employee turnover has almost always been a constant issue. Some turnover is unavoidable, but a good portion can be reduced. According to the National Restaurant Association (NRA) report, employee turnover across the entire restaurant industry was 75% in 2018 and that percentage is much higher for quick service restaurants. The shocking truth is that restaurants on average are losing up to $150,000 a year due to the overall cost associated with employee turnover alone! Better wages combined with a positive restaurant culture and a few key additional benefits can drastically reduce this turnover rate. And reducing turnover will go a long way towards paying for that increased hourly wage of $15.

Before we examine the impact of $15 per hour, let’s look at a hypothetical restaurant currently paying employees an average of $12 per hour. This hypothetical restaurant generates $100,000 per month in sales and has a Prime Cost (Cost of Goods Sold PLUS Cost of Labor) of 58% of sales: 30% in COGS and 28% in labor. Monthly occupancy costs are 8% of sales or $8,000. Other controllable expenses are at $15,000 or 15% of sales. Noncontrollable costs add another $9,000 per month or 9% of sales, leaving you with a profit of 10% before income tax.

Now let’s say this fast casual restaurant increases its average rate of pay to $15 per hour, but does not take a menu price increase. Within this example, the hypothetical sales, COGS, occupancy costs, controllable costs and noncontrollable costs from the previous example remain the same, but the labor costs (and therefore Prime Cost) changes. This changes the profit as well. With the hypothetical restaurant generating $100,000 per month in sales, the Prime Cost (Cost of Goods Sold PLUS Cost of Labor) rises to of 66.4% of sales, 30% in COGS and 36.4% in labor. Monthly occupancy costs remain at 8% of sales or $8,000. Other controllable expenses remain at $15,000 or 15% of sales. Noncontrollable costs remain at $9,000 per month or 9% of sales. By comparing the $15 per hour versus the current $12 per hour, the $15 per hour would be a 25% increase in the average hourly wage. Payroll, all in, would be increased by $6,418. This would mean the labor cost would now be $36,418 per month – which is 36.4% of your current sales.

Is this sustainable? Yes and no. To make it sustainable you would need to take the following steps:

• Menu changes and price increases: If you take a price increase of 8.5% (assuming you can do this without lowering guest counts), your revenue would go from $100k per month to $108,500. Not enough to offset a 25% increase in your hourly rate of pay you say? Think again. If your COGS remain static at $30k per month, they would decline as a percentage to 27.65% of sales. Labor costs would now be at 33.55% of sales. If your occupancy costs remain the same at $8,000, they would decline from 8% of sales to 7.37%. Other controllable expenses remain at $15k, so this category drops from 15% of sales to 13.82%. Your other noncontrollable costs remain at $9k per month, but drop from 9% of sales to 8.29%.

Let’s add these new percentages up:

While your profit drops from 10% as a percentage to 9.31%, your net profit goes from $10,000 per month to $10,082 per month. An 8.5% increase in menu prices has offset a 25% increase in hourly labor rate from $12 per hour to $15 per hour.

• Reduced cost of turnover: Remember the statistics earlier in this article stating that the NRA estimates restaurant employee turnover at 75% with quick service restaurants being much higher…and that turnover costs the average restaurant $150k per year? We haven’t even factored in the reduction of turnover that an increase to a $15 average hourly wage could have on our “hypothetical” restaurant. Let’s be conservative and say we can reduce our turnover by just 20% with a related savings of $30,000. Now, add that $30k to your bottom-line and the higher wage makes even more sense.
• Improved efficiency: You may be able to reduce labor hours by looking at your food purchases (think about items that your staff spends time prepping that you could buy pre-prepped). Examine options for more efficient equipment and better use of technology. Focus on training your servers and counter staff to be sales people instead of order takers. If you operate a quick service or fast-casual format, consider ordering kiosks. Savvy operators will survive and prosper during the rebounding economy and beyond, but not without a great crew.

My opinion is that the restaurant industry should not wait for legislated changes to the minimum wage. Be the first in your market to offer employees a higher hourly wage and you will gain great employees at the expense of competitors unwilling to do the same. By being a pioneer and creating a culture that makes your team feel valued and appreciated, you can make the decision that is right for your restaurant and be the restaurant employer of choice.

Examine your numbers, make sure you are delivering great value to your guests now and share your decision to do this on social media to gain the respect of your community and the loyalty of your guests and employees.