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Minimum wage: how restaurants are responding to the 'inevitable'

Many restaurant operators believe a minimum wage increase is inevitable, and they are responding in a variety of ways.

November 20, 2014 by Alicia Kelso — Editor, QSRWeb.com

Earlier this month voters in four states – Alaska, Arkansas, Nebraska and South Dakota – approved measures to raise their minimum wage levels throughout the next few years. And with a large chunk of low-wage positions, the restaurant industry will be at the center of this change.

Many operators believe the increase is inevitable and have started making adjustments to offset higher labor costs. Gary Wilkerson, president of Sonic franchisee Kergan Bros., said everyone in the industry is leaning on each other for advice on how to handle cost pressures (which also include the upcoming Obamacare enrollment mandate).

"Everywhere I go, this is what people are talking about with each other. It is the top conversation in the industry right now," he said.

And while taking pricing on menu items might seem like the easiest and obvious solution, some are trying to think of other ways to deal with the expected pressures.

"It’s inevitable, I think, that the customer will have to pay a few pennies more for their normal order at restaurants. It’s just going to happen," Wilkerson said. "But we’re going to try to do everything we can in our business to try and prevent that by working on other areas of our PNL. Can we do a better job with electricity, equipment, building maintenance so there are less repairs, for example? There are always going to be areas that we can take a look at to save pennies. Pennies count in this discussion."

Another pizza operator, who wished to remain anonymous, said he is raising delivery charges by $1 to offset labor increases. But he’s also refining his marketing focus.

"If I sell more items, I make more money and I can then better afford higher wages," he said.

A ‘massive headwind'

Whatever the correct solution, Pierre Panos, founder of Fresh To Order and a Papa John’s franchisee, said the minimum wage debate is undeniably a "massive headwind" for the industry.

"But, anyone who says minimum wage is meant to be a living wage is missing a point. It’s meant to be a first job where you can learn a lot and, within three months, you should be off that minimum wage base. When we bring them into Papa John’s, within 90 days, they’re no longer on that minimum wage," he said. "They are getting a 50-cent bump and it keeps going up."

If the industry is forced to rise to $15, as many are fighting for, "everyone will be out of business," Panos added.

Having said that, however, he also believes the current $7.25 federal level is "ridiculous."

"You have to move that up or everyone will continue to leave," he said. As with the ACA implementation, he believes a gradual increase is the best solution right now and that some pricing will inevitably have to be passed onto the consumer.

"All of our businesses live and die by entry level jobs so there’s no question it will create inflation in its own right," he said.

Toppers Pizza, which exists in a few states that have already increased minimum wage levels, has already taken some pricing to manage these changes. CEO Scott Gittrich said labor costs, combined with record-high food costs, are simply hard to absorb.

"We’re taking price to the extent that we can and through a combination of everything – promotion and menu prices are all considered. Ultimately you have to take pricing somewhere and in those markets where the wages have increased already, the whole industry is more expensive," Gittrich said. "When you go into those states, it just costs more to eat, that’s all there is to it."

Technology as a sidekick

Still, like Wilkerson, Gittrich is looking for other ways to offset costs and is betting on technology efficiencies to help. Despite the initial investments, many systems are now able to refine scheduling and staffing to save on labor costs, in addition to offsetting other staffing needs through online ordering.

"In our particular segment, we benefit substantially from technology. Right now about 30 percent of our sales come from online orders and I’m certain within 10 years, up to 80 percent of sales will come from our website," Gittrich said. "The day when we have computers and no phones in stores at this point is just a matter of time; a matter of when. It makes a difference because you would have had to have people in store positions serving away."

Ahead of the curve

While some chains and large franchisees are trying to come up with creative ways to avoid getting hit too hard from a bombardment of expected cost pressures, Colorado-based Illegal Pete’s is trying to stay well ahead of the curve. Founder Pete Turner said his goal has always been to pay a "living wage-plus."

"It may not be popular but I typically aim for $11 to $12 an hour wage," he said.  "If I can make my employees feel more secure, then I’m all for it."

Turner also added that this strategy has led to zero turnover, including a manager who has been with the company for nine years.

"It’s altruistic, but there is big thinking behind it," Turner said. "The writing is on the wall - a raise is going to happen."

Consumers driving a momentum shift

A recent survey from Technomic shows that consumers strongly support Turner’s strategy. Eighty-three percent of restaurant patrons said they support increasing the minimum wage and adjusting it annually for inflation.

Technomic’s study found widespread backing across age groups and political orientations, with 93 percent support among self-described liberals, 87 percent among moderates and 70 percent among conservatives. 

Supporters of a higher minimum wage believe it will stimulate the economy, lift people out of poverty, help the middle class, decrease labor turnover and reduce government spending. Further, 44 percent of those surveyed think a minimum wage hike will have a positive impact on the restaurant business.

Bob Goldin, EVP of Technomic, notes, "Consumers clearly believe the economic benefits of a minimum wage increase far outweigh the negatives. Restaurants and other industries have to recognize the consumer groundswell that exists with respect to this matter and, in many cases, be prepared for increased labor costs."

_{Photo provided by Wikipedia.} 

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