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5 ways fast casuals can combat rising minimum wages

You may be thinking your customer demand is so strong that price increases won't have an impact on your business, but avoid the desire to take the easy route

January 18, 2019

By Mark Kuperman, COO, Revenue Management Solutions

More states around the U.S. are raising the minimum wage in 2019. In total, 20 states will raise their minimum wage this year, with major increases of $1 per hour in Maine and Massachusetts.

In some states, the minimum-wage increases are substantial. For example, Maine's increase will be 10 percent, Massachusetts' is 9 percent, and Colorado's is close to 9 percent. And in addition, there is often a cascading effect with workers higher on the pay scale demanding higher hourly wages in turn.

So how should fast casual restaurant owners and operators deal with these significant increases in labor costs? 

For starters, it's important to pay your staff at a competitive rate to retain highly motivated workers, a key to customer satisfaction and loyalty.

As you determine what those pay rates should look like, devise a plan and keep your customers at the heart of everything you are doing, preventing them from switching to your competitors. 

It can be tempting to raise menu prices across the board to counteract the increase in labor costs. You may be thinking your customer demand is so strong that price increases won't have an impact on your business, but avoid the desire to take the easy route. It may sound easy to increase prices by 2 percent to cover a 2 percent increase in labor costs, for example, without considering all your options. A more well thought out approach comes from a deeper understanding of your customers and what they are willing to pay for each of your items, however.

With this in mind, here are five tips for fast-casual restaurant owners and operators who are figuring out how to address higher labor costs:

1. Understand customer behavior by analyzing point-of-sale data. This will give you important insights into your customers' behavior, which can change by location, day and time. In addition, it can help you determine which items sell best together and how demand can change by different locations and timeframes. Combining pricing and non-pricing tactics will help you attract new customers while retaining your loyal patrons.
2. Look at each restaurant location on an individual basis. After understanding customer behavior at your locations, evaluate each location on its own. Consider internal and external factors that may be hurting or helping its performance and develop a local pricing strategy. For larger restaurant operators, the next step may be to think about common characteristics among locations. This will allow you to make the same menu changes for a cluster of restaurants where you can expect similar results. 
3. Raise prices thoughtfully and selectively. Building margin should be a long-term exercise. Avoid changing a significant number of prices at the same time. Know what customers are willing to pay for each item by understanding their behavior through analyzing transactional data. This will allow you to pick and choose certain items for price increases keeping your customers in mind as you make decisions. The ultimate goal is to be able to increase prices without hurting your customer traffic.
4. Encourage customers to buy higher-margin items. Consider using new photos and layouts in your menu to highlight higher-margin dishes and entice customers to buy certain bundles of items. Of course, this requires careful planning, since changing menu boards requires significant lead time unless you're working with a digital menu board.
5. Build some excitement around your menu changes. Don't just change your menu and roll it out quietly. Create special offers designed to show your customers that you are listening to them by matching your offerings to their needs. This will help build excitement, since customers like to see a restaurant that is innovative and keeps up with current trends.

These steps are important to consider as you face an increase in labor costs as fast-casual customers can be highly price-sensitive. The key is careful planning, tied with understanding your customers' behavior. This in-depth knowledge of your business and your customers is critical in knowing how to address margin pressures in a way that won't hurt your business.

Cover photo: iStock