Let’s call it what is.  It was a promise by an outgoing politician that is being turned into an election platform by political hopefuls. Unfortunately, the recommendation could have very damaging effects on the restaurant industry and the retail industry along with the suppliers to these industries.  The plan to raise the federal minimum wage is a noble one, one that is welcomed by the general population, and is one that politicians seem ready to ‘hang their hat on’.

Last week we learned that New York State has approved a plan to increase the minimum wage in NYC to $15 an hour, phased in over the next six years.  And some other major cities have also approved similar plans while still others are looking into it.  With the likes of NYC and Los Angeles leading the way, you know others will follow. This wage increase, whether it is in stages or immediate, will have some serious effects, even far-reaching effects that it seems the politicians haven’t fully thought-out.
After food and drink, labor costs today are typically the next largest cost in the restaurant business. Between 30 and 35 percent of a full restaurant’s sales is a general industry average for labor. For restaurants with limited service, the accepted average can drop into the 25 to 30 percent range.

In cities like New York and Los Angeles with hourly wages currently at $8.75 and $9.00, this increase to the $15.00 mark represents an increase of more than 60 percent. Do you expect your restaurant’s sales to increase by 60 percent or more over the next five or six years?  I didn’t think so and in the present competitive market, raising ticket prices isn’t the answer either. Restaurateurs will be force to look elsewhere to pick up that labor shortfall. The food and beverage costs will be trimmed which could mean that quality and image suffers and will result in a loss of business.

In a perfect world, operators try to keep rent and occupancy costs below ten percent of sales. Few of us live in a perfect world so the next step will be to trim back occupancy costs. Rents, CAM costs, insurances, etc. will be targeted. Landlords can expect a flurry of rent reduction calls. Oh and taxes are generally lumped in the ‘Occupancy Cost’ category.  Tax collectors can expect an increase in workload.

Making due with less is another option that will have the most far-reaching effects.  There will be layoffs, there will be an increase in part-time staffing and obviously service and reputation will suffer.

More than simply the restaurants, this proposed hourly wage increase will be felt by suppliers and landlords. And you can expect closures with the accompanying job losses. And why, you ask, should a simple wage increase, one that is long overdue, have such a devastating effect?

Well, the simple fact of the matter is, in too many of the major markets, the restaurant industry is over-crowded.  In the past seven years, the economy has rebounded ‘with a vengeance’ and the restaurant industry as one, has experienced some strong growth.   This saturation means that many restaurants today that are simply hanging on and some are not going to be able to withstand this increase………even if it is spread over five or six years. Another sad fact is that these well-meaning public servants are putting the industry and its spokespersons in a ‘damned if you do/damned if you don’t position’. Argue against a minimum wage increase and the middle income population, your customers, will turn against you. Argue for it and you take the first step into an industry ‘adjustment’.  The choice is yours………………..WP