Q&A: Fatburger CEO Andy Wiederhorn on Impacts of Higher Minimum Wages
Andy Wiederhorn has been the CEO of Beverly Hills, CA-based Fatburger since 2006. Watching the debate on higher minimum wages, he has a dire warning for franchisors, operators and customers.
Franchise Times: How are things at Fatburger these days?
AW: We’re thriving and growing quickly. We have about 200 units scattered around the world in 32 different countries ... and we have about 350 more stores in our pipeline to be built in those 32 countries. We also own a sister brand called Buffalo’s Cafe, which is based in Atlanta, and Buffalo's is in about 20 of those 32 countries.
FT: I’ve been a part of other industries facing a crisis and declaring, “This is the end of the industry.” Where do you place the minimum wage issue on the panic scale?
AW: It’s a very troubling development. You have record commodity prices with no end in sight, you have an increase in all of the benefit costs from the Affordable Care Act, and now you have minimum wage, which is essentially going to raise labor costs by 50 percent. It’s a very serious expense.
FT: Are you hopeful for some sort of compromise or positive outcome?
AW: The voting public is smart. Voters are thoughtful and considerate, and they must have considered the effect this is going to have on consumer prices when they backed their elected officials to promote this. Somebody has to pay for raising the wages that restaurant workers by 50 percent, and it’s not going to be the operator. I’m sure that the voting population figured that out when they listened to the pitch on why it made sense to raise wages and raise benefits, and I’m sure they don’t mind paying $7 instead of $5 for a hamburger or whatever, because that’s what it’s going to mean. And that’s going to be across the board, and the guys that don’t raise their prices are going to go out of business 100 percent.
FT: Expound on how this would impact franchised restaurant margins...
AW: Restaurant operators make somewhere between 5 and 15 percent depending on how big of an operation they have. Rarely do you see somebody make like 25 percent—those are very few and far between. Labor is usually about 30 percent of sales, food can be anywhere from 25-40 percent … and then you have rent, let’s say, at 10-15 percent. You're immediately at 60 percent of costs just between food, labor and rent—and then you have royalties and advertising. That’s another 10-15 percent, and miscellaneous stuff. You really only have a 5-15 percent margin.
If your labor costs at 30 percent, and it’s a $10 wage [that] gets raised to a $15 wage, that’s a 50 percent increase. If your labor costs is 30 percent of sales and it gets raised by 50 percent, obviously over the next five years not one year, your labor costs are going up to 45 percent if you don’t raise prices to adjust for that.
FT: How about for restaurant operators?
AW: Some [operators] won’t have the guts to raise prices or the customers will push back too hard, so they’ll continue at a low price for 12 months, let’s say, maybe 24 months before they go out of business. They’ll be absolutely broke, because they will have made no money over the 24 months, they’ll borrow and won’t be able to pay it back. The guys who are smart will raise their prices, but their business will suffer because customers will say oh, this guy just raised his prices 20 percent … the guy down the street didn’t raise his prices—we’re going to go down the street.
FT: Do you have sympathy with those concerned about wealth inequality?
AW: Who doesn’t want employees to have better benefits or earn higher wages? Everyone wants that, but it costs money and either the government’s going to have to pay for it and raise your taxes or the consumers are going to have to pay for it in higher prices. You can’t just give away higher wages and higher benefits and think the operator of the restaurant is going to eat that.
FT: Are these increases still problematic if they’re isolated to higher cost cities like Chicago, San Francisco and Seattle? Isn’t it analogous to higher rents?
AW: An operator in L.A. has much higher rent and higher taxes and utility costs than a smaller market, so they have the same margin pressure. It’s not just this pressure on margins right now, commodity prices are at an all-time high right now and you have real estate at an all-time high.
FT: With front-line employees being the closest to the customers and, listening to some CEOs, most critical to the success of a restaurant, is there a disconnect when they’re lowest paid people in the corporation?
AW: All of our employees are paid at least 50 cents more an hour than minimum wage, but if minimum wage goes up, even those that aren’t earning minimum wage will expect a proportionate increase. If everybody gets a 50-cent or dollar increase per hour everybody wants a dollar, not just the minimum wage earners. All of your employees are key to the success of the relationship with your customer, but the industry has done an excellent job over time providing entry-level jobs and long-term career jobs depending on your tenure and skill set and areas of interest.
FT: Do you see this leading to smaller headcounts?
AW: What it might do is lower the level of customer service that a customer gets in a restaurant to reduce costs. You might see more kiosks, more technology, or less customer service to make up for the cost of labor, but then you have a deteriorating experience, and that’s bad generally for business.
FT: Beyond raising prices, what other levers can operators pull, like smaller portion sizes or squeezing vendors?
AW: The restaurant industry is massive. It’s a very mature industry so prices are very efficient and there’s tremendous competition, so I don’t think there’s a lot of squeezing to do by everyone else. You may see landlords reduce rents … because operators can’t afford it or it pushes back into an economic crisis. Certainly food and beverage makes up a significant portion of retail tenancy. You could argue that the guys who survive will do better because the guys who go out of business will, that eliminates competition and the guys who make it will reap the benefits of fewer guys competing against them.