As Wages Rise, Operators Seek Efficiency Anywhere
In 2020, 20 states will raise minimum wages. As they do, unemployment remains at historic lows and turnover at or near historic highs in the restaurant industry.
That’s nothing new; wages have always been a top cost on a restaurant’s books. But in an era of intense competition, just raising prices to cover the gap is tricky. That was the topic of a panel at the 2019 Restaurant Finance & Development Conference.
For Ryan Dion, of the non-franchised 1010 Grill Restaurant Group, even at his upscale casual restaurants he said it’s difficult to think about a flat price increase.
“We’re going to feel minimum wage fast,” he said.
His company, with locations in New York, New Hampshire and Massachusetts, will face an additional $400,000 in wage-related costs as both New York and Massachusetts raise minimum wages statewide.
“Where can I find $400,000?” pondered Dion. “How much can we increase menu pricing? We’re going through that now. But the question is how much can you take before the guest pushes back?”
State-mandated increases are just one aspect. Georgia still sits at the federal rate of $7.25, but not many people at Vicki Phelps-Chancellor's McDonald’s locations actually see that wage.
“When we looked at the minimum wage, it’s not so much the government imposing that, it’s every restaurant and business has increased labor spending. We’re all searching for ways to get and retain employees. So we’ve had to increase wages just to keep competitive,” said Phelps-Chancellor, who noted wages keep going up as the business thrives. “This year has been our best year for cash flow in 30 years, so being able to give effective and efficient raises and how that affects the P&L is extremely important.”
So where does a company find the efficiencies? For Dion, it started with the trashcan where he found a lot of pickles.
“We're looking at the cost of every menu item,” said Dion. “And we looked at the trash. Not including a pickle, that saved us $250,000. I think we all need to analyze our menu and make smart choices. It’s not necessarily increasing something by a buck, we’re looking at 25 cents to 50 cents.”
Jeffrey Gates, partner at the seven-location Aquatine Group based in Boston, said he’d be looking at a lot of operational tweaks as opposed to price increases.
“These mandated increases are very dangerous for us—now I’ll be looking at pickle spears. But also, how much butter goes in the trash, how much bread goes in the trash,” said Gates. “It’s incredible. My staff should be saying, ‘Do you want a little more bread?’”
Another option is a service fee. It became a trendy practice when Danny Meyer did it at his Union Square Hospitality Group, but it’s fallen out of favor since then. For one, it makes that cost very visible to diners instead of spread across their food. And for someplace like McDonald’s it could quickly become a sales pit.
“You’d have to be able to explain to every customer that comes into our restaurant,” said Phelps-Chancellor. “If we're explaining to customers what the surcharge is, we’re going to lose the four to five cars that don’t want to wait for you to explain that. It’s a much easier path for QSR to build it into the price.”
She said via McDonald's she has access to smart price analysts, but added just planning ahead has taken a lot of stress out of rising wages.
“One of the things that is extremely important, and this is my plug for the accountants, you need to know what your commodity costs are going to be year to year or month to month. We're very fortunate to know what that will be at McDonald’s,” said Phelps-Chancellor. “If you know now in November that you’ll have commodity increases next year, get your accountants and run your P&L with those new prices. Same with the minimum wage; the key is being prepared like you have to do every day in your stores.”
Of course, there’s the nuclear option of cutting hours for the staff or restaurants. According to Mark Kashgegian, of the consultancy firm Antares Group, 70 percent of restaurants in New York slashed employee hours and 28 percent shed operating hours citing wages as a key reason.