Howard Nielsen raised prices 3 to 4 percent at his two barbecue restaurants in upstate New York last year and he expects to raise them again by as much as 10 percent in 2016. The reason: to keep up with state-mandated wage increases.
Nielsen is just one of tens of thousands of restaurateurs facing increased labor costs resulting from the New York State Wage Board’s decision to raise the minimum cash wage for tipped employees by 50 percent, from $5 to $7.25, in 2016. On July 22, the three-member board also recommended an increase in the hourly wage for fast-food workers to $15 an hour.
Although his Sticky Lips BBQ restaurants are fullservice, that increase would also put pressure on his operations, he said.
Add on expenses tied to the Affordable Care Act, a hike in state unemployment taxes, a possible statewide minimum-wage increase for all employers to $10.50 an hour and Nielsen estimates the new government mandates will take up to $400,000 out of his bottom line.
“It’s going to wipe out the existence of my business,” said Nielsen, who has operated Sticky Lips in Rochester, N.Y., for 11 years. “I’m not against minimum-wage increases, but we need to do it in a way that both businesses and consumers can adjust to rather than trying to do it overnight.”
From New York to Los Angeles, Chicago to Washington D.C., restaurant owners are grappling with how to manage new minimum-wage increases that greatly exceed the federal level of $7.25 an hour. Already operating on slim margins, operators are raising prices, considering layoffs or limiting employee hours and using technology to lower labor costs to keep their businesses going.
“You’ve got to protect your margins and maintain a viable business; it needs to be profitable,” said David McDougall, chief executive of Back Yard Burgers, the Nashville, Tenn.-based brand that operates and franchises 63 restaurants in 14 states.
Up to 30 states already have hourly wage rates higher than the federal level and at least six cities have approved minimum-wage rates above $11 an hour. Some have set goals to reach $15 an hour within three to five years.
After Republicans gained control of both the House and the Senate and the push to raise the federal minimum wage was thwarted, it was not surprising to see the fight move to state and local legislatures, said Angelo Amador, senior vice president and regulatory counsel for the National Restaurant Association.
The increased labor costs are causing some restaurants and retailers to close in these cities, Amador indicated.
“Some of these cities believe it’s better not to have those jobs than to have those jobs at a rate that makes a business profitable,” he said.
One way to keep labor costs down is to reduce your workforce, some say. Chili’s, Olive Garden, Red Robin and other concepts are using tabletop tablets to take customer orders. Those devices require fewer servers to bring food to the table. But while running as lean as possible, the industry still must rely on employees, others say.
“You can look at trying to be efficient with labor scheduling, but we’re pretty efficient now and I don’t know how much tighter we can run it,” Back Yard Burgers’ McDougall said.
Restaurant consultant and accountant Rick Braa advises operators to keep staff lean, cross-train employees and analyze hours of operation to consider whether it make sense to close during slow periods.
Passing the cost onto consumers, however, has been one way of covering labor costs for some restaurant companies.
“Unfortunately, the consumer gets impacted,” said Eddie Goitia, chief operating officer of the Tempe, Ariz.-based Tilted Kilt, which owns and franchises about 100 restaurants in 30 states. “Prices have to be increased. We’re already battling high food and energy costs.”
E + O Kitchen and Bar in San Francisco worked out its 2015 budget to include money for wage increases this year, but menu price increases are likely to follow, general manager Akop Paronyan said.
“We are increasing our prices a bit, but not directly,” he said. “The economy is coming out of a recession period and that is a natural time for it to happen if we want to stay competitive. But at some point, [price increases] will max out and not be enough to balance out hourly [wages].”
The restaurant is weighing such ideas as adding on a service charge to guest checks to help cover labor costs, he said.
To attract and retain good employees, restaurants typically offer higher pay than the going minimum wage, but a $15-an-hour starting wage makes raising pay harder to do, he added.
“Realistically, what restaurant can pay hosts and line cooks $16 to $17 an hour and stay open?” Paronyan asked. “At those entry levels, it’s hard to incentivize them to stay if you cannot go far above them.”
The higher wage also makes it harder to justify hiring unskilled, teenage workers looking for their first jobs, the NRA’s Amador said.
“Jobs for those without experience are minimum-wage jobs,” he said. “Not all jobs are supposed to support a family of four.”
Local economies may dictate whether a restaurant can afford to raise prices, some operators say. Sticky Lips owner Nielsen is concerned about the economy in Rochester, where major employers such as Kodak no longer employ hundreds of workers. He worries how customers will respond to higher prices. Meanwhile in Seattle, the economy is “white hot,” said Bob Donegan, president of Ivar’s Seafood Restaurants.
After Seattle city officials voted to raise the minimum wage to $15 an hour over the next three to seven years, depending on the size of business, Ivar’s analyzed the wages and tips of employees at its Ivar’s Salmon House and decided to bring all hourly workers up to the $15-an-hour rate now, instead of following the mandated incremental increase.
To accomplish this, Donegan said it eliminated tipping and raised menu prices 21 percent. They explained to customers that part of the increase included the average 17 percent tip customers had already been paying, so there’s no need to tip any more. Since the price hike, customer counts are up instead of down, and only one server resigned, he said.
In analyzing the price increase, the company realized Ivar’s had been below the median price of family seafood restaurants, so there was room to raise prices, Donegan said. Seattle’s economy also is going strong.
“I’m not sure if this works in Denver or Chicago, but for us in Seattle, it’s been working for the four months,” he said.
Pictured from top right: Sticky Lips BBQ's Howard Nielsen; Back Yard Burgers' David McDougall; a server attending to guests at Ivar's Salmon House