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National Restaurant Association - Here’s what a higher starting wage means for restaurants

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Here’s what a higher starting wage means for restaurants

A slew of ballot initiatives, executive orders and federal, state and local legislation are threatening to increase mandatory starting-wage rates in businesses across the country.

Seattle enacted a $15 starting-wage mandate, New York is looking at $13, and a Chicago task force recently recommended a $13 starting wage. Congress hasn’t acted, but is weighing bills to increase the federal minimum wage to $10.10 from $7.25, and the minimum cash wage for tipped employees to $7.07 from $2.13.

Accommodating labor-cost increases can be tough – especially in restaurants. Labor costs today account for about a third of restaurant sales, according to the National Restaurant Association’s Restaurant Operations Report. Average pre-tax profit margins in restaurants range from 4 percent to 6 percent.

The industry’s labor-intensive nature, combined with the large number of entry-level jobs in the industry, makes it tough to absorb a higher starting wage. “Each full-time-equivalent employee in an eating and drinking place establishment represents about $84,000 in annual sales. By comparison, a full-time employee in a grocery store represents about $304,000 in sales,” says Hudson Riehle, senior vice president of the NRA’s Research and Knowledge Group. The low sales-per-FTE employee, combined with the fact that restaurants provide entry-level jobs for so many people, leaves operators with few options when the starting wage increases.

Some casualties when the starting-wage increases, according to restaurateurs:

  • Teen jobs: Steve Davis, owner of Ardy & Ed’s Drive-In Restaurant in Oshkosh, Wis., says jobs for teenagers are one of the first casualties of a higher starting wage. When the federal wage rose to $7.25 in 2009, “it virtually eliminated us from hiring 14 and 15-year-olds.” He figures an increase in the minimum wage to $10.10, along with restrictions in the tip credit, would cost his 66-year-old classic-diner restaurant $57,000. “There’s no $57,000 on the bottom line to cover it.”
  • Jobs for people who need skills: Jeff Lobdell, president of Restaurant Partners in Grand Rapids, Mich., says “There’s a need in this country to employ disadvantaged workers and those who don’t have a skill set,” Lobdell said. “If you’re expecting everyone who walks in the door to earn $10.10 or greater, it’s just not realistic. If you raise the minimum wage to $10.10, you’re really going to eliminate the 25 percent of people who are looking for a start, experience, a break. I think that would really hurt the employment situation in our country.”    
  • Higher prices: Kris Larson, owner of Becket’s in Oshkosh, Wis., aims to provide guests with a fine-dining atmosphere at casual-dining prices. Checks at Becket’s average under $20 per person. “We’re not expensive,” he says. “We’re reasonably priced, but we try to do all of the things a fancy restaurant does as far as service.” His business model makes it hard to trim staff, so he says the only way to absorb higher labor costs is by raising prices. Starting-wage increases “would be a huge impact to our pricing,” he said. “[Higher prices] would make a huge difference,” he said. “We like people to come here as much as possible. That’s why we keep prices as low as we can.”
  • Out of business? On military bases and other federal properties, restaurant operators are figuring out how to cope with a proposed 40 percent increase in the minimum wage for federal contractors.  The Labor Department is floating a plan to increase the wage for federal contractors to $10.10 from $7.25, and the minimum cash wage for tipped employees to $4.90 from $2.13, effective Jan. 1.

And for those restaurants, raising prices may not be an option, because many service contracts require on-base restaurants to charge equal or lower prices than their nearby, off-base counterparts. “Our inability to raise prices, which we could not and would not want to do anyway, especially to military people, would drive me off base,” said Stan Bavlish, owner of two Subway franchises on military bases in northern Virginia. “It would drive my business out, make me bankrupt. I’m a two-store owner on a [military] base that will be out of business. Period.”

Tell us how your restaurant would deal with the cost of a new starting wage mandate.

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