Minimum Wage Realities Eating into Restaurant Profits
Minimum Wage Realities Eating into Restaurant Profits
For the last several years, we’ve seen local governments like San Francisco pushing to raise minimum wage. We’ve heard sob stories from workers who have chosen to live in high cost areas because their jobs as baristas don’t let them enjoy the quality of life they feel they deserve. Those who dared raise concerns over this trend were shouted down. Now, however, we are seeing reality hit. When you raise the minimum wage, business owners will be forced to find a way to cut costs. That is especially true if they are in an industry with historically low profit margins. The resulting cuts often wind up hurting those the government thought it was helping.
This trend was brought home the other day when I was talking to a friend in another state. She’d walked into a local McDonalds and, instead of having to go to the counter to place her order with one of the smiling faced employees, she was greeted by a computer screen. It was easy enough to use to place her order. Even better, when her meal was ready, nothing had been messed up because she asked for no onions. She input the special instruction and it was followed. When she asked the manager about the change, the answer was simple and to be expected by anyone with a minimum understanding of how economics works – the minimum wage increase meant the franchisee had to find a way to cut costs. Since corporate won’t let them change prices, they had to look at other ways. Replacing flesh and blood workers with computers was the easiest and cheapest in the long run.
For example, a Subway franchisee’s costs to make a foot-long sandwich are as follows: ingredients cost approximately $2. Add to that the cost of labor, utilities, royalties, credit card transaction fees, rent. Not included in the breakdown of the cost of the sandwich are the initial fees a franchisee pays just to get the franchise and set up his store. That means, for a foot-long sandwich, the cost to the franchisee is “well over” $4. So, when corporate announced plans to drop the price of the foot-long to $4.99, it’s no wonder hundreds of U.S. franchisees sent a letter saying that move could force many of their stores to close.
This isn’t something limited to the United States either. Tim Horton’s, owned by Restaurant Brands International, is facing similar challenges as is Subway and other fast food restaurants. In the case of Tim Horton’s, Ontario increased its minimum wage $2.40 per hour to $14. Some Tim Horton’s franchisees, including original owners of the restaurant chain before it was sold to Restaurant Brands International, have been forced to take certain cost-cutting steps. Why? Because corporate won’t increase prices for their menu items. Some of the cost-cutting measures include “eliminating paid breaks and asking employees to pay the majority of costs associated with benefits.” Some franchisees will also eliminate the free uniform policy. This will wind up costing employees approximately $90 – $100 a year. Also going out the proverbial window is the free soft drink employees were allowed to take home at the end of shift.
Little Caesar’s, the pizza fast food restaurant known for its $5 pizzas, also faces the challenge of continuing to be profitable in the face of increasing costs brought on by higher minimum wages and a corporate philosophy that won’t let them increase the cost of their food. Some Little Caesar’s stores don’t carry the $5 pizza. MacDonald’s franchisees have been vocal in their complaints to corporate about the current pricing restrictions in the face of growing costs.
What people, including some of those in the vaunted corporate headquarters, don’t seem to understand is how a franchise works:
Under the franchise system, chain restaurants such as Subway coordinate menus, product sourcing, store design and strategy across all locations. Local operators pay the chain to belong to that system. They also manage the day-to-day business of their stores — rent, labor, ingredients, utilities, maintenance and equipment — and draw their paychecks from whatever is left.
That means franchisees have little control over their costs. Because corporate often controls product sourcing, it means franchisees can’t shop for product at a lower cost. So, when the government suddenly increases minimum wage by not a few cents but by several dollars an hour, something has to give and it is often either going to impact the worker through benefits or it will lead to the store closing.
It is a no-win situation in a lot of ways for not only the franchisee but for corporate. The franchiser, or corporate, has to maintain cost to the consumer at a level low enough to remain competitive in the marketplace. But the franchisee has to make enough money to not only keep the store open but to pay his own bills. Remember, any money he makes comes only after he has paid all his bills, including employee salaries and benefits.
When the government steps in and increases minimum wage, that means the business owners’ have suddenly had a huge increase to their overhead. That cost has to be made up somewhere, especially in businesses with small profit margins already. If they aren’t allowed to recover that cost somewhere, there is only one option – the business will close. How many small businesses and franchises will have to close before corporate offices and politicians understand this?