At first glance, many – if not most – restaurant operators may feel that a $15 per hour minimum wage would be a death blow to the restaurant industry. It is indisputable that the biggest challenge facing the restaurant industry today has evolved from the coronavirus into hiring and retaining staff. Every single client of mine has or continues to have difficulty in recruiting and hiring for all positions; resulting in many of them operating short-staffed. Even in states and cities that are allowing full occupancy for restaurants and bars, many have not been able to take advantage of this because they simply do not have enough team members. Some restaurants are closing up to two days a week because of staffing shortages, costing thousands in missed revenue. Before examining the $15 minimum wage issue, let’s examine why restaurants are experiencing challenges retaining staff.
So … why is it so hard for restaurants to hire and retain staff? Here are the primary reasons:
The restaurant industry is at a major crossroads.
If we are to continue to grow, we must address the most valuable resource needed to do so – great employees. How do we recruit, hire and retain these people? We must become a competitive employer by offering the same or better wages and benefits than other industries we compete with.
Let’s come back to the $15 per hour wage and talk about this for a moment. The obvious impact is that labor costs would increase. And that is about the only negative impact. Could we sustain that wage? Not without menu changes, price increases, improved productivity and implementation of labor saving technology. But it can be done.
Let’s flip the coin and look at the positive impact if we chose to pay a $15 per hour wage. Remember all of the reasons I listed above about why potential employees aren’t attracted to our industry? Well, a higher wage would go a long way towards overcoming the biggest of those objections – pay. If we combined the higher wage with a positive work culture and a few added benefits, we would become a much more desirable employer to work for and in turn, be able to hire – and retain – a great staff.
For the restaurant industry, employee turnover has almost always been a constant issue. Some turnover is unavoidable, but a good portion can be reduced. According to the National Restaurant Association (NRA) report, employee turnover across the entire restaurant industry was 75% in 2018 and that percentage is much higher for quick service restaurants. The shocking truth is that restaurants on average are losing up to $150,000 a year due to the overall cost associated with employee turnover alone! Better wages combined with a positive restaurant culture and a few key additional benefits can drastically reduce this turnover rate. And reducing turnover will go a long way towards paying for that increased hourly wage of $15.
Before we examine the impact of $15 per hour, let’s look at a hypothetical restaurant currently paying employees an average of $12 per hour. This hypothetical restaurant generates $100,000 per month in sales and has a Prime Cost (Cost of Goods Sold PLUS Cost of Labor) of 58% of sales: 30% in COGS and 28% in labor. Monthly occupancy costs are 8% of sales or $8,000. Other controllable expenses are at $15,000 or 15% of sales. Noncontrollable costs add another $9,000 per month or 9% of sales, leaving you with a profit of 10% before income tax.
Now let’s say this fast casual restaurant increases its average rate of pay to $15 per hour, but does not take a menu price increase. Within this example, the hypothetical sales, COGS, occupancy costs, controllable costs and noncontrollable costs from the previous example remain the same, but the labor costs (and therefore Prime Cost) changes. This changes the profit as well. With the hypothetical restaurant generating $100,000 per month in sales, the Prime Cost (Cost of Goods Sold PLUS Cost of Labor) rises to of 66.4% of sales, 30% in COGS and 36.4% in labor. Monthly occupancy costs remain at 8% of sales or $8,000. Other controllable expenses remain at $15,000 or 15% of sales. Noncontrollable costs remain at $9,000 per month or 9% of sales. By comparing the $15 per hour versus the current $12 per hour, the $15 per hour would be a 25% increase in the average hourly wage. Payroll, all in, would be increased by $6,418. This would mean the labor cost would now be $36,418 per month – which is 36.4% of your current sales.
Is this sustainable? Yes and no. To make it sustainable you would need to take the following steps:
Let’s add these new percentages up:
While your profit drops from 10% as a percentage to 9.31%, your net profit goes from $10,000 per month to $10,082 per month. An 8.5% increase in menu prices has offset a 25% increase in hourly labor rate from $12 per hour to $15 per hour.
My opinion is that the restaurant industry should not wait for legislated changes to the minimum wage. Be the first in your market to offer employees a higher hourly wage and you will gain great employees at the expense of competitors unwilling to do the same. By being a pioneer and creating a culture that makes your team feel valued and appreciated, you can make the decision that is right for your restaurant and be the restaurant employer of choice.
Examine your numbers, make sure you are delivering great value to your guests now and share your decision to do this on social media to gain the respect of your community and the loyalty of your guests and employees.
David Foster is a seasoned restaurant and hospitality consultant.