Changes to the federal overtime rule and widespread minimum wage hikes in many states across America are adding new challenges for restaurant owners already facing a myriad of competitive pressures.

While many restaurants have been able to adapt to consumer preferences for more transparency, sustainable ingredients, and organic, healthy menu options, restaurant traffic counts have been steadily declining in 2016.

One of the many factors impacting restaurant performance is increased competition from grocery and convenient stores. Walgreens, Whole Foods, and Trader Joe’s are just a few examples of giant companies getting into the foodservice game by offering consumers a one-stop shop for both everyday household items and ready-to-eat meal options, catering to changing consumer lifestyles.

Consumers, especially the coveted Millennial demographic, are also holding on more tightly to their wallets. According to TD Bank’s Consumer Spending Index, although Millennials dine out more often, they spend less overall, spending $103 per month on meals out compared to Generation X and Boomers, who spend $123 per month and $139 per month, respectively. These numbers speak to the fact that when consumers dine out, they want to be sure they are getting as much value as possible from their experience.   

Long-term Impact of Minimum Wage Increase, Federal Overtime Rule

The Whitehouse fact sheet on the federal overtime rule states that the change will nearly double the current salary threshold from $23,660 to $47,476, qualifying these workers for time-and-a-half pay as of December 1, 2016. This means that many managers, chefs and sous chefs—who are notoriously known to work long hours—will now qualify for overtime. Coupled with many states increasing the minimum wage to $15 and federal government considering increasing the current national rate of $7.25 an hour to $10 to $12 an hour, Restaurant owners are likely to see labor costs skyrocket in the near future.

The policy shift to $15 per hour will likely lead restaurants to become more dependent on technology for labor and create higher unemployment rates for 16- to 24-year-old workers. While the labor policy creates the perceived benefit of offering workers more money, it will likely lead to restaurants having to do more with less.

Further, the increased cost of labor will ultimately drive menu prices up for consumers. Today’s diners are already extremely value-driven and in many instances, unwilling to pay more for the same product. As menu prices rise, restaurant traffic may indeed fall off further as the fickle consumer opts for more affordable meal options.

What You Can Do About It

While the changes in labor policies will no doubt have a significant impact on full-service restaurants, there are ways to lessen the degree to which yours will be affected. Taking some simple measures early on to reduce your risk could benefit your bottom line long-term:

• Adapt Your Menus: The purchasing role is becoming increasingly vital in today’s restaurant industry. While it’s always been important, sourcing high-quality products at the right price and adapting menus to accommodate changing consumer preferences without sacrificing margin is critical to long-term success.  While some diners do want and expect certain staple entrees on your menu, making some slight adjustments can help offset additional labor costs. Some operators, for example, are incorporating “value proteins” into their offerings and re-evaluating portion sizes. Others are engaging third parties to perform pricing research to survey their competition and assess what consumers are willing to pay in order to make pricing decisions that maximize margin without sacrificing guest count. 
• Invest in Technology: According to the June 2016 edition of RSM’s The Real Economy, you might have to consider substituting technology for labor. Many restaurants have already announced that they will be installing self-service kiosks or tabletop tablets to respond to consumer demand for a fast, convenient dining experience, while balancing the pressures of new labor policies. Others are investing in cost-effective tools that increase the efficiency of purchasing operations, recipe creation, and labor management. Even more alternative mobile payment or pay-at-the-table technologies may also be used to reduce the time needed to process transactions, creating efficiencies for wait staff that could lead to more covers in prime time and reduced fill-time equivalent wages during non-peak hours.
• Focus On Your Differentiator: The restaurant space is already extremely competitive, so it’s important to create a unique experience that consumers will come to expect and appreciate every time they walk through the door. This could be through exceptional service, innovative food, or an unusual atmosphere that helps you stand out from the rest. The danger all operators face is the loss of that point of differentiation as they battle the headwinds facing the industry.      

Though these labor policies will undoubtedly have a more dramatic impact on some full-service restaurant operators than others, all should view this as an opportunity to hone in on ways to be more efficient and attract new diners in an increasingly competitive market. At RSM, we’re advising clients to view investments in technology and customer experience as more than just ways to respond to these short-term challenges, but as ways to stay competitive long-term.

It’s important to remember that the companies that succeed in times of change and technological disruption are often the ones that emerge as industry leaders.