What is Rising Minimum Wage Doing to Restaurants?

The challenge is going to heat up in the coming months and years.

April 2019 Danny Klein

In 2018, economists from Miami and Trinity Universities used Congressional Budget Office methodology to measure the effect a $15 federal minimum wage might have on the workforce. They found, if implemented in 2020, it would reduce employment by roughly two million jobs. Raising the minimum wage would also disproportionately impact entry-level positions where unemployment rates are the highest. In other words, it would hit the restaurant industry like a sledgehammer.

The National Restaurant Association recently surveyed 529 full-service operators with tipped employees. The median hourly earnings of entry-level servers were $19 per hour. More experienced servers made $25 per hour.

That’s a small sample of how serious this issue could be for restaurant owners, who already grapple with razor-thin margins and the challenges of running a small business. But unlike many companies, you have to toss gratuity into the picture.

Willie Degel, restaurateur and host of the old Food Network series, Restaurant Stakeout, once illustrated the problem. When front-of-the-house employees were moved to $7.50 from $5 in his markets, the 50 percent increase took a swift $350,000 out of his picket. If you added in the other minimum wage increases, he was looking at $500,000. Degel’s restaurants, at the time, had to eliminate the bus boy position. “You’ve got to ask more out of everybody,” he told FSR. “We have to do more with less and the people working here have to understand that. You have to make some cuts. You have to make serious changes. You have to take some risk. You have to look at portions. You’ve got to look at prices. You’ve got to look at linen. You’ve got to look at bread. You’ve got to look at your lighting. You’ve got to look at energy. You’ve got to look at everything.”

There’s a valid reason the concern is so breathless. The economic landscape is not uniform for restaurants. Employees in New York City and Alabama don’t have the same hourly wage concerns. Given the margin and cost issues, and labor challenges, restaurants benefit from state-to-state flexibility. “Should Congress drastically increase operating costs then these small businesses will be forced to hire fewer people, reduce hours, or even close their doors,” said Shannon Meade, vice president of Public Policy and Workforce at the National Restaurant Association, in a statement.

Harri, a workplace management platform for restaurants, released its 2019 Hospitality and Food Service Wage Inflation Survey last week to dive into the real-time effects.

Before exploring some of the results, it’s worth looking at how this conversation has evolved. Because even though the federal rate hasn’t jumped to $15, minimum wage has been on the rise nationwide for some time. This year brought minimum wage hikes in more than a dozen states and cities. That includes over 20 where the lowest wage workers got a pay boost starting New Year’s Day. Here’s a breakdown of all the changes.

Harri’s survey measured responses from restaurant operators representing about 4,000 restaurants and more than 112,000 employees throughout the U.S., across all restaurant formats in areas where minimum wage was raised.

The main question: How is this affecting the industry?

flickr: Kent Kanouse

The hourly wage debate is especially complicated for multi-unit restaurant chains.

A tough figure

Harri’s data showed that 45 percent of operators said labor costs rose from 3 to 9 percent this past year. Twenty-six percent saw labor increase from 9 to 15 percent. Twelve percent had labor costs hike more than 15 percent. This has been a pretty universal issue lately. How do you offset labor costs to guard margins, but also not cripple your customer service?

Restaurants responded in the following ways:

Business operations

71 percent raised menu prices

Let’s circle that last note for a moment. TDn2K’s recent Black Box data found that growth in average check was 3 percent, year-over-year, during March across the chain industry. The pace at which guest checks are growing has also been accelerating, year-over-year. On average, guest checks grew 3 percent since the fourth quarter of 2018. For perspective, the average was 2.4 percent for the first three quarters of last year.

Currently, this is proving an effective remedy for many restaurants. And it’s not only offsetting rising costs—it’s making up for, to a large extent, the reality that is declining guest counts.

Customers are simply willing to pay more right now, making upselling a smarter strategy than ever. Confidence is high. Some of that is actually tied to accelerating wage growth.

Given recent increases in minimum wage rates, and more to come, Joel Naroff, president of Naroff Economic Advisors, expects income growth to keep fueling check. “The outlook is for continued good income growth the rest of the year, which should translate into solid retail sales and restaurant spending,” he said.

So it appears, for now at least, that raising menu prices is a forgivable offense. Texas Roadhouse is a good example. The steakhouse chain planned to take an additional 1.5 percent price increase in Q2 of 2019 on top of last November’s 1.7 percent uptick to offset most of the margin pressure. This past quarter (Q4 of 2018), Texas Roadhouse saw an 8.8 percent growth in labor dollars per store week thanks to wage and inflation of about 5 percent and growth in hours of 3.2 percent.

The steakhouse also managed to boost guest counts 3.2 percent. In the 555-unit brand’s experience, higher prices didn’t hurt traffic. And that’s something to consider, although it’s always going to be a balancing game.

Here were the other results:

45 percent reworked food & beverage offerings
23 percent made no changes
9 percent closed locations

Labor operations

64 percent reduced employee hours
43 percent eliminated jobs
32 percent made no changes
2 percent eliminated tipping

Sometimes the easy answer is the only answer. As much as nobody wants to cut labor, it can be the obvious option. But restaurants find it to be a riskier proposition than most. Guest-facing hospitality companies don’t have the luxury some offices do. Your weaknesses are on full display. Cut five servers from a staff of 10 and people will notice. Have that one veteran leave and regulars will ask questions.

For restaurants, this issue is a serious Catch-22, and one hard to rival in any sector. The key to winning, especially in sit-down dining, remains customer service. How you get there: through knowledgeable, effective, engaged, and dedicated employees. Yet it’s historically tough to retain high performers. Now, it’s almost equally difficult to simply find and hire them. Not to mention afford them out of the gate. So you might write an operations manual on day one with all the right buzzwords, like company culture, hospitality, and pillars of excellence. But if a restaurant’s staff flips over quicker than pancakes, it’s nearly impossible to live those ideals. Stats show that it costs a restaurant $1,902 to replace an hourly back-of-house worker; $2,000 for an hourly front-of-house employee; and $14,036 for a manager.

Texas Roadhouse

Even though prices are going up, traffic isn't going down at Texas Roadhouse.

Sticking to Texas Roadhouse as a case study, one of the reasons the chain has guarded traffic despite higher prices is because of how it approaches staffing.

President Scott Colosi said Texas Roadhouse’s individual restaurants are currently better staffed than they’ve ever been. How? For the past three years or so, Texas Roadhouse challenged its managing partner system (similar to the one Outback used to build its early empire) to fully staff restaurants, regardless of what it costs and what it takes.

This came down to asking a simple question. Why were employees leaving Texas Roadhouse? On the hourly level, most of the chain’s turnover takes place in the first 30–60 days.

The main issue: Quality of life. There was definitely a time when that sort of concern was shoved to the bottom of the labor barrel. Were you paying them? OK, good enough. Those days are long gone.

According to the Bureau of Labor Statistics, 55 percent of 16–24-year-olds were employed as of July 2018. Hospitality (including foodservice) amassed the largest portion of teen and young adult workers at 26 percent—well ahead of perennial competitor retail, which only claimed 18 percent. That’s the good news.

Now how do you retain and lure a generation that cares as much about flex hours and benefits as extra pay? And not every restaurant can be a cool startup in Silicon Valley that puts a Ping Pong table in the break room.

This is why it’s critical today to grow a restaurant brand on culture as much as profit. Gen Z and millennial workers flock to purpose-driven organizations that align with their goals. A study from research and consulting firm Y-Pulse surveyed 1,400 restaurant workers aged 18–34. In the data, 79 percent said they lean toward restaurants that serve locally sourced foods; 80 percent said they were willing to pay more to visit ethically responsible companies; 93 percent seek restaurants that treat staff well; and 76 percent said their friends considered them foodies for working at a restaurant.

In sum, restaurants have to stand for something or they’ll stand alone.

Texas Roadhouse

Texas Roadhouse is targeting single-digit manager turnover rates.

Colosi said Texas Roadhouse could improve the quality of life of its employees by just adding more of them. And making sure the stress level of a busy shift isn’t boiling over.

Texas Roadhouse has methodically added managers in certain locations as it targets single-digit manager turnover rates (that cost of turnover earlier shows how critical this is). Additionally, this doesn’t concern the managing partners who run Texas Roadhouse’s restaurants. It’s the day-to-day engine drivers: kitchen managers, service managers, assistant service managers, assistant kitchen managers, and other employees that directly affect the guest-facing experience.

The initiative to fully staff restaurants created scheduling flexibility as well. Colosi said you can't understate that note given the gig economy. “When you've got management turnover getting down close to single digits, that is a huge competitive advantage for us as far as what it bodes for the future quality of the guest—what the guest is going to experience from us,” he said. “So we know that, and it's a big part of our traffic growth right now. And it's one of the things that makes us pretty confident about the future.”

Colosi really drilled down on it.

“When I hear about or go by places and you can see it in certain restaurants how understaffed they are and what it's doing to their guest experience or the loyalty that those guests have, it's kind of scary,” Colosi said.

When you consider Texas Roadhouse’s managing-partner formula, the wage issue is really a store-by-store dilemma. Earlier in the year, CEO Kent Taylor said Texas Roadhouse wasn’t taking a unilateral approach to pricing. There were 20 or 30 different versions around the country, Taylor said. So it might be 2 percent-plus in some higher-wage states and as a little as 1 percent in others.

Now imagine if those wage pressures were uniform nationwide? Would it also account for the change in volume and other state-level costs that touch individual units differently? It wouldn’t, which would make trying to survive the wage challenge a pretty disconcerting one.

Willie Degel

“You’ve got to ask more out of everybody,” Willie Degel says.

Other findings

Harri’s study noted that 88 percent of restaurant operators granted a wage increase to non-minimum wage employees to maintain the delta between minimum wage-earning employees and the rest of their workforce.

This is also an interesting point. What is says is rising minimum wage affects more than just minimum-wage employees. It makes for a delicate balancing act between the front and back of the house. Nothing new exactly. But it would be emphasized. And as the statistics showed before, just eliminating tipping isn’t a widespread solution. That’s a path some restaurants might find effective. Yet many guests still want control. And they aren’t willing to absorb the extra cost up front to help restaurants out.

Fifty-six percent of non-minimum wage employees received a wage increase of 5–15 percent. You have to keep everyone happy. But it isn’t cheap these days.

The turnover problem

Harri’s survey said 50 percent of operators nationwide are currently experiencing annual turnover rates of 50 percent or more.

As a result of changes in business or labor operations to offset wage inflations, 35 percent of operators experienced a spike in turnover.

Changes in business process to counteract wage pressures:

27 percent of restaurants eliminated ancillary positions
26 percent deployed new technology
6 percent activated a commissary

In conclusion, minimum wage hikes aren’t going to disappear. Will they ever hit the $15 federal level? That’s hard to guess. However, restaurants would be wise to invest in their people before the labor pool shrinks further and costs rise higher. And devise and implement systems and technology to survive turnover as quietly as possible (training procedures) and streamline other processes (like scheduling). You can’t put a price on brand authenticity, though. It’s where the entire equation begins.