Web Exclusive | January 2012 | By Daniel P. Smith

Wage Hikes Pressure Operators

Latest minimum-wage increases force quick serves to reevaluate hiring, menu prices.

Escalating food costs and only modest traffic gains aren’t the only things Rob Grendow is concerned about these days with his five Ohio-based Danny Boy’s Pizza outlets. Ohio’s latest minimum-wage hike is also putting pressure on the operation.

“It might be only 30 cents,” Grendow says of the shift from $7.40 to $7.70, “but for a little business, that’s a big number.”

While the federal minimum wage remains locked at $7.25, seven states joined Ohio in instituting minimum-wage hikes on January 1, increasing labor costs at thousands of quick serves across the country.

Florida jumped 36 cents to $7.67, while Vermont rose 31 cents to $8.46. Arizona ($7.65), Montana ($7.65), and Oregon ($8.80) all implemented 30-cent increases. Colorado operators encountered a 28-cent leap to $7.64. And with a 37-cent rise to $9.04, Washington became the nation’s first state with a minimum wage above $9.

“This is not a fun spot to be in,” says Phil Costello, who runs Stop-n-Go, a Spokane, Washington, burger concept where about three-quarters of the workforce earns the minimum wage. “A $9 wage is one thing in the Seattle area, but quite another for the rest of the state.”

Proponents of higher minimum wages argue that the pay increases protect low-wage workers and stimulate local economies with greater consumer spending. Many others, however, contend that minimum-wage increases, particularly in an already sluggish economy, stunt job creation, negatively impact GDP growth, and spark rising costs for consumers.

“These increases simply don’t reflect what’s going on in the economy or what’s happening in the business world,” says Bruce Beckett, director of government affairs for the Washington Restaurant Association (WRA).

Grendow says the new minimum wage will increase his labor costs about 5 percent and introduce a range of problems, such as asking more of fewer staff, restricting raises to deserving employees, and raising menu prices.

“We’ll try to drive sales first because that’s the best option, but the decisions get tougher after that,” says Grendow, whose five units employ nearly 250 workers, about one-third of whom earn the minimum wage.

To cover increased labor and food costs, Costello anticipates raising prices about 25 percent, Stop-n-Go’s first price increase since its July 2010 opening.

“You almost have to raise prices and deal with the backlash,” Costello says.

“It might be only 30 cents, but for a little business, that's a big number.”

At Lillian’s Pizza in Pensacola, Florida, owner Lillian Walsh says Florida’s minimum-wage increase will only impact her delivery drivers. Though she will absorb the increased labor costs and stick to her $3 delivery charge for now, she says change may be inevitable.

“People aren’t willing to pay more, so I’ll have to leave that delivery charge where it is and see how it goes,” Walsh says.

Other operators will either pursue savings elsewhere, potentially targeting commodity or real estate savings, while many others will rely on a leaner workforce. In a recent WRA survey of 480 Washington-based restaurants, 66 percent said they planned on eliminating jobs or halting hiring in 2012 as a result of the state’s new minimum wage.

“We’ll all have to ask more out of the employees we have,” Grendow says.

Some quick-serve operators, however, say the minimum-wage hike won’t even register.

Nathan Pollak is co-owner of the American Grilled Cheese Kitchen in San Francisco, where, as one of nation’s few big cities with its own base pay standard, minimum wage increased 32 cents, bringing the new rate to $10.24.

Pollak says many of his customers understand San Francisco’s high cost of living and that making a premium product demands a skilled workforce and appropriate pay. He says his one-unit operation will continue paying above the minimum wage just as it has since opening in May 2010.

“We’re blessed with business and have priced the product right, so making payroll has never been a problem,” Pollak says.

Similarly, Tony Crump, owner of Forefathers Gourmet Cheesesteaks and Fries in Tempe, Arizona, posts his starting hourly wage at $9.50, nearly $2 more than Arizona’s new $7.65 standard.

“I’ll pay a little more and expect a little more,” Crump says of his 20 employees.

Crump believes the minimum-wage hike might even help his five-year-old fast casual. As many major quick serves increase menu prices, he says, it will narrow the gap between his prices and theirs, underscoring his store’s value perception.

“The closer the major quick serves get to me on menu prices, the more headway I’ll make,” Crump says. “I see the minimum wage increase as an opportunity to gain even more ground with a quality product and service.”