The financial markets are currently facing volatility not experienced since the Great Recession of 2008. The Bitcoin fad is off 50 percent from its all-time high. Low interest rates that have been the “norm” over the past 10 years will soon be a thing of the past. The wage landscape is changing in both the U.S. and Canada and with more quick-service restaurants estimated to enter the market in 2018, franchisees will face new challenges that is going to make 2018 and beyond extremely competitive.
A Soaring Trend
On January 1, 20 states implemented minimum wage increases. The state with the highest increase is Maine, going from $9 to $10. Alaska has the lowest wage increase, going from $9.80 to $9.84. The average wage increase for the 20 states was only 41 cents. On the other hand, if we look at Canada, the average increase for the provinces and territories was more than double at $1.06, so far. This number will change as the rest of Canada adjust wages upwards, based on the consumer price index later this year. The minimum increase went to Nova Scotia going from $10.85 to $11. The province with the highest increase is Ontario, their wages going from $11.60 to $14, and will further increase to $15 in 2019.
The Ontario wage increase of $2.60 aggravated many of Canada’s Tim Hortons franchisees. The Great White North Franchisee Association, represents more than half of Tim Hortons franchisees in Canada. GWNFA released a statement that the wage increase along with other factors associated with it, would result in an overall cost increase of $243,899.10 for each franchise in Ontario. The report only took into consideration the 2018 wage hike.
Price Increases Won’t Absorb Wage Costs
Whether this number is too high or to low will always be debatable. What is more important to consider is whether or not a franchise can absorb a wage increase of almost 21 percent in its cost structure. Given that profit margins in the quick-service world are in the single digits, according to IBISWorld, it makes these external shocks hard to swallow for any franchisee. In Canada, the profit for a quick-serve is 6.1 percent and 9 percent in the U.S. The other way to think about it, profit in Canada is $0.061 and $0.09 in the U.S., for every single dollar of goods that are sold.
After the purchase of food and beverages, the wage cost is the second largest expense for a quick-service restaurant at 28.2 percent in Canada and 24.5 percent in the U.S. Any wage increase will make a huge impact to a quick-service restaurant’s bottom-line. To mitigate some wage increase, franchisees could simply pass the increase to the end consumer by increasing their price. This simple economic theory works very well in a monopoly or oligopoly environment but the quick-service world is highly competitive with so much choice for consumers. Increasing prices is a recipe for disaster for many quick-service restaurants to practically consider implementing. New quick-serves in the U.S. are forecast to grow by 4,074 in 2018, a 2.1 percent growth; in Canada, new entrants are expected to grow by 395 or 1.5 percent from 2017.
Adapt to Have Healthy Margins
In a crowded landscape of razor-thin margins and new hordes of new entrants and established incumbents competing for space, most quick-service restaurants organizations are aware of and effective in their efforts to manage costs yet foreign exchange costs are often overlooked as the cost of doing business. To give you a better picture of new entrants into the quick-service world; since 2014 there have been 14,006 new quick-service openings in the U.S. and 1,892 in Canada. These numbers reiterate how much choice there is for consumers.
It does not have to be this way for quick-service restaurants. By re-examining their foreign exchange strategy, individual quick-serves can save thousands of dollars, without much work on their end, simply by leveraging their purchasing power in order to source competitive rates. This, coupled with payments software technology that can execute international payments can also eliminate the hidden costs of “doing business.”
Quick-service restaurants that adapt will be more successful in dealing with the impact of rising wage costs on their bottom-line. To paraphrase Charles Darwin, it’s not the smartest or the strongest that survive but those that adapt best to the changing environment.