Wage Hikes Are Back on the Menu

While some state and local governments have enacted a higher minimum wage in recent years, another round of hikes July 1 by several states and cities is putting even more pressure on local businesses.

San Francisco’s minimum wage increased to $15 an hour, reported KOMO.com (June 30), Los Angeles and Chicago implemented hikes, and in Oregon, the minimum wage increased to $10.50 from $10 in rural areas and to $12 from $11.25 in the Portland area, reported Statesman Journal (June 29).

Though not the only ones feeling the pain, restaurants could be among the hardest-hit businesses. Wage increases will likely apply additional pressure at a time when many restaurants are facing slim margins and falling traffic, resulting in companies raising menu prices, reported Bloomberg (July 3).

That becomes a “delicate balance,” says Bloomberg Intelligence analyst Jennifer Bartashus. “You can’t raise your prices too much because then you lose customers, and traffic is already under pressure.”

According to MillerPulse data, traffic fell 1.2% in May. Meanwhile, earnings before interest and taxes have been on a downward spiral for eateries, with the median margin dropping to 7.6% as of the first quarter from more than 10% at the end of 2015, Bloomberg Intelligence data show.

The unemployment rate, which now stands at 3.8%, matching April 2000 as the lowest since 1969, is adding to the impact, making it even more challenging for restaurants to find enough staff. “It’s a bit of a double whammy,” Firehouse Subs CEO Don Fox said.

Here are just some of the effects the wage hike is having on some big U.S. restaurant chains:

  • Jack in the Box raised prices on tacos in some California locations in June to make up for the $0.50 boost in the state’s minimum wage for large employers.
  • Starbucks recently bumped up the price of a drip coffee by $0.10 to $0.20. Although the company didn’t attribute the increase to labor costs, CEO Kevin Johnson said that “increases in wage and occupancy, and other regulatory requirements” were making some of Starbucks’ urban stores unprofitable.
  • Firehouse Subs franchisees make their own pricing decisions, and variations can be seen depending on location. The flagship turkey-and-ham Hook & Ladder sandwich goes for about $1.20 more in Southern California than in Jacksonville, FL. To help ease rising labor costs, restaurants may look to push technology such as mobile apps and install more self-ordering kiosks, Fox said.
  • Wendy’s, which expects labor expenses to be up as much as 4% this year, is adding kiosks to its restaurants as it looks to pare costs. About 300 locations have them now, and Wendy’s is trying out some lower-cost versions that sit on the counter. The company is installing automated dishwashers, as well.

Time will tell how minimum wage increases will affect other large restaurant brands across the U.S.