How Seattle's $15 Minimum Will Affect Restaurants
Guess we're about to find what if the minimum wage is raised to $15 an hour.
Seattle's city council passed a measure in that city, raising its minimum wage from $9.50 to $15 an hour. It'll be difficult to tell what will happen as a result of this pay hike, but there's no question that it'll have a substantial impact on restaurant owners there, especially franchisees who will have to comply with its increase much sooner than their independent competitors.
Our guess is that, ultimately, franchises will be slow to move into the city. A few locations could close. Most restaurants will probably just raise prices, cut an employee or two, and then keep going, perhaps with a lower profit margin than they once enjoyed, with smaller-scale franchisees selling to larger operators.
Labor is one of the two biggest cost lines in a restaurant. The percentage varies, depending on the concept and its unit volumes, but generally restaurants spend about 30 percent of sales on salaries and benefits.
Wendy's is perhaps the perfect example. Its unit volumes last year were about $1.5 million. And it spends about 30 percent of that on labor costs. Thus, it spends about $450,000 on labor. (Seattle's restaurants likely have a higher percentage labor cost, but for this piece we're using average numbers.)
About a third of those costs are management salaries, which would have to go up, too, but probably not as much as the hourly rate. We're assuming that overall labor costs in that typical Wendy's would go up about 31.3 percent, to give raises to hourly workers from $9.50 to $15 an hour, and to raise management wages 20 percent. Labor costs for that Wendy's would go up from $450,000 to $591,000.
That's an increase of $141,000—or nearly two-thirds of the roughly $225,000 margin that Wendy's makes.
To make up for that increased cost, the typical Wendy's would have to raise prices by nearly 10 percent. That may not sound like a lot, but in the fast food world where price and convenience matter most, and in an environment in which consumers are reluctant to spend more, that's a substantial increase.
There are some, by the way, that believe the price increase should be even higher, so the restaurant can get back to that 30-percent labor margin—in the Wendy's case, that's a 31-percent price hike. That's doubtful. Most likely, the restaurants will live with a smaller percentage margin because even in a city like Seattle, $5.50 is a lot for a Big Mac.
Still, it's an open question whether consumers will pay even 10 percent more to eat a meal at a fast food chain. Kevin Burke, managing director at Trinity Capital, believes that some restaurants won't survive. "You're going to see some closures," he said. He also believes that business is going to be "great" for restaurants on the edge of town that won't have to raise prices like that.
As it is, there are reports that restaurants in the market are taking a wait-and-see approach when it comes to expanding or renewing. Burke said he knows of a yogurt franchisee in the market that won't likely renew leases on a trio of low-profit locations because of the higher wages.
There are other potential impacts. The industry could lure a better and more efficient workforce which, in theory, could enable that Wendy's to get by with fewer workers. It could well reduce turnover—restaurants that have paid higher wages have generally enjoyed lower turnover rates.
Then again, if everybody is making $15 an hour, even the weak employees will be making that living wage.