If you’re in the restaurant business, then you’re likely well-versed on the topic of minimum wage for restaurant workers. However, your starting pay for new hourly employees may affect your business more than you think. In many cases, your profits can suffer from minimum wage hikes. Some restaurants may not be dealing with an increased minimum wage currently since the federal mandate hasn’t gone up since 2009.
However, if your business is located in one of the 22 states that just recently increased their minimum wage, then you may be debating the best way to maintain your profit margins. Maintaining high profit margins is essential for success, but as you need to start paying your hourly employees higher wages, those margins will shrink. In addition to the many states that have passed legislation to increase the minimum, some cities and counties have their own local starting rates that exceed their state-mandated minimum.
While they do pose the issue of making up for profit losses, there are also a few positives to raising your base pay, including higher employee retention rates. When you have high employee turnover rates, you need to introduce a motivation for your staff to stay. Starting their pay higher will keep your current employees around longer and may help draw in new talent as well.
Despite the increased expenses, you can balance out your losses by analyzing other areas of your business and making strategic changes. If you perform a thorough analysis of your labor and inventory costs, you may be able to find a bit of wiggle room where you can make up for lost profits.
How Minimum Wage Increases Are Affecting Restaurants
In the service industry, there tends to be a lot of different opinions — and even some panic — surrounding restaurant minimum wage increases. After all, higher costs can naturally result in lower profits. So, how does minimum wage affect restaurants and how can you mitigate those consequences?
Restaurant owners and operators typically use two main methods to counteract minimum wage increases — cutting costs and raising prices. Reducing your expenses can balance out the profit losses that come with increasing pay, but it can become detrimental if it turns into cutting corners. Raising the prices on your menu can also make up for the new pay scale, but you stand the risk of potentially losing a few customers or hurting your business in the long run.
Let’s take a more detailed look at what restaurants are doing to cut costs and increase revenue, along with some critical reflection on each of these strategies:
1. Downsizing Staff
One approach many restaurants have taken to balance out an increase in labor costs is to downsize their staff. According to a recent survey about how restaurant owners choose to mitigate higher labor costs, 43% of restaurants decided to go this route to offset the expense of higher wages.
The problem with cutting back on staff is that it can have an immediate negative effect on employee morale, as well as an ongoing effect on your employee turnover rates. When employees work in an understaffed environment, they’re more likely to feel stressed and overworked and therefore leave to seek employment elsewhere. If you choose to downsize to balance out the new pay scale, make sure you are retaining your top talent and scheduling plenty of employees on shifts.
2. Scheduling Strategically
An alternative to downsizing your staff is to schedule your employees more strategically. To create a schedule that works consistently, you need to know when your slowest and busiest times are. You should keep staff at a minimum during slower times of the day and schedule more employees for peak times. Reducing your staff’s hours will significantly cut down on your labor costs. It’s also a relatively common practice — about 64% of restaurants say they have employed this strategy.
The issue with this solution is that cutting back on employees’ hours may be enough to prompt them to look for another job. If your employees want to work more hours but are not scheduled to work shifts for financial reasons, your turnover rates may rise significantly. Again, try to hold on to your top talent. When you’re creating the new schedules, it may be beneficial to give the most hours or peak shifts to your best revenue earners.
3. Eliminating Tips
While tipping is a common practice for restaurants, as most servers make the bulk of their pay based on tips, it isn’t absolutely necessary. Some restaurants may consider eliminating tipping from the way they do business. If you relieve customers of their tipping responsibility, you can raise prices on your menu by 15% or 20% and most customers will ultimately pay the increased price for their meal. However, many restaurants that have tried this model have ended up regretting their decision and returning to the traditional model.
For one, customers are used to tipping restaurant staff, so they are likely to push back on a non-traditional system that eliminates tips. It may make them feel disrespectful or rude, as tipping is a way of showing appreciation for good service. Additionally, skilled and experienced workers are attracted to restaurants where they are confident they can earn a significant amount in tips. If you choose to take away their potential for earning tips, you might push away some of your most stellar staff members.
4. Raising Meal Prices
The most popular response to minimum wage increases, according to CNBC, has been to raise menu prices. This seems like a simple enough solution and one that doesn’t directly impact your employees. However, this strategy can do more harm than good for your business. Higher prices may deter loyal customers who are used to paying a certain price for their favorite meal. For some, higher prices on your menu could be enough to take your restaurant off of their list of favorite lunch or dinner spots.
If you want to raise your prices, you need to do so strategically. Conduct an analysis of your menu to see which of your items are ordered the most and the least. This may give you a good idea of the average price range your customers will pay. You should also balance out increases among multiple items, opting for several smaller price hikes instead of fewer more significant ones. Raising the prices slightly on a few of your top sellers will bring in extra revenue quicker, and customers will be more willing to pay.
5. Rethinking Menu Offerings
While increasing prices is a strong option, you should also consider evaluating your current menu offerings and adjusting them based on your most profitable and popular items. According to CNBC’s survey on minimum wage increases, most restaurant operators reworked their food and beverage options in response. It’s an excellent way to focus your labor and inventory costs on items you know will sell while removing those that don’t from the equation.
For example, if your salads are popular and come with an especially high-profit margin, you should feature them on your menu prominently. By adjusting the focus to certain popular items, you can do away with other dishes that have a slim profit margin in comparison and don’t sell as often. It’s natural to adjust your menu periodically, but if you change your offerings based solely or even primarily on profits, then you’re likely to upset some customers whose favorite dishes disappear from the menu.
Evaluating the Impact of Restaurant Minimum Wage Increases
While there are many options to combat the profit losses associated with minimum wage increases, there are also several ways the pay hikes can directly affect your business. To respond effectively to this new challenge, you first need to know exactly how new minimum wage requirements have affected you, your employees, and your customers. The best way to get the full picture is by conducting a thorough evaluation.
It’s important to consider the input of your staff and customers, as the increase may affect each of these groups differently. If you want to understand the overall impact on your restaurant, including the negative and positive aspects, your evaluation should include four main areas of interest.
1. Employee Retention
One potential advantage of paying your employees more is that higher wages may encourage them to stay. After all, pay has long been a priority for workers and can influence the decision to either stay or leave their current job. So, take a moment to ask yourself, has the minimum wage increase improved your restaurant’s employee retention?
If not, employees may be leaving for other reasons besides pay. If there’s a problem in your company culture that is driving employees away, then fixing this issue should be a top priority. However, in many cases, employees will leave a position for their own personal reasons, especially if they think they have more to gain elsewhere. One of the best ways you can reduce turnover in your restaurant is to reevaluate your hiring process. This way, you can make sure candidates are a good fit for your restaurant’s culture beforehand.
2. Employee Compensation
In addition to retention, you should also consider how minimum wage increases have affected the pay employees are taking home at the end of their shift. Are your employees making more or less after the minimum wage increase? The motivation behind higher minimum wage legislation is to ensure employees earn more at work, but this isn’t always the actual result.
It’s essential to find out how the wage changes have directly affected your employees’ pay. If your restaurant has cut hours to compensate for the wage increases, then employees could be making less than they were before. The same could be true if you choose to eliminate tipping from your business model. If your top waitstaff sees a downturn in their pay, they could leave for other employment opportunities, which affects your retention rates in turn.
3. Menu Analysis
If you’ve reengineered your menu or raised prices, then you’ll want to find out how these changes have impacted customers ordering in your restaurant. One way to check is by analyzing your recent sales. Use data from before and after you made changes to the menu and compare how your customers were and are ordering. If anything has changed significantly after the reengineering, you can see how by observing shifts in trends and order amounts.
If waitstaff has noticed a lot of disappointment over the removal of certain items from the menu, then you may want to incorporate those items back into your menu. You can also find ways to promote higher-margin items like salads and pasta to help your bottom line.
4. Feedback from Customers
When considering customer satisfaction, you should look into whether or not your guests are still receiving the same quality service they were used to before. Though minimum wage increases often focus on workers and their job satisfaction, in the service industry, customers can be affected as well. While guests may be upset by menu changes, if you choose to implement them, this isn’t the only way they can be affected.
Depending on the way you attempt to mitigate profit losses, there are several results that could affect your customers’ experiences. If tips are no longer a strong motivator for your staff, then employees may allow their standards to slip, as their behavior will have less of an impact — if any — on their overall pay. Find out from customers what their experience has been like to analyze how well your restaurant has been performing and find any potential areas for improvement.
Staying Up to Date on Laws
It’s crucial for restaurant owners to stay up to date on changes to the minimum wage rate and relevant legislation. This means paying attention to federal legislation, including the current bill that aims to raise the minimum wage to $15 an hour by 2025. Even if you’re not politically inclined, be sure to stay on top of how this bill and others are progressing. Remember that your state, county or city can have minimum wage requirements of its own, so you’ll need to keep tabs on local legislation as well.
While current legislation is what will most immediately affect your minimum wage for waiters and other staff members, you also need to pay attention to potential future law changes as well. Understanding where trends are headed enables you to adjust proactively before any legal action. When you know higher labor costs are coming soon, you can gradually begin to make positive changes to save your restaurant money elsewhere. Find ways to maximize profits without hurting your employees and without compromising customers’ experience at your restaurant.
To set your business up for future success in the face of increasing federal minimum wage for waitstaff, you should focus on:
- Hiring devoted employees: Every employer wants to bring on staff members who will stick around. It’s best to hire people who are skilled in several areas, willing to learn, and can switch gears quickly. This way, if you need to make changes based on pay increases, such as downsizing or changing schedules, you can rely on your team to adapt without getting frustrated or quitting.
- Improving your menu: While conducting a menu analysis is a great way to regain profits after legislation changes, it may be even more effective beforehand. Also, while offerings and pricing are the two main considerations, the design itself can lead customers to pay more for the same items.
- Creating scheduling strategies: Before you have to change your scheduling out of necessity, you should optimize it as much as possible. Use data like labor costs, server sales, and peak times to create the most productive schedule possible. If you still need to make changes after a pay increase, you can do so in an informed way.
- Investing in technology: As restaurant technology evolves, so should your business. Investing in intuitive, integrated systems for your restaurant can make up for the profit difference caused by pay increases.
If you stay informed about potential legislation and legal changes, you can act ahead of the curve and begin making up for future losses before your profits ever decrease. With the correct sources of information and a strong understanding of your industry, you may even be able to predict how the minimum wage increase will affect restaurants.
