This year, 21 states and the District of Columbia saw increases in the minimum wage, according to Ballotpedia. The result: an abundance of restaurant closings, widespread job loss, and customer complaints about rising prices.
The restaurant industry has become synonymous with razor-thin margins, and, as anticipated, these adjustments hit our industry especially hard. A new study by Harri, a hospitality industry employee management platform, revealed that a whopping 71% of restaurants have responded to the recent minimum wage increases by raising menu prices. Only time will tell whether this will have a significant impact on consumers’ dining-out behaviors. FSR Magazine believes that these price increases are “a forgivable offense,” yet with more people choosing to eat at home, restaurants need to find creative solutions to counteract wage increases beyond passing costs on to diners.
The Harri Wage Inflation Survey asked about 4,000 restaurants and 112,000 employees throughout the U.S. about this issue and how they’re combating it. In addition to price increases (71%), reduced employee hours (64% of surveyed restaurants) and job eliminations (43%) were the most common reactions to wage inflation.
According to the survey, 88% of restaurant operators gave a pay increase to non-minimum wage employees to close the gap, and 56% of non-minimum wage employees received increases of 5 to 15%.
Needless to say, this was a significant hit to an industry that’s already struggling with low margins, fickle customers, and high staff turnover.
How Real Restaurants Are Responding to Common Minimum Wage Increase Effects
John Banquil, CEO of Ling & Louie's Asian Bar and Grill, a four-location restaurant in three states, says, “We’ve had to take incremental menu price increases, worked with food and beverage distributors to secure better contract pricing, and adjusted our scheduling to be more efficient.”
Banquil believes that passing along costs to diners is not the only solution. In his 11 years of business experience, Banquil has seen the importance of employee satisfaction in driving business success. "We find it more important than ever to pay far above minimum wage for great employees. We need to maintain a great culture that ensures people love coming to work every day," he continued.
The Harri Survey revealed that 43% of restaurants are cutting jobs as a result of wage increases. Although some of these changes may result from streamlining operations, others are simply necessary for those restaurants to stay in business. Some states have been hit especially hard. New York City (where the minimum wage is $15) has experienced its sharpest decline in restaurant jobs in almost 20 years.
Making sudden or dramatic changes in staff roles or eliminating positions may result in short-term savings, but the Harri study indicates that these moves can result in increased employee turnover – by as much as 35%.
Restaurateurs are actively searching for an option that allows them to hold onto their best employees and cover the increased labor overhead without compromising the quality of their dining experience; so far, there isn’t a clear winner.
Three Alternatives to Increasing Menu Prices
Only 2% of the restaurants polled in the Harri study eliminated tipping as a means of dealing with minimum wage hikes. No-tipping policies have been adopted in markets like New York, where the minimum wage is up to $15, but, according to Grub Street, both diners and restaurant employees have balked at this new approach. Customers want to be able to reward high-quality service, and top-performing restaurant talent has grown accustomed to being acknowledged for their abilities.
A recent restaurant satisfaction survey conducted by AlixPartners found that 67% of respondents dislike automatic service charges, one of the most common tactics restaurants are using to offset mounting labor overhead.
Here’s where it gets interesting: When asked whether they support an increased minimum wage, 59% of respondents were in favor; 64% stated they would be willing to pay more as a result. However, when asked about the factors that may deter dining out in the year ahead, 49% said they were planning to put their money toward something other than going out to eat, and 30% believe meals at a restaurant are too expensive as is.
So, it seems, restaurant diners are in a bit of a catch 22: They believe front of house restaurant staff should be paid more for their hard work and, in theory, would support higher meal prices, but when the bill comes they aren’t comfortable with what they see, so much so that they may just stay home and save their pennies for something else.
Sadly, about 1 in 10 restaurants say that closing locations has been the only solution to wage increases.
Boston landmark Durgin Park (founded in 1827) cited labor costs as the reason for its closure, and a Harvard Business School study indicated that restaurants that were already experiencing service or popularity issues had a higher likelihood of going under if the minimum wage went up in their area.
Matias Pesce, CEO of the V & E Restaurant Group, oversees 60 restaurants in Miami, Mexico City, and Las Vegas. With 34 years of experience in the industry, he stressed that labor costs will ultimately have an impact on the customer experience – whether through increased menu prices or diminished service. He believes strongly that service quality and employee satisfaction are crucial in the face of wage increases.
Pesce asserts, “We have a great working relationship with our team members and a very good understanding of our guest count trends… We did not have to make adjustments to employee hours or price increases to offset the [minimum wage] impact. We understand a modest increase improves worker productivity and reduces employee turnover and absenteeism as well.”
How to Stay One Step Ahead of The Minimum Wage Increase Effects
Rising labor costs can be beyond your control, but taking a proactive approach and adjusting your response plan can help minimize their impact on your restaurant's health. Here are some ways restaurant owners can successfully offset labor overhead.
Be creative and mindful in your menu pricing. Your menu prices must balance customer spending habits and preferences, market research, and competitive intel, all while offsetting operational costs in your restaurant. Your menu's design and layout also has an impact on customer perception. If you're raising your prices, now is a good time to evaluate how you present your selections to customers. To get started on the journey to mastering menu pricing, check out these tools and sign up for Toast's free Menu Engineering Bootcamp.
Adapt Your Scheduling Strategy: Carefully tracking your labor costs and creating schedules around peak sales times is key to controlling labor expenses. Check out our post about how to create a scheduling strategy based on your server sales data. The new Toast Payroll & Team Management solution makes creating employee schedules, tracking performance and timesheets, conducting payroll, and adapting your overall employee strategy easier than ever. Did I mention it also integrates seamlessly into your restaurant point of sale?
Hire the Right People: If you employ workers with a can-do attitude and a range of skills, they'll be able to pick up the slack if you need to downsize your team. Knowing how to interview, cross-train, and build a strong culture are more important than ever. If you need to consolidate positions, do it mindfully and get feedback from your team throughout the process. Operating with fewer people means you need to be more selective in looking for talent. According to the Harri study, turnover increased by 35% when positions and hours were cut due to wage increases. If you're stuck in a hiring rut, take this interactive, five-chapter course – Hiring the Modern Restaurant Workforce – for in-depth insights and actionable advice related to the restaurant hiring cycle.
Stay closer-than-ever to staff and customer sentiment. Customer feedback is vital to the success of any business; this is especially true in the restaurant industry. Consistently solicit and collect feedback from your guests via all channels possible. Read Facebook and Instagram comments, keep close tabs on your Yelp or TripAdvisor page, and send out surveys periodically using your restaurant CRM platform. Restaurants that use Toast can now access customer feedback in real time using the guest feedback feature on their handheld point of sale technology. During the payment process, guests are prompted to rate their experience and leave comments for the staff; should a poor rating be recorded, restaurant management is instantly alerted via text message, giving them the opportunity to connect with guests and learn how their restaurant can improve for next time.
Invest in Technology: In recent years, restaurant technology has evolved to take the stress out of running a restaurant. Handheld point of sale technology, specifically, can be a big help for restaurants in a tough labor market. Teams that incorporate handheld payment products into their restaurant operations have found they increase server tips and decrease turnover, can onboard new staff members quickly with notes about menu items, ingredient info, and wine pairings, let servers run their own food during slower times with notifications every time one of their tables meals are ready, and can turn tables faster by cutting out the time spent walking between the table and the terminal, so you can staff fewer servers on busy nights.
Monitor local and national legislation that may impact your future costs and be proactive in finding solutions. These simple charts from the Department of Labor can help you monitor the minimum wage in your area and prepare for any upcoming increases. If you aren't already, becoming active in your local and national restaurant associations or attending industry events like Food for Thought will help you learn from others in the industry who are facing the same challenges.
The full results of the Harri Survey can be viewed here.