Point/Counterpoint: Is the minimum-wage increase good or bad for the industry

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POINT: I’ve been listening to the noise several industry associations have created throughout 2017 and into 2018 related to the increase in minimum wage.

These organizations pride themselves on the number of people their members employ and call their front-and back of house staff, ‘their most important assets.’ These minimum-wage, or near minimum-wage, employees — those who prepare meals, serve meals and clean up after one eats — are mostly those making minimum wage. The minimum-wage workers — those who represent our companies — are the ones the restaurant and franchise sectors have been working hard to suppress by fighting, rather than embracing, the new minimum wage. Many restaurant workers have two jobs so they can pay their bills and cover family expenses; shifts are not guaranteed, as one can come in for an eight-hour shift and be sent home after three and many are not even paid the three hours that law requires if management doesn’t let them sign in. While restaurant EBITDA is low, it does not have to drop because of the new minimum-wage laws.

So what’s the rub? Minimum wage for hourly employees increased by 21 per cent and some feel it puts too much pressure on the bottom line. However, a moderate price increase is all it takes to cover the cost. Labour represents about 30 per cent of restaurant expenses (of which management makes up about six to eight per cent). As the increase impacts only hourly-wage employees, or 23 points of the labour cost, a 21-per-cent increase in labour can be offset by a simple five-per-cent increase in sales prices — maybe even creating a slightly better margin for the operator.

We were made aware of to a situation at Tim Hortons, where a franchisee had cut back on some of the non-required benefits provided to their staff. This franchisee has not reduced working hours, nor have they cut back benefits that most Tim Hortons’ employees get. I agree, the franchisee’s response was poor, but it brings the focus back to the franchisor — the sales price regulator.

Tim Hortons’ corporate office is the place price increases are calculated and approved. Its control of a franchisee’s profit is unparalleled in the industry. The company sells on price. The fear at head office is that an increase in price may reduce shareholder profits and this, of course, does not bode well for a company that sees almost no year-over-year increases in franchisee store sales. The time is now for the franchise sector to focus on its franchisees rather than shareholders — as there is no business without strong franchisee support and employee engagement.

The problem, therefore, is not the rise in minimum wage — it’s the reaction of the sector leaders, who were not prepared to guide their membership and franchisees in how to prepare for the change in minimum wage. Some restaurant companies have learned raising prices is sometimes difficult. Regular customers know what they pay for a coffee or a burger and a price change could impact their purchase decision, or so some say.

In response, some operators reconfigured menus to create new items that will be attractive and may draw the consumer to lower-cost or higher-priced items. With this approach, they don’t have to raise pricing, but rather develop new offerings. This is an excellent strategy, where no guest sees the menu increase. Others are simply raising prices to accommodate the change. Some spread the change out over the past six months, implementing nominal two-per-cent increases, which are almost unnoticeable by the customer.

The simplest strategy, of course, is to simply give all hourly employees a raise of 21 per cent as required for the minimum-wage employee (allowing those who were making $14 per hour to now make $16, for example). This can be done by simply raising prices by five per cent.

If all restaurants simply increase their pricing by a mere five per cent to offset the minimum-wage increase, they would remain equally competitive and profitable as they were before the wage increase.

There is not one employee who should lose a job in the restaurant sector due to the increase in minimum wage. Stability will be found when associations and the major franchisors stop thinking about themselves and instead focus on the real needs of the employee. Fortunately for employees, the government has stepped in to take care of the problem. One simply cannot live adequately on the current minimum wage.

Raise prices by five per cent and refocus on staff satisfaction. A happy staff provides good service and will keep your guests engaged and coming back, while overworked, complaining staff, drive customers away.

Douglas P. Fisher is president, FHG International, Restaurant and Franchise Consultants

COUNTERPOINT
Much has been written about the minimum wage and, along with the debate surrounding the topic, it can soak up incredible retention of memory space. It’s easy to separate the proponents from the opponents — mainly by their related field of work and association. Paradoxically, one would think both groups would agree to avoid the increase altogether and, instead, reflect the same amount to decrease the employee’s income-tax payments. More for the employee, less for government coffers, with employees avoiding paying taxes on the increase.

It’s not about the increase of Ontario’s minimum wage — it’s about the accelerated speed and empty government commitments in offsets. Why the speed? The impact to the hospitality industry will have lasting effects as the industry is starting to behave differently to stay profitable and, in many cases, sustainable. For more than a decade, Ontario has been experiencing the lowest pre-tax profit margins in the country. The consequences of collateral damage end up regretfully hurting employees. I have been hearing this from many minimum-wage workers in many parts of Ontario. Plainly stated, it’s tough to be successful operating a business in this province and this comes with a price. Once again, it’s not about the minimum wage, it’s about the whole package — including expense pressures. For example, the cost of a hydro invoice to a typical Ontario hotel or restaurant is more than 100 per cent when compared to a similar operation in Quebec. A fair, higher minimum wage would have positive outcomes to the hospitality industry if government supports the industry’s success through offsets such as a wholesale beverage-alcohol regime and employee-training incentives. Paying higher wages makes sense only if the business is functioning to par and the doors are open.

Traditionally, the industry has been resistant to price-point increases — even with rising expenses exerting business pressures. This is attributed to high customer sensitivity crafting a rigid price-elasticity model in a competitive industry that includes grocery stores. The recent dramatic minimum-wage increases are busting paradigms and changing that view, with menu-price increases being unavoidable.

Advocates of minimum-wage increases state raising the minimum wage will increase disposable earnings for workers who will, in turn, support the local economies by spending their earnings. In fact, the opposite will happen as businesses increase menu prices. It will cost more for goods and services and will impact consumer disposable income. A unique feature of this industry is the gratuity model. The minimum-wage increases since 2004 have, unintentionally, created an inequity issue to employees who earn just above the minimum wage. This inequity is now escalated even more, as non-tip-support employees such as cooks and dishwashers are restricted, or limited to, future overall-wage increases. This inequity is a direct by-product of the minimum-wage increases impacting employee morale and driving employee conflict.

The proposed minimum-wage increases will also drive changes to hiring policies — including youth, hospitality school co-op candidates and people with disabilities. Management will be reluctant to replace workers who leave and will be demanding more from those who stay. Where applicable, full operations and business hours will be minimized, leading to trimming worker hours. In addition, employer’s benefit plans will be reconsidered and structured differently.

High on the list of priorities is a focus to resort to technology and concept changes to eliminate or reduce work hours.

The planned wage hikes will increase the payroll burden in employment insurance, WSIB and CPP based on increasing payrolls and higher indemnity benefits based on the average weekly wage of workers. Additionally, the supply chain will be increasing the price paid for goods and services from suppliers, as they’ll be passing off the cost of the minimum-wage increases to their customers. With Ontario currently having the highest lease and rental fees in Canada, landlords will use this as an opportunity to further raise rents. Cost pressures impact the number of small businesses in the 20-employee range, making it tougher to focus and meet compliance in regulations such as ESA, OHSA, AODA and other provincial and municipal laws.

Ontario’s hospitality industry feels its competitiveness and capacity to invest in Ontario is eroding. Higher labour payroll will impact investment in the hospitality industry, affecting a huge supply chain and spin-off jobs in skills required for purchasing, distribution, building and concept development. Once again, it’s not about the minimum wage — it’s about fostering a conducive climate to operate a successful a business. It’s about the whole package.

Tony A. Elenis is president & CEO, Ontario Restaurant Hotel & Motel Association (ORHMA)

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