Big QSR chains are the primary target of legislators and activists now leading the push for a higher minimum wage. But a new report from research and credit rating giant Moody’s Investor Services sees independent operators in the casual dining segment taking the biggest financial hit if these efforts succeed.
Many industries will feel the pain that will accompany any minimum wage increase. Foodservice will get hurt the most.
“A higher minimum wage represents a particular challenge for restaurants, which depend heavily on hourly workers," says Moody’s v.p./senior credit officer William Fahy. "But restaurant operators will have a tough time passing higher labor costs on to customers without negatively impacting traffic, with soft consumer spending, a high level of promotions and discounts throughout the industry and consumer spending on everyday needs such as rent and higher education taking a larger share of income."
The report, ominously titled “Higher Minimum Wage Will Eat into Restaurant Margins as Movement Gains Momentum," sees trouble on another front. When a restaurant’s least-skilled and least-experienced workers get a pay boost because the minimum wage has gone up, employees with more skill and experience are going to want an increase, too, even though their pay rate may already exceed the new minimum.
"If the pay gap narrows between employees paid above-minimum wages and those brought up to mandated minimums, workers currently above the minimum may demand that their compensation be increased commensurately, an issue that could end up being the single biggest cost consideration for affected operators," Fahy says. The rate of employee turnover in restaurants, already high, could get worse.
Moody’s puts a number on what a minimum wage boost will ultimately cost restaurant operators. Its analysis calls for restaurant profit margins to shrink by one to four percent over time. The key variables are the dollar amount of any minimum wage increase and the number of hourly workers a restaurant employs.
In a scenario where the minimum wage would rise from $7.25 to $10.10, QSR profit margins would shrink by about one percent, from 22.5 percent to 21.4 percent. Casual dining profit margins would decline about two percent from the current 12 percent to 10 percent.
Owner/operators of casual restaurants, typically independents, could feel the largest impact.
“The labor force of casual dining operators, which traditionally follow an owner-operator model, includes not only workers who are paid the full minimum wage, such as back-of-the-house staff like cooks and food preparers, but also front-of-house staff, including waiters and hosts.” Moody’s says. “While waiters often receive a combination of tips and wages, in non-tip wage states such as California, even employees who receive tips also receive the full minimum wage.”
Restaurant operators could live with a $10.10 minimum wage scenario such as the one Moody’s describes here. But full implementation of a $15-an-hour minimum wage could make future profit margins problematic for many, many operators, regardless of their market segment or ownership structure.
Contact Bob Krummert at [email protected].