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March 6, 2013
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Higher wages for servers, but restaurants will employ fewer
By John Hamburger
Minnesota restaurant owners should prep for a minimum wage of at least $9.00 per hour, maybe $9.50. I can’t imagine a DFL governor and legislature turning down an opportunity to mandate what employers should pay their employees, no matter what the consequences to business.
The debate about minimum wage will never end. New York Times columnist Paul Krugman says a minimum wage increase doesn’t hurt employment. The Wall Street Journal’s Steven Moore says it will further drive up teen unemployment, and will result in fewer employed adults.
Here’s what I know after 33 years in restaurants: Restaurants are challenged with a business model that involves higher input costs for food, liquor, utilities, taxes and now increased labor costs and benefits. Price increases are hard to come by. If a restaurant can pass on the increased minimum wage cost to their best customers they will survive. If not, they’ll look to reduce expenses and that includes cutting labor.
Recently, I examined the impact of minimum wage increases in Oregon—currently at $8.95 an hour and no tip credit. An Oregon labor economist, Scott Bailey, predicted in an issue of Portland’s newspaper, the Columbian, that the state’s high minimum wage has little impact on the economy and no loss of employment. Oregon resident and national economist, Bill Conerly, told me, “Higher minimum wage rates clearly reduces employment. The decision is always a balance between revenue and costs—and the minimum wage pushes up costs.”
Last year I talked with John Plew, an Oregon restaurant owner about his experience paying the higher minimum wage without a tip credit. He said an increase in minimum wage pushes up labor costs because it’s not just the minimum-wage employees who get the raise. “The cooks want a raise and the managers look at the money the servers and bartenders are making with their tips and they want a raise, too,” said Plew.
He told me no matter what the wage, he has to maintain certain service levels if he is going to compete in Oregon. In order to pay for the increases, Plew looks for ways to raise menu prices by “squeezing in any price increase he can find.” He said he is constantly tinkering with the menu, ramping up table sizes per server and changing his restaurant layout in order to use less labor. He is even using bartenders to double as table runners.
San Francisco restaurant owners do the same thing, as their minimum wage is now $10.55 per hour plus mandatory health insurance. Adriano Paganini, the San Francisco founder of Pasta Pomodoro, told me that fortunately all San Francisco operators must play by the same rules. “We all pay the same wages so we charge a little bit more on the menu, and fortunately customers don’t expect enormous portions of food in this city,” he said.
The options for Minnesota restaurateurs are easily identifiable based on Oregon and San Francisco’s experience, but will be tough to implement. They will raise prices, reduce labor hours and cut portion sizes. Nationally, multi-unit restaurant companies are on a quest to reduce labor hours.
California restaurant consultant Philip Gay says Chipotle has become the standard bearer for new up and coming restaurants in his state. Fast casual chains like Chipotle and Panera have caught on with customers because they serve high-quality food with no servers and customers save money with no tipping. National chains are using real-time restaurant data providers, developing theoretical labor cost models and incorporating rigorous time-and-motion studies to compare with actual results. Why? Restaurants need to reduce labor expenses to stay profitable. IHOP is even experimenting in California with a fast casual prototype, sans servers.
Roman Lubynsky, an MIT venture advisor who advises new companies including restaurant technology providers, says restaurants are experimenting with self-order kiosks, iPad ordering systems, mobile ordering apps and drive-thru technologies to improve employee efficiency. Recently, I reviewed an ordering technology where customers could pre-reserve their table, order food in advance from their mobile device, and have it ready when they arrived. The goal is to reduce server labor and the time it takes customers to get their food.
Is it fair for restaurant owners and publishers like myself to focus on the servers? If you consider the added cost of a tip as a tariff, as I do, then restaurant owners have every right to reduce or eliminate server labor to make themselves more competitive with their fast casual and quick-serve brethren. Why should 15 to 20 percent of a full-service restaurant’s daily take go home in the server’s pocket, when it stays with the fast casual or quick-serve owner?
Servers and bartenders enjoy your raise, but stay on guard. The restaurant industry is out to eliminate you. And Minnesota politicians, consider this when you vote for a minimum wage increase: Oregon restaurateur Plew is building his new restaurants in Arizona where the server rate is $4.80 per hour.
Read more on this issue here.
