Restaurants and Ontario’s Minimum Wage Increase

I’ve had several people ask about my thoughts relative to the increase in the Ontario minimum wage and restaurants.   Here is my stream of consciousness perspective.  I am sure more will occur to me as I think about it more and have the chance to speak with people in the industry,

1 – It will be hard.  It’s not the end of the world but the cost increase will be significant and the short timeline does not give restaurants much time to adapt.  Most restaurants are not high margin businesses so something will have to give.  I’ve read that average profit margin for restaurants in Canada is 4.6%.  That doesn’t leave a lot of room for higher labour costs.

2 – I’ve seen some studies that suggest that higher minimum wages don’t lead to lower employment.  I’ve also seen some anecdotal discussion of specific markets.  Understanding the dynamics of specific markets is always difficult because there are so many factors at play that it is hard to attribute change to a specific measure.

(https://www.forbes.com/sites/eriksherman/2017/01/07/seattle-restaurant-jobs-keep-growing-with-higher-minimum-wages-after-a-year/#461837f63579)

3 – It will be interesting to see how restaurants approach the higher costs (and the associated lower margins).  I expect we will see several things:

  • Prices will go up. There are likely some things that restaurants can do to trim costs but I expect that many of these have already been done – there has been food cost pressure over the past few years too.  In some markets (particularly Toronto, escalating rents have also pressured restaurants.  These price increases will have to be executed strategically (revenue management!).  A 10% across the board increase would be unlikely to yield a 10% increase in average cheque.  People might cut back on appetizers, deserts or drinks in response.  Making price changes strategic is critical to achieving your objectives.  Price increases may also cause people to eat out less reducing overall demand due to less frequent outings.
  • Portion sizes may change. If costs go up then something has to give.  The size of the drink might go down.  The protein portion may go down slightly.  The reducing cost approach is an alternate strategy in increasing prices.  My expectation is that there is some room for this but that some of this has already happened in the food price squeeze.
  • Menus will change. In the search for margins, lower margin items will disappear.  We will likely see more offcuts in proteins – perhaps even more vegetarian options or at least less meat forward options.  Plant based proteins may replace or supplement meat proteins.
  • Restaurants may restrict hours. Many restaurants are open on days or day parts that are not profitable.  Staffing these times will become more expensive and may lead to fewer hours.  This should probably already have been happening but the wage increase will likely accelerate it.  This will result in either fewer jobs or, more likely, fewer hours for those that work there.  That would mean staff earn more per hour but take home pay doesn’t increase because they get fewer hours.
  • Restaurants may rethink tipping. The movement away from tipping has been slow.  Some restaurants have tried it and succeeded.  Others have tried and gone back to a tipping model.  In Ontario, server wages will go up by more than $3 per hour.  While it’s not true for everyone (most notably low average cheque breakfast places), servers in most restaurants are making much more money from tips than they are from the hourly wage.  I’ve argued that past increases in minimum wage have actually hurt low wage kitchen workers because the restaurant has to pay servers more too.  Our research from several years ago suggested that 75% of respondents make more than $10 per hour in incremental wage from tips, 50% earn more than $15 per hour and 25% earn more than $20 per hour.  Moving away from tipping and paying a fixed wage (higher than minimum wage for servers) would provide the restaurants with an approach to paying all staff a living wage without charging customers more.  It wouldn’t be easy but this might provide additional impetus.  It’s not for everyone but I expect some will try it.
  • I saw something about restaurants implementing a “Wynne tax” of 20% to highlight to customers that the minimum wage increases are costing restaurants more. I’m not sure this would work – not least because Wynne is unlikely to be premier if and when the final increase is implemented.  It is difficult to highlight specific costs separately on a bill.  I expect that restaurants who tried it would see it decrease tips too.
  • Those that can will likely automate some functions. QSR is looking at ordering kiosks already – this will improve the business case for automation.  Tablet ordering at the table will at least get increased consideration.  I don’t believe that you can take servers out of full service restaurants entirely but tablet ordering may allow operations to reduce the number they have on staff.
  • Some restaurants will close. Those working in those restaurants will lose their jobs.   This may actually increase the demand in the remaining restaurants.   I’ve heard some people argue that we have too much capacity in the restaurant industry.  Fewer total seats may mean more bums in the remaining seats.  I read a report of a Harvard study that evaluated what sorts of restaurants went out of business when minimum wages went up.  They evaluated Yelp and TripAdvisor reviews.  Restaurants with good reviews were much less likely to go out of business.  This suggests well run, customer focused restaurants will keep customers and stay in business but those with challenges are at more risk.

In the end, restaurants will find a way to adapt.  This is a tough business and these operators have adapted before.

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