Study: higher menu prices, staff cuts to stem from wage-hike mandates

Nation's Restaurant News, Jan 21, 2008 by Dina Berta

Restaurant operators expect to raise menu prices, cut back on staff and reduce employees' hours by 2009 to deal with impending federal minimum-wage hikes, according to a study by the nonprofit Chain Restaurant Compensation Association, which has 115 members.

Thirty-one states and two cities--San Francisco and Santa Fe, N.M.--currently have higher hourly minimum wages than the federal rate of $5.85 that went into effect last July. The wage jumps to $6.55 this July and then to $7.25 in July 2009. If there are no further state or local minimum-wage changes, only eight states and the two cities would have threshold wages higher than the federal rate in 2009.

"Not many were impacted in 2007 because the market was ahead of that," said Chip Stalter, compensation manager at the 407unit White Castle burger chain, based in Columbus, Ohio. Stalter also sits on the CRCA board.

"Typically we've been ahead of the minimum wage anyhow," Stalter said. "Now we're getting to a point where states and the government are driving labor wages as opposed to business [doing that]. Supply and demand were driving the market; now the government is driving the market."

The study, conducted by the Hay Group, an international human resources research firm, questioned HR and compensation executives from 24 large restaurant chain operators, including Buffets Inc., Burger King, Carlson Cos., Fazoli's, Panda Restaurant Group, IHOP, Jack in the Box and Starbucks Coffee Co.

"It's 2009 I'm really concerned about," said CRCA president Ann Tincher, who is director of total rewards and recognition for Lexington, Ky.-based Fazoli's, the 300-plus-unit Italian fast-casual chain. "We're really going to have people scrambling to figure out how to manage and remain profitable and take care of our people."

When asked what tactics their companies would take to offset increased costs from wage hikes, 48 percent said they would raise menu prices.

With food and energy costs expected to continue rising, the minimum wage is just one thing putting a squeeze on operators' margins, noted Tincher, who is responsible for compensation, health and welfare benefits and reward programs for Fazoli's.

The study's respondents also said they would try as ways to manage higher labor costs optimizing employee work schedules, picked by 16 percent of respondents, and redefining job duties, chosen by another 16 percent.

Thirteen percent said they would decrease employees' hours and overtime hours. Ten percent would reduce the number of workers and 6 percent said they would decrease the number of new hires.

One of the biggest challenges for operators will be what to do about the ripple effect an increase in the starting wage will have on wages throughout an organization, noted Tom McMullen, leader of the Hay Group's U.S. practice.

"If I'm an hourly worker making $6.75 an hour, and I've been there for two years, in July, any new person coming on will [be] paid $6.55 an hour, and my salary is compressed," McMullen said. "Companies will have to boost the pay for people making above the minimum wage."

In the study, 23 percent of respondents said they would make those ripple adjustments to wages above the minimum, but 32 percent do not plan to make any adjustments to their pay scale.

While the ripple effect can be costly and hard to manage, not making the adjustments could adversely affect employee morale and retention, White Castle's Stalter said.

"You have to deal with this issue," he said. "You have different classifications in a restaurant-people just hired, front-line folks, crew managers, assistants and all the way up. If the difference in pay between a shift leader and an assistant manger and the general manger shrinks, that can cause issues as well. You risk losing experienced people at that point."

NEW FEDERAL HOURLY MINIMUM WAGE RATES:

* Increased from $5.15 to $5.85 on July 24, 2007

* Will increase to $6.55 on July 24, 2008

* Will rise again to $7.25 on July 24, 2009.

dberta@nrn.com

Tacktics to offset minimum-wage increases.

Increase prices                     48%
Optimize existing schedules         16%
Job design changes                  16%
Decrease scheduled/overtime hours   13%
Decrease exisitng head count        10%
Decrease new hires                   6%
Other                                0%

SOURCE: THE HAY GROUP MANAGEMENT LTD.

Note: Table made from bar graph.