I want to make sure I have all my facts straight before I post a rant thread or have a chat with the owners of two local restaurants. Let me explain it as I see it, and hopefully those Dopers more experienced with restaurant economics can tell me whether I understand things correctly. Two core facts are required to begin with:
Montana requires restaurant workers to be paid minimum wage - tips are extra
The minimum wage went up a buck as of January 1
When the minimum wage increased, two restaurants right by my store raised their entree prices by a dollar. That’s fine. They can charge what they wish. But they cited the minimum wage increase as the reason.
Here’s my math: According to a friend who waited tables at one of those restaurants, he typically handled six tables at a time, with an average of 3-4 people at each table. Let’s be conservative and call that 20 entrees served per hour. One busboy assisted. With an increase of $1.00 per entree, that’s a $10.00 per employee per hour increase in income to cover a $1.00 increase in wages. It’s actually worse than that, since the busboy assists several servers. The kitchen staff already makes over minimum wage, so I’m not counting them. Ditto the hostess.
They could have easily dealt with the minimum wage increase by raising prices 15 cents per entree, but they’re using it as an excuse to hit us for about seven times that amount.
Is my math wrong, or are they just using the minimum wage increase as a way to channel customer resentment over increased prices off on their employees?
They also have to cover the increase of the payrate when the server when during non-peak hours (i.e. when she’s not serving your hypothetical and questionable 20 entrees an hour). Let’s say a waitron at a standard family-type restaurant has a five hour shift, from 5pm to 10pm. Only about two hours of that–7pm-9pm–is going to be busy and profitable. So, you’re out three extra bucks without making any more from your price increase, because there are no entrees being served. They could only be open from 7pm to 9pm, but then they’d lose customers who’d decide to go someplace where they can show up early or not be shoved out the door.
The food service industry is–except for alcohol sales–such a low margin, high risk business I’m often surprised anybody makes a go of it at all in the middle ground between commodity fast food and haute cuisine. An extra buck an entree? They’re probably just breaking even against the wage increase. Imagine what it would cost to eat of restaurants if they were required to pay an actual “living wage” rather than minimum wage.
My suspicion is that you are more or less correct, although I will note that several places I’ve shopped at(groceries mostly) or eaten at over the last several years commented on needing to raise prices on individual items due to increased costs to the business owners. Orange juice (damage to orchards from weather, I think), butter(demand for premium milkfat has increased more than supply), baking supplies in general (high fuel prices post-Katrina) just to name a few. In each case, the increased price was small, but I could imagine a business owner not wishing to bump prices slightly every few months, and instead making a major upward shift that would encompass several of these inconveniences all at once.
That said, is blaming the price jump on a minimum wage increase mathematically sound? Doesn’t sound like it.
Don’t forget the people working lunch from 10 to 5. They get paid more too. As does the dishwasher, and maybe the cooks, depending on if they want more money since everyone else gets more. The waitron, etc., also get paid $1/hr more on mondays and tuesdays when the joint is a quarter full. Thirdly/fourthly, whatever, their suppliers may have to pay a higher minimumm wage and raise their prices to cover it too.
These questions come up all the time, where a customer implies that the restaurant industry is running some sort of con game, raking in ridiculous profits on the backs of workers and customers alike. The reality of the restaurant business is that restaurants fail time and again, and the owners sometimes earn a lot of money, and sometimes work 16hr days just to keep the doors open.
They are definitely overstating the case.
But most restaurants fail within a couple of years, so I think none of them are opened by math majors, just chefs with a dream.
All your points are pretty good. I cooked for one restaurant where I was paid more than minimum wage, and when minimum wage went up, so did my pay. The owner had a policy of paying cooks a certain percentage over minimum. Then the place changed owners, and the new owner kept raising the waitresses wages every time MW increased (at that time in WA state, the MW was going up every Jan. 1), but she wasn’t raising the cooks’ wages proportionately. By the time I quit, we cooks hadn’t seen a pay increase in almost three years, and were making maybe 40 cents/hour more than the minimum wage servers, and we weren’t tipped.
On the other hand, the new owner told me once that I was taking home more money than she was. However, part of that was because she was attempting to pay off, as quickly as possible, the business loan she’d taken out to buy the place. So she was making personal sacrifices in order to eliminate her debt, and had the place paid off in a little under four years.
Sure, I was just trying to go with the most generous viewpoint of a wage increase for the o.p. in hopes of forestalling claims that I’m overstating the real operating costs. But you’re right; the restaurant owner has to pay the same wage whether customers are lined up around the block or slowly drizzling in on a sleepy weekday winter night; the idea that a waitron is serving 20 entrees an hour–even at peak hours–is optimistic at best. (I’m not saying it can’t be done, but if you can figure out a way to keep that kind of demand going throughout the dinner hour you’re well on your way to surefire profitability.)
Lunch is even worse; people tend to order things with low food cost margins that still require a fair amount of labor to assemble, and they tend to order soft drinks and iced tea rather than hang around and drink beer or the even more lucerative cocktails and mixed drinks. For the most part, being open during lunch–and especially the dread 2-5 after lunch shift–is a way of maintaining some income while coping with the overhead of having the kitchen staff prep for dinner. Some restaurants just close during these hours; others just don’t have lunch hours at all. (Try, if you are so inclined, going to Outback Steakhouse for lunch and see how far that gets you.)
People do occasionally make fortunes in the restaurant business, but not by happenstance and not without a hell of a lot of work and long hours. And not at the mid-level, neighborhood bar-and-grill type place, except as a regional or national chain with heavy promotion and a free-flowing bar.
Most business (mine included) do not raise prices often enough to keep up with inflation. Then, when there is a reason/excuse to reprint menus/etc they have some catching up to do.
The point is, people do not charge what they need to charge plus a margin. That would be foolish. They charge what the market will bear. If people are willing to cough up an extra buck for the entree, the price increase will stay. That’s the free market at work. Just because the restaurant’s costs have increased does not confer upon you an obligation to pay them more, just as if their costs decrease, they are not obligated to reduce their prices.
In my opinion, the only mistake the restaurant made was in coming up with any excuse to raise their prices, much less a specious one. The do not need any justification other than that they think their customers will pay.
I work in a restaurant, and the minimum wage also just went up in California. We raised the prices on some of our lower priced entrees and appetizers by $1, but not all of them.
Things to consider:
The servers are not the only ones who make minimum wage. The bussers, the expediters (people who run the food to the tables. This is a necessity in a fairly busy restaurant such as ours), the dishwashers, and the hosts all make minimum.
As others have pointed out, it’s not busy all the time, there are lulls throughout the day and all those employees still have to be paid the extra money. Even when they are doing sidework which does not involve serving tables at all (e.g. rolling silverware), and there may be an hour a day or more of this for each employee. Still gotta get paid.
Now, if business is good it’s quite possible that they are making a little more than they absolutely have to to pay the extra labor costs, but it’s hardly like they are making a grand fortune by raising entree prices a dollar. We are a restaurant/bar combo and the lion’s share of our profit comes from selling alcohol, not food anyway.
I agree with most other replies that your estimates are pretty optimistic. Here’s another way of looking at the situation: Labor is typically about one-third of the total cost of running a restaurant; costs of food and drinks is another third. (Here are a couple of example balance sheets: Checkers and McCormick&Schmick’s.) If the minimum wage increases from $5.15/hr to $6.15/hr, then labor costs are increasing by about 20%. (As others mentioned, when the minimum wage goes up even employees making above minimum wage are going to want a raise.) This increases total costs by about a third of that, or about 7%. Since restaurant profits are generally low, prices are going to have to rise by about that amount to maintain about the same level of profits. I don’t know what the cost of an entree is at these restaurants, but if it’s in the $10-$15 range then a $1 increase is actually about right.
In fact, as others have pointed out this understates some effects. Some other restaurant expenses, such as food, have a large proportion of labor costs in their prices, so those costs will also increase. The owners may also be taking this opportunity to raise prices to keep pace with inflation or other sources of increasing costs.
Your math is correct but it’s really somewhat beside the point. Waitress wages aren’t a direct cost - well, they’re mostly not a direct cost since waitresses are not paid by the table/meal/customer, they’re paid by the hour, and staffing has to be done in discrete increments that only vaguely match demand.
In other words, it’s valid to cite a price increase if it’s due to a DIRECT cost. For instance, if there was a worldwide cow plague and the price of beef went up 200% it would be perfectly legitimate to raise the price of the steak byt twenty bucks a plate and cite the added cost.
While limanalee is right in that most restauranteurs fail, what we have here is a simple case of the restaurant trying to placate customers. This is pretty common; a few years back (you just knew I would find a baseball angle) The Cincinnati Reds gave their start shortstop Barry Larkin a nice new contract and prompty raised ticket prices, citing Larkin’s contract. That’s economic bullshit; salaries aren’t the slightest bit connected to baseball ticket prices. But the Larkin contract gave them an excuse - a PR angle - to jack up prices. If they’d jacked up prices and said nothing, or said “Well, we’re gonna hit you for more money because the market will bear it and we just want more money,” the negative publicity might have caused a drop in demand. By publicly throwing up their hands and saying “Shucks darn, we’d like to give you all cheap tickets, but what are we going to do, we have to pay Barry Larkin” they succeeded in distracting some fans from the truth.
Can you expound on what you mean by this? Labor is a pretty direct cost in my book, and frankly your implication that the cost of labor has absolutely no bearing on the cost of goods sold is bogus.
Prices were probably increase so that labor once again represented 20% of total revenues, meaning for every extra labor dollar spent, another $5 in revenues was earned to balance the books. Of course the percentage of total revenues spent in the other categories effectively dropped a tiny bit but thats a bonus to the owner. Considering that he is ultimately the one paying for the slow nights, let him have it.
It’s true that labor isn’t a direct cost; it’s what is called a fixed cost to overhead. Restaurateurs and other entrepreneurs who fail to account for and allocate the real costs of overhead–and their increases with inflation, labor and supply costs, taxes, et cetera–will find their profit margins far more marginal than anticipated. Your argument would make sense in a contract for “cost plus” work (that is, the contractor is entitled to charge the actual, direct costs of the work plus an agreed upon profit margin), but a business offering a product or service on the open market should and will include the cost of maintaining overhead into the price of their product or end cost of their service. As a customer, if you don’t like it, you go to another vendor, like the Szechwan place down the street that…oh, crap, they just went out of business. I guess we’ll have to eat at the Chew ‘n’ Blow Steakhouse after all.
I would suggest that those who have never worked in a commercial food service operation (being the drive-thru attentent at Carl Jr’s doesn’t count) do not have a grasp on the economics of the restaurant industry, which bears about as much resemblence to making food at home in your kitchen as an industrial office furniture manufacturer has to the hobbyist in his garage shop.
Have those restaurants raised their prices at all recently? My guess is that they have been eating cost increases for a couple of years, watching their profit margin slowly erode, but had decided they would rather lose that tiny part of the profit then continually raise their prices by a nickel or a dime. Then comes the day that minimum wage goes up by $1/hr. Suddenly that profit erosion does from tiny nibbles to maybe 50¢/customer. The restaurants aren’t able to put off the cost increase any long. They HAVE to raise prices. So they go for the whole dollar, putting them back at the profit margins they would rather be at. And next month, the price of iceberg lettuce will go up, costing the restaurant 1¢/customer, and the cycle starts over.
Another implication of minimum wage rise would be the cost of (locally sourced, at least) produce, and possibly delivery costs, since local supply businesses will also have to factor the increased salary, comp & SS overheads into their rates.
As an aside, the minimum wage was only brought in a few years ago in the allegedly “socialist” UK. Despite dire warnings about its impact from business bodies, its effect has been largely beneficial, and it isn’t even a discussion point any more, other than by people who earn it, and by how much it rises.