I’M GOING TO SET THE EXPECTATION RIGHT FROM THE GET-GO
Let me be very clear here: This article as well as our upcoming podcast episode are not opinion pieces advocating or denouncing the increases. The fact is, wage increases happen every year across the country, and whether your state chooses to enact one that may or may not include a tip credit is far above my pay grade; however, what is in the RSI wheelhouse, is what to do in order to successfully manage the increase without sacrificing your profit or the guest experience. I’d also like to remind you, that now more than ever, it would behoove you to pay attention to the podcasts, blog posts and webcasts that we’ve been presenting to you in our Resource Center.
Each piece focuses your attention on a different segment of your business and how to increase your cash flow and profit. Along with our best practices outlined in this article and forthcoming podcast, these resources will serve as a reaffirmation that you’ve made the right decision when the super-friendly dude who has only been to you restaurants’ website, decides to hop on Yelp, Facebook and Twitter and let all three of his friends know that, “due to the way you chose to handle the minimum wage increase, I’m never coming back to your place.”
Now let’s get started. First and foremost you must accept the fact that no matter what course of action you choose to take, you will unfortunately, piss-off some faction of the public – this is the very reason why it’s incredibly important that you STAY THE COURSE. There’s nothing worse and more confusing to your guests (and ultimately your bottom line) than flip-flopping on a decision – especially a decision that can elicit such an emotional uprising from your employees as well as the general public. Secondly, and quite simply put: remember the rule you learned in elementary school that MATH DOESN’T LIE.
TO SURCHARGE OR NOT TO SURCHARGE; THAT IS NOT THE QUESTION…
Surcharging, the act of adding an additional dollar amount to a guest check to cover a specific cost, has been in play for years. Yes folks you read that correctly; contrary to the social media justice system, surcharging is not new. Here are some common examples of surcharges you might see: delivery, to-go, and catering charges. Below you’ll see some of the most frequent questions that our Operational Trainers, Restaurant Accountants and Tax Specialists receive when speaking with our clients. You’ll need to consider the implications of these questions and their effect on your restaurant before adding a surcharge to cover a minimum wage increase:
- How much is the surcharge going to need to be in order to cover the cost of the minimum wage increase?
- What impact will the surcharge have on my guest experience? Will it negatively impact my ability to execute on the basic principle of providing a great value?
- How will the surcharge affect my employees? Especially the tipped employees? Does the surcharge replace tipping altogether?
- What metrics do I need to keep an eye on to determine if the surcharge is having a negative effect on my profit?
- What tax implications are incurred by using a surcharge?
Now’s a good time for me to plug that our monthly webcast will demonstrate how we assist our clients in determining whether implementing a surcharge makes sense for their businesses. There are many moving parts to consider (including several that are compliance related). I’ll say it again; know the math and the facts before you add a surcharge to cover the cost of a minimum wage increase.
Enjoy your $18.00 burger and fries…
This phrase has been said more times by restaurant owners and operators than the universal cry, “that’s the dumbest play call in NFL history!” shouted in the last few seconds when the Seahawks lost the Super Bowl in 2015. Ok; I may be exaggerating just a tad but you can catch my drift with the utter desperation and disbelief in each of the two statements (insert sad face here).
Once again – the math doesn’t lie. Here’s a quick example to demonstrate the logic and math behind rising the price of a $ 14.00 burger to become an $18.00 burger:
- Let’s say a $1.00/hr. minimum wage increase is going to cost your business $ 40,000 annually (based on a $1.5 Million operation).
- Let’s go on to say that your guest check average is $ 15.00.
How many more guests would you need to serve to make up the $40,000? You would divide the $40,000 (loss) by your $15.00 guest check average, amounting to the need to add 2,666 guests annually. Now assuming you’re open 360 days a year, that’s 7.2 guests that you would need to find daily.
Alright, keep this number in the back of your mind while we address the menu price increase on the burger:
- Let’s say that we sell 2,700 of these tasty burgers in a year; that equates to $37,800. Escalating the price to $18.00 increases the revenue that burger brings, to $48,600, totaling a difference of $10,800.
Well there you have it, you’ve just made up 25% of the minimum wage increase in one menu item. Sounds great right?! Or maybe not… ask yourself the following questions:
- Does increasing one menu item by 28.5% still provide a value to my guests?
- Will the increase in the price of my tasty burger impede my ability to attract 7.2 more guests daily? Simply put, will I piss off my regulars and therefore wind up trying to do the backstroke in a pool of quicksand?
- Will anyone notice if I take a smaller menu price increase and spread it across my entire menu?
- How will I know if I increased my menu prices enough, and what happens if I need to increase them again in 6 months?
These are some of the questions that you better have rock solid answers for prior to increasing your menu prices to cover the cost of a minimum wage increase.
One final point since I’ve heard folks say that they’re going to cut back hours to make up for a wage increase. If you’re trying to absorb a minimum wage increase through aggressive labor scheduling, kindly remember: you cannot merchandise product nor increase sales without well-trained, knowledgeable sales associates and you cannot increase sales without a BOH that can handle volume and produce great tasting, high quality meals. Cutting hours with the intent to absorb a minimum wage increase is the equivalent of selling your car for gas money… how well do you think that would work out?