On May 30, the Wynne government announced a monumental change to the wage structure in Ontario. Effective January 1, 2018, minimum wage will be increasing from $11.40/hour to $14/hour, a 22.8 per cent increase. Then on January 1, 2019, the minimum wage will rise again to $15/hour – a 31.6 per cent increase compared to current rates.
This increase will have a paralyzing effect on the restaurant industry. Average profit margins of restaurants in Canada are 4.6 per cent of sales revenue. This labour increase without any other changes (e.g. price increases) will take that average profit down to a staggering profit loss of six per cent of sales revenue.
David Hopkins, President of The Fifteen Group, points out two main factors to the price increase that will impact restaurant operators. First is the direct cost to labour – approximately 35 per cent of restaurant revenue goes to labour costs and a large proportion of restaurant staff are paid minimum wage and if not, their wage is directly proportional to and effected by that minimum wage benchmark.
The second factor is the effect on product costs. Many suppliers (think local produce companies or meat companies) will have to increase their prices for restaurant supplies in order to combat the wage increase themselves. The Fifteen Group estimates that in addition to the direct labour cost increase, this trickle-down effect will increase the overall product costs for a restaurant by an additional five to 10 per cent. The total impact to the restaurant bottom line is staggering – restaurants will have no choice but to raise prices and pass this on to the consumer.
“For anyone to think that the restaurant industry has that kind of buffer in profitability to absorb such increases is absurd,” says Hopkins.
According to The Fifteen Group calculations, price increases are anticipated to be as follows for a restaurant to maintain a profitability status quo:
- On January 1, 2018, restaurants will need to increase menu prices by 13 per cent across the board
- On January 1, 2019, restaurants will need to increase menu prices by an additional seven per cent
The Fifteen Group believes that this wage increase will have an incredibly negative impact across the restaurant industry. However, there are strategies for restaurateurs to combat the increase.
“It would be interesting if the restaurant industry would consider adding their own surcharge to guest bills that covers the required increase – such as a 20 per cent ‘Wynne Tax’ surcharge right beneath HST,” says Hopkins. “That way the consumer would be aware of the direct cost to them from this policy change and restaurants would not have to raise their menu prices.”
A more subtle solution exists for dine-in restaurants involving creative and strategic menu engineering combined with a new approach to customer tipping.
Hopkins adds, “This change may force us to re-visit the tipping structure within the industry. Executed properly, there is the potential for a win-win way to massage this wage change into the overall framework of the business operation. I don’t think a straight price increase across the board is the best solution – we need to be more innovative than that. Quick-serve restaurants that have a low average check and who are highly minimum wage driven will be much more challenging – we still need to think about that one.”