The Governor has proposed to raise New York’s minimum wage from $7.25 to $8.75, a 17% increase of $1.50 per hour. If labor costs average one-third of a restaurant’s operating budget, a restaurant would have to raise prices at least 6% to cover the additional costs. Add to that the impact of health care reform costs to employers, menu price increases of 10-15% are needed for restaurants to retain current profit margins.
Such large price increases would be dramatic and noticeable to the consumer. A price jump would likely have a negative impact on overall sales, as customers generally don’t have the extra disposable income for eating out as the economy continues to struggle along. One study showed that a 10% increase beverage costs results in a 4.8% decrease in beverage sales.
Restaurant owners have other options to address these cost increases, focusing on the second large component of the operating budget, food costs. I recommend a 3-step strategy to offset the effects of a minimum wage increase:
- Identify cost-saving ingredient substitutions. Review your menu against your food invoices to identify some of your high-cost ingredients. Weather can cause dramatic seasonal increases in certain fruits and vegetables. Natural disasters can also play a role in supply and demand for certain products, especially seafood. Modifying recipes to take advantage of lower-cost ingredients can both lower costs and have the added benefit of refreshing and updating your selections for your regular customers.
- Review your food usage with your kitchen staff. Are there items that are used so rarely that there is significant waste and spoilage? Simplifying your menu to use fewer ingredients and have fewer menu options will reduce losses due to waste and spoilage of perishable ingredients. Faster turnover of food supplies will also mean fresher ingredients and the best product for the customer experience.
- Reduce portion sizes. Most restaurants offer sizes that are well above a recommended healthy portion. You can offer a “lunch sized,” “tappas,” or “weight conscious” portion at a slightly reduced price. You could also offer single side dishes with the entrée (vegetable or pasta/rice/potato but not both or an additional cost for the second). You may want to run a few weekly specials to see what entices your customers and how they respond to these options.
Running any business involves constant adaption to address the increasing costs of supplies and the ever-changing consumer demands. With some creativity and business acumen, you can adapt to minimum wage changes without cutting into your profits.