Minimum wage increases: 4 tips to help restaurants brace for what’s next

In 2020, 21 states raised their minimum wage. On New Year’s Day 2021, 20 more states did the same. Five additional states (Connecticut, Delaware, Nevada, Oregon, Virginia) and the District of Columbia will follow suit over the coming months, in addition to Florida’s second increase of 2021 (planned for October). All told, this cost challenge will affect nearly 428,000 foodservice operators in the US. On the heels of these changes, the new administration is pushing for a $15 federal minimum wage. For a state-by-state look of the minimum wage increases projected in 2021, take a look at our deep dive

While you may have been preparing your brand for minimum wage hikes years ago, the ongoing pandemic has added unseen variables, to say the least. How do you brace yourself for the increase? And what plan of action should you put in place?

Keep in mind that solutions vary by brand — and they might vary within a brand. Initially, we recommend the following approach to address coming minimum wage increases:

Tip 1: This is not a uniform bump. A one-size pricing approach will not fit all restaurants in your portfolio.

With such state-by-state variations, it’s safe to say that multi-unit operators will feel the impacts of a minimum wage increase unevenly. So across-the-board price increases are not your silver bullet.      

Moreover, restaurants should look beyond just profit margin percentage or labor percentage and instead focus on maintaining margin dollars.

As a first step, restaurants should calculate the impact of wage increases in dollars for each location. The results will help you understand the impact that needs to be offset, which will likely vary widely.

Once you understand the dollar impact, we recommend evaluating each individual location’s pricing opportunity. What customer behaviors drive performance? What other internal and external factors may affect behavior? The combined insights will allow you to develop a local pricing strategy.

For larger restaurant operators that are operationally unable to control store-specific pricing levels, a more manageable step may be to think about common characteristics among locations. This will allow you to create pricing tiers for a cluster of restaurants where you can expect similar results.

Tip 2: The path forward lies in the data — even if there’s less of it.

The answer to increasing costs seems obvious: raise menu prices. But RMS Senior Vice President Richard Delvallée says to resist the urge. “First, be sure to understand the true implications of the labor increase on your bottom line. While adjusting pricing seems like a logical place to start, relying on pricing as your only lever to offset those costs could lead to declines in the number of transactions.”

He goes on: “Before making any changes, you’ll want to make sure to implement them at the right time, in the right magnitude and on the right items. In ‘normal times’ you’d utilize your historical transactional data to gain a better understanding of your customers’ purchase behavior. You can — and should — still do that. However, given the unusual circumstances of the past year, the universe of data you have to work with will be smaller. Some of our clients are asking for help in this uncharted territory. Because of our ability to gather, analyze and model data — whether it’s overall industry data or six months of data from three units — the answers are still there. We can find a path forward.”

Tip 3: Let guests guide you.

Throughout the pandemic, restaurants have likely revised menus many times (axing items that aren’t drive-thru or takeout conducive), tried new approaches (family meals) and made continuous tweaks to get the right product mix. Throughout that journey, Delvallée advises looking at the data to answer some basic, but telling, questions: “What are your customers willing to pay for items, and more precisely, for which items are they willing to pay a premium? Can you develop price strategies that build product attachment and increase check — for instance, via discounted add-ons or bundling?”

Look at these figures on an ongoing basis, with a particular focus on how shifting dining restrictions are causing consumers to spend. Don’t be afraid to go straight to the source as well; data from consumer surveys can provide valuable feedback. At the beginning of 2020, RMS began surveying US consumers on a quarterly basis to help restaurant operators better understand new purchasing behaviors. These techniques can help restaurants balance the customer’s willingness to pay for convenience and comfort during cyclical phases of the pandemic.

Tip 4: Think small for the long haul.

Seventeen states have laid out the dates for future minimum wage increases, and their magnitude, allowing restaurants to plan ahead. Depending on the overall cost pressures, you may want to consider implementing changes in smaller increments ahead of the date the new minimum wage kicks in. This approach can reduce sticker shock caused by a big hike when the minimum wage takes effect.

Remember, while many hourly workers may benefit from the legislative increase, some of your loyal customers may see little to no change to their paychecks. That means their total food budget remains unchanged.

As a result, significant price increases could mean fewer visits to your restaurant or guests’ choosing less expensive (and perhaps less profitable) options. This is yet another compelling reason to consider spreading out your price increases in increments. It allows you to measure your guests’ reaction and monitor potential changes in their purchasing behavior.

Delvallée adds, “No matter the situation, whether climbing wages or rising costs of ingredients, operators should always take a guest-first approach.”

Operators must bear in mind that if panic sets in and operators increase menu prices commensurate with wage increases, the guest is the one who suffers. Approaching margin pressures with a plan will mean the difference between losing customers due to price increases and keeping them because they perceive (and receive) any changes you make as value-adds.

While it will continue to take effort to execute a guest-centric response — whether to the pandemic or wage increases — it’s well worth it when considering the long-term health of your business.

Guest-centric and brand-supporting pricing strategies are our specialty. Contact us today to create a plan to address rising labor costs.