Minimum wage is on the rise in areas across the country, challenging restaurants facing a spike in their labor cost. The actual cost increases vary by restaurant and by brand, but here’s one rule of thumb: for every dollar increase in minimum wage, restaurants will need to take 1.25 to 1.5% in price to cover the increase.
That’s what we learned talking to Mark Kuperman, President of Consulting Services for Revenue Management Solutions, a company that advises restaurants and hospitality firms on optimum margin management. Mark oversees a group of consultants and analysts serving a range of restaurant clients, from QSR to fine dining.
Currently, there are multiple states facing minimum wage changes, including Rhode Island, New York, Maryland, Nebraska, and Arkansas. Here, Mark shares some of his top tips to help restaurants manage rising labor costs — without losing guests’ trust.
Spread price increases across multiple markets.
“In many ways it’s not the segment that has the different challenges as much as the ownership type,” says Mark.
For example, he worked with one chain of 200 restaurants, 40 of which were in California. That brand had the opportunity to spread price changes across their entire system rather than focusing specifically on their California locations. On the flip side, California-only operators don’t have the luxury of passing on smaller increases across multiple locations and states.
“With multi-unit operators, they don’t have to think about pricing all of their stores the same,” Mark adds. As long as there’s enough distance between locations — five or ten miles, roughly — you have the opportunity to test different price points.
Consider near-minimum wage employees.
Interestingly, minimum wage employees aren’t the most affected group when it comes to the laws. Instead, much of the conversation revolves around “near-minimum wage employees” — not the person making $7.25 an hour, but the one making $8.25.
In the U.S., Mark says, 3 million people are at minimum wage, or roughly 2.3% of all people making wages. The number of people making near-minimum wage is much higher, at 20.6 million.
“What really happens isn’t so much that the people who are making $7.25 an hour are seeing their wages go up,” he explains. “It’s more that there’s this ongoing wage compression. Someone’s making $3 above minimum wage, and then minimum wage goes up by a dollar, and now all of the sudden they’re only making $2 above minimum wage.”
With restaurants focused on recruiting top talent, they have to be competitive with wages. That wage compression described ultimately impacts their ability to do so as they aim to differentiate themselves from other employers.
Start making changes early & incrementally.
One upside of minimum wage changes is that owners and operators know far in advance when they are going to take place. If you’re going to raise menu prices to compensate, Mark recommends starting early, making small, incremental changes six months in advance.
Many brands decide they are going to raise prices by 2% for the year, for example, and they do it all at once. Mark advises possibly taking even more (say, 2.5%) but breaking it up into increments of half a percent or so. “Customers aren’t likely to notice a significant change if they’re biting off small increments.”
At the same time, “there is no better time to make price changes than when the minimum wage changes,” he says. Since new laws are being discussed and reported in the media, the public is aware of the pressures and everyone is making changes across the board.
Make sure the timing is right to raise prices.
On a similar note, it’s also important to consider the time of year when making price changes.
In general, Mark says the best time to increase prices is going into the holidays, starting in October, and going into the summertime. Those are periods when people tend to have less price sensitivity. Less ideal times are in January (right after the holidays, when credit card bills are coming in) and when people are heading back to school in September (also an expensive time).
But remember, those are generalizations. Mark also worked with a salad chain that was extremely successful making price increases in January, when New Year’s resolutions were top of mind. Another good time? After a restaurant remodel, when the guest experience has improved significantly.
Influence guests’ decisions without changing prices.
Of course, there are plenty of creative solutions to dealing with rising costs besides increasing prices. Highlighting your highest-margin items on your menu can influence purchase behavior without any fundamental structural changes.
Mark recommends listing your highest-margin items on the top and bottom of your menu list and burying the lower-margin ones in between. Since customers tend to remember the first and last items they see, you want to make those visible.
One word of caution here: don’t lead with your highest-priced item in a category, or people may completely opt out of the whole category. “Let’s say you’re looking at the steak menu category and your highest-margin item is your porterhouse steak. They go, I’m not even going to look at steaks because the first item on the steak menu is $45.”
Offer unique ingredients and dishes.
On restaurant menus there are a handful of “known-value” items — guests have a sense of what they should cost (think cheeseburgers). These items are staples across different segments, and customers are familiar with them.
Then there are dishes that are specific to your restaurant, that guests can’t find anywhere else. These are the items where you have the most pricing power, because they are unique to your brand; customers can’t associate a specific value to those items. Do something to differentiate your restaurant and menu, and you automatically have some leverage when pricing your menu.
The same goes for ingredients. “You often see that one of the levers to get people to spend more on the menu is giving more description to the item,” says Mark. Calling out local or specialty ingredients can raise a dish’s profile and influence guests to spend more.
Avoid introducing new charges.
In general, Mark advises clients to avoid introducing new ways that customers have to pay them, such as packaging fees for carry-out orders. “A lot of times what we see is that when someone looks at a check, it’s not that the check was $85, it’s that they were charged $1 for this menu item,” he says.
Asking your guests to pay for something that they feel should be included can raise a red flags — too-expensive soft drinks or bread, for example.
Actually, sometimes removing menu items can be an effective tactic. Mark points to one pizza chain he worked with that offered five different cheese pizzas: plain cheese, Margherita, four-cheese, etc. He recommended removing their plain cheese pizza, only making it if customers asked for it specifically. Since that one was priced at $9.99 and the next lowest cheese pizza was $11.99, the company moved a huge chunk of customers into a more premium product that better represented their brand, without raising prices.
Be careful trying to re-train your customers.
Mark emphasizes that restaurants should be careful any time they try to revamp their brand, changing their service style or any other expectations guest have of them.
Speaking of Danny Meyer’s decision to eliminate tipping at his New York City restaurants, Mark says, “I’d ask myself, am I trying to re-train my customers? To an extent, the answer is yes: I’m trying to re-train how my customers read the value on the menu. I think it’s going to be really interesting to see, as more brands are testing that out, if it does influence frequency and purchase behavior.”
Olivia Terenzio is the Content Marketing Manager at OpenTable and editor of Open for Business.
Article originally published on December 15, 2017 by Open for Business by OpenTable