At the beginning of January, minimum wage increases took effect in 18 states and 20 cities across the nation, and some industries are struggling to keep pace with rising labor costs.
Late Monday, casual dining chain Red Robin Gourmet Burgers (NASDAQ:RRGB) announced that it would eliminate bus boys at 570 restaurant locations, a move that is expected to save the company an estimated $8 million over the course of the coming year. The company’s chief financial officer said the decision was made in order to “address the labor increases we’ve seen.”
“I read that as minimum wage,” Michael Saltsman, director of the Employment Policies Institute (EPI), told FOX Business. “Somebody like Red Robin, which has a lot of exposure in western states [where the minimum wage is rising faster] … this is sort of a burger and beer chain. If they can’t pass those increases off in higher prices … they have to find a way to do more with less.”
Introducing new technologies has been one way restaurants have sought to cut costs. Other chains like Chili’s and Applebee’s have replaced servers with tableside tablets for placing orders.
“From a business standpoint, [Red Robin made a] very smart move. From an employee standpoint, you just cut out $8 million worth of labor,” 1851Franchise.com editor-in-chief Nick Powills told FOX Business. “The interesting thing about the minimum wage hike is that those that made the decisions to do it, did it on behalf of the employee … when intentions are good, and you can’t appease everybody, someone is going to eventually be on the short [end of the] stick.”
Michael Mabry, president and chief operating officer of restaurant franchise MOOYAH Burgers, Fries & Shakes, told FOX Business that his business has been “greatly affected by … rising costs.” While MOOYAH Burgers is not eliminating positions, it is looking for ways to combat the increased expenses resulting from minimum wage hikes.
“What we are looking at, of course, is how do we build efficiencies within the restaurant to keep the same guest service … with the same people, but still allow franchisees to make money? Some of that comes through renegotiation of leases [and contracts] … unfortunately some of it comes through [increasing] menu prices,” Mabry said, adding that during the fourth quarter of fiscal 2017, he was able to decrease menu prices again by 10% thanks to successful contract negotiations.
Mabry noted that as a business practice, he is not looking to reduce labor because in the hospitality industry, “you’ve got to have people to deliver hospitality.”
Still, cutting jobs is often a popular response to rising labor costs among restaurants, Iain Murray, vice president for strategy at the Competitive Enterprise Institute, said.
“The restaurant industry exists on razor-thin margins … there are very few other places where you can cut costs to offset that rising cost,” he said.
Other industries where rising labor costs have forced companies to make tough decisions include retail and manufacturing.
Saltsman said one negative consequence of rising minimum wages has been increased challenges for America’s youth in the labor market.
“I think the loss, as the minimum wage goes up … [is the] hollowing out of entry-level opportunities,” Saltsman added.
Murray agreed, adding that this trend sets certain demographics up for long-term unemployment.
There are conflicting reports on how rising minimum wages affect the labor force. Earlier this year, a study conducted by EPI, which analyzed employment trends from 1990 through 2017, found that each 10% increase in the minimum wage in California has resulted in a corresponding 2% decline in employment for affected employees. The impact was larger, 5%, for lower-paid workers.
However, the Institute for Research on Labor & Employment (IRLE) at U.C. Berkeley found that a higher minimum wage would actually add a small amount of jobs to the state economy by 2023.
One thing is clear: Red Robin is not the only restaurant in the industry feeling pressure.
“At the end of the day … [Red Robin is] a good company, and my guess is they’re looking to enhance guest service and I’m sure they’ve got a plan to do that,” Mabry said. “We’re all fighting the same thing.”