Chef standing in open kitchen

How the Minimum Wage is Impacting the Restaurant Business

In my conversations with restaurant owners, I hear a lot of concern about the impact of minimum wage increases. Here’s a round-up of what the reports so far are indicating, and how you should be positioning your restaurant to not only survive these changes, but thrive.

An industry already battle-scarred

It hasn’t been an easy decade for restaurants in the U.S., as many businesses are battling declining sales. 2016 was a near-recession year with stalled wages, political uncertainty, and rising living costs causing many Americans to cut down on meals out.

Starbucks CEO Howard Schultz weighed in on the challenges facing food service businesses: “We can’t hide behind the fact that there is a seismic change that we’re experiencing as a brick-and mortar retailer,” he warned. In an NPR story, Gwyneth Bolden of the Golden Gate Restaurant Association said: “The full service restaurant space in general, not just in San Francisco but across the country, is in crisis mode.”

With such pressures, minimum wage hikes are understandably causing worry among restaurant-owners. They are concerned about profit pressures due to more expensive labor and the potential for reduced tips as minimum wage increases. A 2015 Eater article revealed the fears of leading chefs in Los Angeles such as Alan Shulman who said, “We don’t disagree with the increase of the minimum wage, we are asking that they take tips into consideration as part of the process.” The sentiment was echoed in an op-ed in USA Today by the National Restaurant Association.

The consequences so far

In the spring of 2017, a study called Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit was published by Harvard Business School. The study’s authors looked at San Francisco during the period of 2008-2016—when numerous minimum wage hikes went into effect. By weaving in data from the online review site Yelp, they showed that increased minimum wage caused more closures of restaurants—and that lower quality restaurants were disproportionately impacted than higher-rated venues.

As the study reports, “A one dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of exit for a 3.5 star restaurant—but has no discernible impact for a 5-star restaurant.”

You might argue that increased closures simply weed out less able businesses, and are not indicative of restaurant health across the board. But compare it with a story that emerged in Maine where restaurant workers campaigned to decrease the minimum wage for tipped workers, after the wage increases were put into law. Their argument was that customers were tipping less in the belief that wait staff were earning more, and their incomes were actually falling.

What can you do about it?

To weather labor cost increases, start by understanding how profitable your business is today. POS systems like Instore give you a much more accurate view of your sales, gross profit, labor costs, and operating profit. For most restaurants, labor is their second largest expenditure after food costs. In part 2 of this blog post, we’ll explore how customer self-service might help you manage costs while increasing revenue.

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