Restaurants already hurt by higher food and labor costs will face yet another challenge to their profits come next month _ the second phase of a hike in the federal minimum wage.
Under a bill signed into law last year, the federal minimum wage will rise 70 cents to $6.55 per hour from $5.85 per hour beginning July 24. The rise follows a 70-cent per-hour hike last July. In 2009, the wage will rise another 70 cents to settle at $7.25 an hour.
The impact of the higher labor costs has already been seen in most restaurants' profit reports. At California Pizza Kitchen Inc., labor costs jumped nearly 15 percent in the 2007 fiscal year, which ended in December. At Darden Restaurants Inc., which operates the Olive Garden and Red Lobster chains, labor costs climbed 21 percent in the nine months ended Feb. 24.
The higher labor expenses have come just as commodity costs have skyrocketed, adding another pressure to profits. Many chains have offset those higher costs by boosting menu prices.
"My sense is that our guests have a sense about what is a fair price for what we serve and, at least to date, they've given us permission to pass on at least some of the cost" for higher minimum wages, said Rick Hendrie, spokesman for the privately-owned Uno Chicago Grill chain. "But that doesn't mean we don't go to the ends of the earth to avoid it if humanly possible."
This time around, some industry watchers say consumers may be less willing to accept menu price increases. Some chains are already reporting falling traffic numbers as consumers cut back on eating out to save money for gas and bills.
"Everything is just in a vice," said Tom Miner, a principal at consumer research company Technomic Inc. "There are very few operators that have escaped it."
A typical table service restaurant pays about 33 cents of every dollar of sales for wages, salaries and benefits, said Michael J. Donohue, vice president of media relations at the National Restaurant Association, an industry group which lobbied against the wage increase in 2007.
Food and beverage costs also account for about 33 cents of every dollar of sales, making increases in both categories at the same time a real challenge, he said.
"The costs of this mandated wage hike clearly must come from somewhere, very often restaurateurs' bottom line," he added.
Some restaurants, though, have tried to make sure that doesn't happen by streamlining their labor systems to cut costs.
At Darden, for example, the company changed the way it managed its wage rates at its Longhorn Steakhouse chain in its third quarter, which ended in February. In a conference call with investors, the company said the program was showing early signs of success with labor costs declining as a percentage of sales at the brand.
Darden has said it is looking at extending the program to its other brands.
Terms & Conditions
RSS Headlines
Fool UK