So here’s a math problem for you. What do you do if you run a low-margin, labor-intensive business and your labor costs are about to go up 60 percent?
That’s the dilemma facing Seattle restaurants. Restaurants employ about a quarter of the city’s minimum-wage workers. These businesses typically make profits of 5 percent per year or less.
In April, the minimum wage in Seattle rose to $11 an hour. It will rise every year, at different rates for different businesses, until it reaches $15 an hour between 2017 and 2021. It’s expected to exceed $18 an hour by 2025.
So how can restaurants survive the transition? Here is what some restaurant owners have decided to do.
Chef Tom Douglas, who owns 15 restaurants in the city of Seattle, is raising prices on his menu items by 4 percent. Douglas had initially announced plans to tack a 2 percent surcharge on every bill, but scrapped that after negative reaction from his customers.
Douglas employs close to a thousand people and is considered a large employer under the law. But since he provides medical insurance to his employees, he has one extra year — until January 2018 — to reach $15 an hour.
Douglas supports raising the minimum wage and already pays some of the highest wages in the business. But he also doesn’t know how much he can raise prices before customers start to cut back on spending.
“I don’t know if it is worth it for you to come to our restaurants when chicken is $30 a portion compared with when it was $20 a portion. I just don’t know,” he said.
He says it’s conceivable that he may have to close down some of his restaurants if labor costs become unaffordable. But he thinks that’s OK. “I would rather have people making a living wage instead of selling more chicken,” Douglas said.
Jeremy Hardy owns Coastal Kitchen, a neighborhood restaurant that is open for breakfast, lunch and dinner.
He said he likes to be open all day because there are not many places in the neighborhood where you can get a meal at, say, 3 in the afternoon. But he is already opening one hour later and closing one hour earlier, and he is considering whether he should close at some points during the day.
“I’m going through hourly sales, and if it is not profitable, we are not going to do it, because we can’t afford to,” Hardy said.
As a small business, Hardy has until 2021 before all of his staff must be paid at least $15 an hour. But he is making the changes now in anticipation of the coming crunch. Even in good times, running a restaurant, with its tiny margins and high failure rate, is like “juggling with clubs.”
“With the labor pressures that are coming from this $15 eventual minimum-wage increase, we are juggling with razor-sharp daggers. And if we don’t get it right, it’s really going to hurt,” Hardy said.
In many restaurants, tipped workers are amongst the highest-paid employees. Servers typically make the minimum wage, but then can take home double or triple that amount in tips.
Washington is one of only seven states in the U.S. (plus Guam) that require tipped workers to be paid the full minimum wage, in addition to their tips. Most states have a separate, lower minimum wage for tipped workers. Nineteen states require only the federal minimum wage for tipped workers of $2.13 an hour.
Restaurants have been struggling with the fact that under the new Seattle law, they are required to give the biggest pay raises to the employees who in many cases already make a decent wage, while the people who work in the kitchen — so-called “back of the house” staff — are the ones who really need the raise.
Ivar’s, the Seattle-based seafood chain, has responded to that dilemma by experimenting with doing away with tipping entirely. Since April, the menus at Ivar’s Salmon House, the company’s sit-down restaurant on Lake Union, include a note saying that tipping is no longer expected.
The restaurant has also raised menu prices 21 percent. A fifth of that increase will allow the company to immediately raise the starting wage at the restaurant to $15 an hour, three years ahead of schedule. The other 17 percent, which Ivar’s president Bob Donegan said is the equivalent of the average tip at the restaurant, will be shared by all employees, in both the front and back of the house.
According to Donegan, diners so far seem to like the new arrangement and a large portion of them are continuing to leave tips. But he acknowledges that there will be some customers and some servers who won’t like the new system.
“Some people love it and some people hate it. And the bulk of people in the middle will find if they like it or they don't,” he said.
Manu Alfau, owner of La Bodega in Pioneer Square, pays all of his employees more than $11 an hour, so he has not yet felt the effects of the new minimum-wage law.
Small businesses have to reach $15 an hour by 2019, with two extra years if they provide tips or medical benefits. Alfau said the wage increase will start to affect his bottom line when it hits $13.
La Bodega, which serves Dominican food, is Alfau’s first restaurant. He opened in 2013 with loans from family members. During lunch, the line of customers often reaches the door.
Alfau said he’s too busy to really contemplate what the future wage increases will mean for him. “I’m just watching the big guys to see what they do,” he said.
But he worries what the Seattle restaurant scene will be like in 2025, when the minimum wage is expected to be over $18 an hour. “Only the really, really strong are going to survive,” he said. “I don’t think small businesses are going to be able to keep up at $18 an hour.”
That may sound bleak, but Alfau’s goal by 2025 is to be one of those big businesses that does survive the transition.
Small franchise owners are likely to be most affected by the new law. Because of their connection to a larger national network, the Seattle law regards franchisees as large businesses and requires them to reach $15 an hour by 2017, or 2018 if they offer medical benefits.
Ritu Shah Burnham operates zpizza, a California franchise, on Capitol Hill. Burnham opened the business four years ago during the recession. She employs 12 people.
This year, the restaurant was on track to make its first profit, Burnham said. But the prospect of raising salaries to $15 an hour by January of 2017 was daunting.
“If you have to pay $15 an hour in 20 months, it’s a little difficult to do a business plan to make that work. I tried, before I made my decision I tried, and I didn’t see it happening,” she said.
Burnham had an escape clause in her 10-year lease. She decided to exercise it, rather than lock in for another five years with her house as collateral.
“Me, my husband, my children, we're all personally accountable if I go under. I'm not willing to take that risk with these kind of numbers,” she said.
Burnham is now looking for a buyer, but she said she there has been no interest. She expects she will have to write off most of her initial investment in the business.
Proponents of the $15 wage argue that with more money in workers' pockets, Seattle's restaurants will do better than ever.
Even if that is true in aggregate, individual restaurant owners question whether their restaurants will benefit.
Typically, about 18 percent of Seattle restaurants either close or change hands every year, according to the Washington Restaurant Association.
Researchers at the University of Washington will be studying the effects of the law over the next five years. They will look at business openings and closings, employment numbers, and workers' earnings, among other things.
Jacob Vigdor, the head of the study, said he expects most businesses will be able to adapt to the first year of the wage increase. But as the wage moves to $13 and then $15 an hour, that's when the crunch will come.
"The restaurants that are really in high demand, the restaurants that attract a higher income clientele will probably find ways to make it work out. But if you are a restaurant in a poor neighborhood where your margins may be lower to start with and where you are really relying on low-wage labor, it might be tougher to work out. And then your options look a little less attractive," Vigdor said.
According to Vigdor, one of the key questions will be how diners react to the inevitable price increases: whether they are willing to pony up more money for meals out, or whether they will eat more of their meals at home.
"There is no law that says the citizens of Seattle must eat at restaurants," he said.