Eateries cope with wage increases state by state

The federal minimum wage has again taken center stage after President Barack Obama’s State of the Union address on Tuesday, but as the debate over raising it continues, operators must deal with the changes already occurring at the state level.

Thirteen states have already increased or will raise minimum-wage levels higher than the $7.25-an-hour federal level, requiring restaurant operators to adjust to higher labor costs. At least another dozen jurisdictions are considering increases this year either at the ballot box or in their legislatures.

“Most operators see labor costs as one of the major challenges for 2014,” said Scott DeFife, the National Restaurant Association’s executive vice president for policy and government affairs, in a phone interview earlier this month. “We are unlikely to have a minimum wage increase at the federal level, but we’re hard-pressed to avoid it at the state and local level.”

At the end of 2013 or on Jan. 1, minimum hourly wages rose in Arizona, Colorado, Connecticut, Florida, Missouri, Montana, New York, New Jersey, Ohio, Oregon, Rhode Island, Vermont and Washington. California’s minimum wage will rise July 1. And legislative or ballot-initiative proposals to raise the minimum wage are under way this year in more jurisdictions: Alaska, Arkansas, Delaware, District of Columbia, Hawaii, Idaho, Maryland, Massachusetts, Minnesota, New Hampshire, New Mexico and South Dakota.

“By the time we get to the November elections, we’re likely to see it in more states and cities,” DeFife said.

Just this week, for example, two Democratic lawmakers from Cheyenne, Wyo., said they had introduced legislation that would raise Wyoming's minimum wage from $5.15 to $9 per hour and the minimum wage for tipped employees from $2.13 to $5. The Wyoming Lodging and Restaurant Association has already announced its opposition, saying higher labor costs could reduce job opportunities for restaurant workers.

Other restaurant operators are also voicing their concern for state-level raises.

“When a state establishes a minimum wage higher than the federal standard, there is a ripple effect on the entire hourly and salary wage structure in the restaurant industry,” said Don Fox, chief executive of Jacksonville, Fla.-based Firehouse of America LLC.

With relatively narrow profit margins in the restaurant industry, Fox added, “many operators then have little choice other than to raise prices in response to an increase in the minimum wage.” Operators also might conclude they need to reduce worker hours to offset increases in the hourly rate, said Fox, whose Firehouse Subs has 715 units in 36 states and Puerto Rico.

“And worst of all,” he said, “depending upon just how much variation there is in labor costs from state to state, the operator may conclude that operating in some areas is simply not a prudent option.”

Analysts: Effect of increase is manageable

However, a recent report from Piper Jaffray restaurant analyst Nicole Regan Miller suggests the effect on restaurant earnings among brands operating in wage-increase states is manageable.

“On a broad level, we recognize additional labor costs as an added stress to restaurant operators,” wrote Nicole Miller Regan, Piper Jaffray’s senior research analyst, “but ultimately believe potential impacts should be manageable through a combination of menu price and/or operational efficiencies.

The Piper Jaffray analysts looked at brands it covered that had above-average exposure to wage increases in the states of California, Connecticut, New Jersey, Rhode Island and New York. Those brands included Huntington Beach, Calif.-based, B.J.s Restaurants Inc.; Seattle-based Starbucks Corp.; Calabasas Hills, Calif.-based Cheesecake Factory Inc.; and Denver-based Chipotle Mexican Grill Inc.

“Potential earnings impacts in 2014 will largely be based on a company’s particular exposure to various states, the expected increase in minimum wages in those states, and that concept’s ability to offset said labor increases through menu price and/or operational efficiencies,” Miller wrote.

She said highly franchised concepts like Atlanta-based Popeyes Louisiana Kitchen Inc., Miami-based Burger King and Canton, Mass.-based Dunkin Brands Group Inc. “provide for the highest levels of insulation from potential earnings impacts.”

Concepts with more than 20 percent of company-owned units in the five states face the most exposure there, according to Piper Jaffray. Those concepts include BJ’s, Starbucks, The Cheesecake Factory, Chipotle, Winter Park, Fla.-based Ruth’s Hospitality Group Inc., and St. Louis-based Panera Bread Co.

B.J.’s, Regan wrote, “is expected to have the highest wage rate given its 44 percent exposure to California, which in addition to already having higher-than-average wage rates is also expected to experience a 12.5 percent increase in state minimum wages in 2014.”

Despite the added pressure, the Piper Jaffray team expects restaurant brands to offset the added costs.

“We believe menu prices and operational efficiencies are able to offset this pressure,” Regan said.

Piper Jaffray’s analysts said that over the past 15 years, industry menu price increases have averaged about 2.9 percent a year. With the current minimum wage increases in the five states, the report said, “Our analysis suggests an approximate average of 50 basis points of price would offset unfavorable impacts.”