Dunkin’ franchise owners were standout performers in the challenging times that followed the arrival of the coronavirus pandemic last spring. While the rest of the restaurant industry has struggled to stay above water, Dunkin’ and other quick-service restaurants have done a remarkable job adapting to difficult circumstances, quickly shifting their focus to app-based delivery and drive-thru. The latest estimates point to a rebound for the restaurant sector in 2021 as the pandemic is finally brought to heel, with Dunkin’ and other quick-service chains leading the way.
But here’s another thing that is poised to go up in 2021, labor costs. And that is likely to happen whether or not the Biden Administration succeeds in making $15 an hour the law of the land.
Several states have already hiked their minimum wages, while others are debating whether to adopt a $15 an hour standard, as we shall see below. Meanwhile, McDonald’s may provide some lessons on how to adapt should your local city or state go the $15 an hour route. To find out, read on.
More States Debate $15 an Hour
Even as the U.S. Senate removed a national, $15 an hour minimum wage proposal from the Biden relief package, supporters of the Fight for $15 continue to push proposals at the state level. State lawmakers in Pennsylvania are debating a proposal that would raise the state’s minimum, currently at $7.25, to $15 an hour through a stepped or phased approach. The increase is part of a wider, coronavirus relief package in Pennsylvania.
Gov. Tom Wolf, a Democrat, wants to raise the minimum to $12 an hour starting in July, with an incremental increase of 50 cents each year before leveling off at $15 an hour in 2027. A trio of the state’s top federal elected officials – Sen. Bob Casey and U.S. Reps. Conor Lamb and Dwight Evans – have also thrown their support behind the state measure.
“Give people a raise. They earned it, they worked for it. It’s a part about valuing workers,” Evans told Harrisburg television station WHTM.
In the same news report, Gene Barr, president and CEO of the Pennsylvania Chamber of Business and Industry, urged lawmakers to consider the impact of a wage increase on small business owners amid an economically challenging time.
“This would have tremendous adverse impacts likely at a time when we’re just coming out of this pandemic and many small businesses are literally struggling to survive,” he said.
In Ohio, a pair of Democratic state lawmakers is pushing to boost the state’s minimum wage to $10 an hour next year, which would be followed by increases of $1 a year until it hits $15 an hour in 2027, according to Cincinnati TV station WXIX.
In New England, Rhode Island took a step closer to putting into place its own, $15 an hour minimum. The Rhode Island Senate voted 30 to 6 to raise the state’s minimum, now at $11.50, to $15 by Jan. 1, 2025, through a phased in, four-step process, the Providence Journal reports. The proposal will now have to clear the Rhode Island House.
The Ocean State’s neighbors, Massachusetts and Connecticut, have already passed plans to increase their minimums to $15 an hour, with the Bay State getting there by Jan. 1, 2023 and the Nutmeg State following later that year by June 1. But there’s also pushback brewing.
New Mexico’s governor is questioning the timing of a $15-an-hour hike in her state. Gov. Michelle Lujan Grisham, a Democrat, is taking heat for arguing the timing is wrong to hike the minimum wage and require paid family leave. While she largely agrees with the measures, the Albuquerque Journal reported Lujan Grisham is concerned about the timing and the pressure the new requirements would put on local businesses. “I would say the debates and efforts are good,” the governor told reporters. “The effort today to make that law? Premature.”
And in Florida, State Sen. Jeff Brandes wants to put a question on the 2022 ballot that would give the Legislature power to carve out exemptions to the state’s new $15 an hour minimum wage, including exempting people under 21 and convicted felons from receiving that higher wage. More than 60 percent of Sunshine State voters approved the increase last November.
The Secret to McDonald’s Wage Strategy
How does the nation’s largest quick-service chain deal with increases to the minimum wage?
A new report by a pair of economists offers a fascinating inside look. The study, by Princeton University’s Orley Ashenfelter and Štˇepán Jurajda, analyzed reams of data from 10,000 McDonald’s restaurants from 2016 to 2020, according to the National Public Radio program “Planet Money.” The economists specifically looked at hourly wages of basic crew members and the prices of Big Macs, and what happened to both when states boosted their hourly minimums.
One clear priority for McDonald’s appears to be hanging onto more experienced crew members and holding down turnover, even when states raise the minimum wage. For example, a “substantial fraction” of McDonald’s restaurants pay some of their workers a dollar more than the current minimum, a retention bonus of sorts. When states decided to boost their minimum wages, managers at these McDonald’s responded by boosting the pay of these more valued workers as well, raising it to a dollar above the new minimum.
On the downside, the economists didn’t have access to hiring and firing data and so were not able to analyze whether overall employment rose or fell. But the study’s authors felt they did have enough data to argue that the rollout of touchscreens was not a labor-saving response to minimum wage increases.
“We couldn’t find any relationship between minimum wage increases and the adoption of touch-screen technology,” Ashenfelter told the program. But the study did note the increase in Big Mac prices in the wake of minimum wage increases. The “increase of labor costs gets passed right on to the customers,” Ashenfelter, the former president of the American Economic Association, told “Planet Money.”
Big Growth Ahead?
It’s been a tough year for the restaurant industry, and the quick-service sector has felt its share of challenges. In-restaurant dining went out the window in many states starting last spring, when local officials began imposing restrictions in the wake of the pandemic. And, as Dunkin’ owners quickly learned, quick-service restaurants without drive-thrus couldn’t measure up. However, better times may be ahead.
Quick-service and fast-casual restaurants are on tap for an 8 percent increase in nominal sales and a 4 percent rise in real revenue, according to the National Restaurant Association (NRA). In fact, total revenue for the sector will not only top pandemic-stricken 2020 by $23.2 billion, but will surpass otherwise healthy 2019’s totals by a robust $4.7 billion.
By comparison, the NRA predicts full-service restaurants will see revenue rebound to $228.8 billion in 2021, a significant improvement over 2020’s $199.5 billion. But full-service eateries will still see revenue come in well below the $285 billion the sector generated in 2019, according to the association’s forecast.
The quick-service sector is also doing better by another key metric as well – return on investors’ capital. When it comes to return on assets, quick-service chains posted a formidable 9.2 percent return in 2020, rising to an even higher 9.3 percent return in the coffee and bakery sector.
That’s compared to a restaurant industry median of 5.4 percent, with fast-casual at the bottom of the heap, at 3.3 percent.
Firing Gets Tougher in New York
The $15 an hour minimum wage is already a reality in New York’s quick-service sector, with big chains like McDonald’s and Burger King required to pay the higher amount. (And that number just rose to $14.50 for quick-service workers in the rest of the state, up from $13.75 previously.) Now the New York City Council has just made it harder for quick-service franchise owners to dismiss employees.
Newly-minted legislation restricts the ability of quick-service corporate owners and franchisees alike to fire employees, who must now have either “just cause” or a “bona fide economic reason,” writes attorney Gerald Hathaway in the National Law Review. In order to meet the “just cause” standard, the franchise owner must either prove the employee has failed to “satisfactorily perform” his or her job, or demonstrate the employee’s conduct “is demonstrably and materially harmful” to the owner’s business interests.
“These stricter requirements effectively eliminate the at-will status of quick-service restaurant employees and create a discipline structure similar to that bargained for by unionized workforces,” Hathaway writes.
The Big Apple’s new firing rules are set to take effect on July 4.
Spring 2021 is shaping up to be a period of optimism, as more people get vaccinated for COVID-19 and as the federal government rolls out its latest relief package. Quick-service restaurants are poised to lead an industry resurgence, with experts predicting stellar revenue growth that will beat even 2019.
Still, we should expect 2021 will have its challenges. Operators are already feeling the increase of higher labor costs. As we have seen, states and cities across the country continue to debate whether to hike their local minimum wages to $15 an hour, even as federal action appears to have stalled. And as economic conditions improve, state and city governments are likely to be less inclined to defer proposals to hike the minimum.
Keep an eye on this space and Independent Joe will continue to keep an eye out for you.