Is the minimum wage increase hurting your hospitality business?

Since introducing the ‘national living wage’ last April the UK government has increased minimum hourly pay for the over 25’s from £6.70 to £7.50 and it is expected to rise to £9.00 by 2020. The Labour Party manifesto for the upcoming election is expected to pledge a £10 per hour minimum pay by 2020.

The worry is that certain industries will be affected more than others, particularly the hospitality sector that offer a high number of low-skilled jobs, the result being that the sector’s most affected will curtail employment and look closer at expansion plans.

So far in the UK there is very little data to suggest it is having a detrimental effect on employment, but then this is only the first quarter and the hospitality sector “always the optimist” will be buoyed by the generally positive economic data in the UK and hope that this will be a good year for them. But as the minimum wage is set to rise year on year it is maybe too early in the process and in the years to come we may well see jobs lost as businesses are unable or unwilling to absorb the extra cost and cease trading.

A report out of the US, where 18 states and 22 cities and counties have raised their minimum wage since the start of 2017 and where low-skilled jobs have been lost, looks at whether raising the minimum wage can subsequently force firms out of business.

The report by Dara Lee Luca and Michael Luca, looked at the impact of the higher minimum wage on the restaurant industry and if the wage rise could have been instrumental in the demise of the business.

Using the restaurant rating firm ‘Yelp’ they tracked restaurants from all categories and they found that the restaurants with the highest ratings suffered less than those with the lowest ratings. Also, price was seen not to be an issue, so the low-price diner that served high quality food had less to worry about than the expensive restaurant with a low Yelp rating.

We can infer from the report that in the face of increasing labour costs the business owner must not be tempted to cut standards as a way of saving money, they must continue to ‘delight their customers‘, as given the level of competition in the food service industry and the fickle nature of the customer, slim margins can quickly become large losses as customers walk away.

It would be my contention that this is a time for increased management control and vigilance. Starting with having well prepared monthly management accounts that track product costs and wages, and show sales in terms of actual cash received. Then linking the management accounts to a budget forecast, and if performance is less than projected corrective action can be taken before it becomes fatal.

It is early days in the introduction of the increased minimum wage and in the hospitality sector where net margins are very slim, and where balance sheet assets are of questionable value (the majority of restaurants are housed in leased premises and closing stocks are worthless in real terms) unless operators really get to grips with business management this increased pressure will undoubtedly force businesses to close and further cut employment opportunity for the low skilled worker, the people whom the wage increase was meant to help.