Thousands of restaurant and retail employees are in an fight for fair wages. Darden Restaurants, the owner of Olive Garden and Longhorn Steakhouse, is rallying against them.
In March, Darden, the largest restaurant chain in the US, was the specific target of protest in seven major cities, with activists and employees from New York to Los Angeles calling for higher wages and other changes within the company.
About 130,000 people signed a petition calling for Darden to establish one fair wage for all its employees, instead of continuing the use the federal minimum wage of $2.13 per hour for tipped workers.
For Darden, the risk here is simple:
“If competitive pressure or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline,” the company warned in a recent financial report.
Over half of the company’s 1,530 restaurants are in states that already have minimum wages above the federal rate of $7.25 an hour, and 11 percent are in the eight states that have eliminated the tipping wage of $2.13 an hour — ostensibly because tips make up the difference.
But the movement to raise wages is gaining steam. Currently 29 states and D.C. have minimum wages above the federal minimum and four more states passed ballot measures on Nov. 8 to increase state minimum wages, including Arizona, Colorado, and Maine.
Current State Minimum Wage
Source: Economic Policy Institute and Darden Restaurants Inc.
Labor makes up about 30 percent of a restaurant’s operating costs, and roughly a third of restaurant workers are paid within 10 percent of the minimum wage, according to prior wage research.
For restaurants that are worried about maintaining profit margins in the face of increasing wages, the first line of defense is to raise prices, says Michael Saltsman, research analyst at the non-profit research organization, Employment Policies Institute. But rising prices can lead to a loss in customers.
“Customers are price sensitive, especially in the restaurant industry,” said Saltsman.
In a recent research note, Credit Suisse analysts noted that in scenario where the national minimum wage is increased to $10.25 by 2020, as has been proposed in past legislation efforts, labor cost could increase 4.95 percent for casual dining restaurants like Darden. Menu prices would have to jump 1.5 percent in order to make up for the profit loss, in comparison to the 0.59 percent price increase suggested if the minimum wage remains the at $7.25.
But that seemingly small increase could actually be difficult to achieve. A recent report from the Institute for Research and Labor Employment looked at the actual price increases from minimum wage increases in San Jose, California that occurred in 2013. After analyzing 844 restaurant menus on the internet, the analysts found that a 10 percent increase in the minimum wage is associated with only a 0.58 percent increase in average restaurant menu prices across the city.
“If employers can’t pass of their higher prices, they either have to reduce employees hours, they have to find a way to reduce staffing levels either by staffing fewer people per shift or in the case of what McDonald’s just did by announcing that it’s pursuing widespread automation across its chain,” Saltsman said.
Fast-food restaurants like Wendy’s and others are announcing self service kiosks and other ideas for innovative technology, that won’t necessarily rule out human service.
Darden already has issued tabletop tablets in several Olive Garden restaurants, and continues to include waitstaff in addition to the tablet service. The company’s technology efforts are most focused on marketing and enhancing to-go services.
In the Darden’s most recent earnings call, CEO Gene Lee praised the company’s focus on digital spending in conjunction with promotional strategy in a way to market to specific customers.
“Digital is a much more cost effective way to reach your consumer,” Lee said during the call. “The landscape on advertising and marketing is changing dramatically and we’re constantly trying to find new ways to analyze what is going on, and what is the most cost effective way to deliver the appropriate value to the right guest at the right time.”
And so Darden is lobbying against wage hikes. This year the corporation contributed to the Keep Colorado Working coalition, an effort to fight a ballot measure that would raise the state’s minimum wage though a constitutional amendment. Darden’s contribution added to the $1.7 million in total to fight the movement. However, this was not enough to defeat the opposition that was able to raise $5.2 million under the name Colorado Families for a Fair Minimum Wage.
The National Restaurant Association, the country’s largest foodservice trade organization of which Darden is a member, is also lobbying against wage increases and other labor regulations. The organization praised the election of Donald Trump on Nov. 8, stating the industry would likely to see relief in burdensome requirements concerning labor regulation and in particular wage and overtime regulations.
Darden’s lobbying efforts come from the understanding that raising wages will eliminate jobs and do nothing to improve poverty conditions, but some economists say this isn’t the case.
“The effect of increasing the minimum wage on employment is probably the most studied topic in economics,” said David Cooper, senior economist at the nonprofit, nonpartisan think tank Economic Policy Institute. “After decade of research on this to overwhelming conclusion of the literature is that moderate increases of minimum wages have little to no effect on employment levels.”
Darden is the largest full-service restaurant group in the U.S., employing roughly 150,000 people with 140,000 as hourly workers, many of them servers and bartenders who receive the sub-minimum tipping wage of $2.13 an hour and essentially are paid by customers.
Cooper has researched the implications of wage hikes over the past few years, with specific research zeroing in on the restaurant industry. According to his work, many tipped employees live in poverty and roughly 50 percent of waiters and bartenders are workers in families that earn less than $40,000 a year.
Jerry Quinn, 26, worked at an Olive Garden location Spartanburg, SC for two years acting in several positions. After a little over a year as a server and trainer, Quinn was promoted to a bartender but would see even less in tips and general income.
“I do think bartenders should have a set wage,” said Quinn. “At lunch I would bring home $0 for a 7-hour shift.”
Cooper says ultimately if states continue to issue increases across the board nationally, no specific restaurant will be at a competitive disadvantage. Businesses like Darden depend on a strong consumer base, so if raising the minimum wage and tipped wage put more money in the pockets of consumers they will be more likely to go out more and spend it.
“It’s not like we’re asking one particular restaurant to unilaterally raise their pay, all of their competitors are also going to be raising pay presumably at similar levels.” Cooper said. “If that means every restaurant in a state has to raise their menu prices slightly to accommodate the higher labor costs, then that’s fine, customers might have to pay a little more, but if everyone is making a little more money then that isn’t such a bad thing.”