- - Monday, October 10, 2016

ANALYSIS/OPINION:

Minimum wage activists and the legislators who do their bidding are contributing to the start of a restaurant recession.

Last week Don Pablo’s, the nation’s second-largest Mexican restaurant chain, filed for bankruptcy. Also last week, Garden Fresh Restaurants, which runs Souplantation and Sweet Tomatoes, filed for protection. And the week before that, Restaurants Acquisitions, Logan’s Roadhouse, and Cosi did the same. Don Pablo’s vice president implied its bankruptcy was partially a result of “increasing minimum wage requirements.”

These bankruptcies follow a string in the fast-casual restaurant segment. Other recent casualties include: Fox & Hound, Champps, Bailey’s, Old Country Buffet, HomeTown Buffet, Ryan’s, Johnny Carino’s, Quaker Steak & Lube, and Zio’s Italian Kitchen. Other chains are cutting back: In August, Ruby Tuesday announced it would close 15 percent of its 624 locations. At stake: thousands of jobs and millions of dollars of economic activity.

Broader restaurant indicators show these bankruptcies aren’t just part of the normal churn in the industry. The market research firm NPD Group found that visits to fast-casual establishments fell in the most recent quarter for the first time since it began tracking them in 2004. Restaurant bonds moved into fourth place in Standard & Poor’s Distress Ratio. The National Restaurant Association’s Restaurant Performance Index (RPI) is now in contraction mode for the first time in several years. Only 30 percent of the restaurant operators reported a year-over-year increase in same-store sales, down from 71 percent in February. And the percent of restaurants reporting a decline in same-store sales has been steadily rising.

Meanwhile, the minimum wage is rising in most of the country measured by population. And not surprisingly, restaurant owners are increasingly citing starter wage increases as factors in their closings. One-quarter of San Francisco restaurants that went out of business in September cited the city’s forthcoming $15 minimum wage as a reason.

Numerous restaurants in New York state, which recently passed a $15 starter wage, have also been forced out of business because of the minimum wage. These include longtime favorites like Bob and Ron’s Fish Fry in Albany, whose owners said, “There is no way we could pay that high minimum wage that is coming,” Medici House in East Aurora, whose owner said it closed “for no other reason than that increase in the minimum wage,” and Del Rio’s Diner in Brooklyn, whose owner said, “The minimum wage, that’s what broke the camel’s back. It killed us.” (More stories can be found on Facesof15.com.)

The role that starter wage increases have on the tightrope of restaurant operations is something that seemingly only politicians and social justice warriors can’t understand. Restaurant labor costs make up roughly one-third of operating costs and profit margins are just a few cents on the dollar. Cosi’s labor costs, for example, were 38 percent and its profit margins were nonexistent. Thousands of dollars a year in additional costs per employee because of starter wage mandates are enough to push some restaurants over the edge into insolvency.

Starter wage increases also contribute to the start of a restaurant recession indirectly because they make grocery stores — restaurants’ main competitor — comparatively cheaper for customers. Labor costs at grocery stores are approximately half those at restaurants. As a result, grocery stores have been able to pass along recent food cost savings to their customers. But restaurants have raised prices because increased labor costs have more than canceled out food cost savings. As Andy Puzder, CEO of CKE Restaurants, pointed out in a recent Wall Street Journal op-ed, this has caused the spread between restaurant prices and grocery store prices to be the largest in almost seven years.

What’s especially worrying is that a restaurant recession and its associated job reductions are especially harmful to young employees who often start their careers in this industry. Legislators need to acknowledge the outsized role that restaurants play in the labor market, and protect those jobs by resisting calls to raise the starter wage.

Richard Berman is the president of Berman and Company, a public affairs firm in Washington, D.C.

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