The potential impact of minimum wage hikes

Restaurants Scramble to Offset Costs

Within the past five months, the city has said goodbye to Upper East Side standbys China Fun and Mon Petit Cafe, vegetarian pioneer Angelica in the East Village, the Michelin-starred Semilla in Williamsburg and Mexican Radio, a fixture in Nolita. Many of the shuttered restaurants had been in business for decades.

New York’s dining scene has long been cut-throat, but many restaurants find themselves squeezed more than ever due to mounting competition, spiking rents and, now, an added financial pressure – higher labor costs. The new law raising the state’s minimum wage from $9 to $15 over the course of the next several years has forced many restaurants across the city to find new ways of improving their profit margins or face the alternative: closing their doors.

“We call it death by a thousand cuts,” says Andrew Rigie, the executive director of the NYC Hospitality Alliance.

This has been Rigie’s standard line in recent months as the trade association lobbies city government for relief from the financial burden of rising wages – such as adding service charges that would allow them to avoid raising prices.

Rigie says rising rents and rising labor costs, including the bump to the minimum wage for tipped workers, have made it hard for local restaurateurs. At the end of the month, he says, many of them have little money left in the till.

“The restaurant industry is a very small profit margin industry to begin with, if there’s even profit to be had,” Rigie says. “And then when you have these multiple increases in such a short period of time, it puts a lot of pressure on the restaurants.”

For some restaurants, the recent minimum wage increase is the straw that broke the camel’s back. The owner of Del Rio Diner in Gravesend, Brooklyn, said he closed shop last year because he couldn’t afford the $15 minimum wage without raising prices. Albert Wu, whose parents owned China Fun, also blamed the wage hike for its closing early this year.

To make up for the increased cost of labor, many restaurants may have to raise menu prices on the menu.

“One of the determinants of prices is costs,” says Gabriel Chodorow-Reich, an assistant professor of economics at Harvard. “The minimum wage is a binding concern, so increases of the minimum wage do and will show up in prices.”

Among the restaurants charging more is the Chinese noodle chain Xi’an Famous Foods, which in January reportedly raised its menu prices by an average of 15 percent, and sometimes higher, to make up for rising labor costs. That bumps dishes such the popular lamb noodles up from around $8 in 2014 to more than $11, according to Eater.

Owner Jason Wang called the move “inevitable,” but Rigie says raising prices can be a risky move for restaurateurs.

“Let’s face it, the consumer is price sensitive,” he says. “There’s only so much a restaurant can charge for a burger.”

Some restaurants have dealt with wage issues in a different way – by eliminating tipping. Under this model, the cost of labor is folded into the price of a meal, which can mean marking up menu items as much as 25 to 30 percent.

“To all of a sudden see a hamburger priced at $30 scares some people away,” says Steven Hall, a restaurant industry publicist.

Some restaurants in other states have been trying to avoid hiking menu prices by instituting “minimum wage surcharges,” which are added to the check at the end of the meal. While many consumers have reacted negatively, the surcharge allows restaurants to avoid the kind of sticker shock that Rigie and Hall are talking about.

These surcharges are currently prohibited in New York City, thanks to consumer protection legislation, but groups like the NYC Hospitality Alliance and New York State Restaurant Association have been pushing officials to do away with the law.

Some in the hospitality industry also blame growing financial pressures on the city’s oversaturated dining-out market, which means restaurants must compete both for customers and for workers.

“A lot of the restaurants are being forced to raise rates above the minimum wage because it is a much stronger economy,” says Bob Goldin, partner and co-founder of the food industry strategy firm Pentallect Inc. Beyond the increased minimum wage, higher pay is required to keep many more experienced, higher-earning workers, restaurant owners say.

“That puts cost pressures on them,” he says, “which leads them to increase menu prices.”

Rigie says other restaurants are reluctantly cutting and consolidating staff as a way to avoid raising their prices.

“I spoke with some restaurateurs where they had, for instance, a separate barista who made coffees and prepared after-dinner drinks, but they’ve eliminated that position,” he says. “Now it’s the responsibility of the busser or the server to prepare their own coffee.”

Steven Lindner, whose recruiting firm the Workplace Group studies employment trends, sees an even more dire possibility: that serving positions could be eliminated entirely as more automated technology becomes available.

“There is a whole new technology movement where you’re basically allowing customers to self-order,” he says, pointing to eateries at the Newark and LaGuardia airports, where diners can both order food and pay for it using tablets that are at every table.

That, he says, could mean even fewer serving jobs in the future.

“You’re not going to see none of them, but you’ll see fewer of them,” he says, “because this technology is going to allow you to be able to order without needing someone to physically take your order.”

For a lot of restaurants, however, it may be too soon to tell how everything – pricing, overhead costs and business – will all balance out. Xochitl Taqueria, a Mexican place in Clinton Hill that recently raised its menu prices after changing ownership, is one of many spots trying to figure it all out.

“When you take over a new business, you need to see where the wiggle room is, you know?” says manager Vanessa Diaz. “As the neighborhood changes we have to change with it, so that’ll also bring up the prices.”

Diaz says that the bump in minimum wage has been manageable at the current level of $11 an hour. Will Xochitl Taqueria be able to afford $15 an hour?

“No not at the moment,” she says with a laugh. “I don’t think anybody would be able to the way things are.” — Liz Tung and Mariah Brown


Higher Wages May Mean Fewer Workers

From quick bites on the run to the daily dose of caffeine, small restaurants and cafes have long satisfied consumer cravings. But amid rising minimum pay mandates, many small businesses face a dilemma: adjust to higher wages, or die.

“We were just talking about this in our managers’ meeting last week,” said Edwin Jaden, morning manager at Lenox Sapphire, a Harlem restaurant with 10 employees.

Restaurants with 10 or fewer employees have until 2019 before they must pay $15 an hour. But in Lenox Sapphire’s case, Jaden said, it won’t matter, because the majority of his staff is paid partly in tips. That means the higher minimum wage will affect the members of his  kitchen staff only—and there are only a handful of them.  He does think he will probably have to cut back their shifts, however, when the hourly minimum wage hits $15.

“Instead of 8 a.m. to 5 p.m., we will probably schedule some of the kitchen staff from 10 a.m. to 4 p.m.,” Jaden said.

But he does see one positive effect from the wage hike. “We will probably hire fewer people,” said Jaden. “We typically do a lot of hiring in the summer, but if we have to pay our staff more than we won’t hire as many.”.

Some nearby restaurant owners and manager say the bump may actually make restaurant jobs more attractive. “I think it will increase applications,” said Po Davis, who manages Chaiwali Harlem, a restaurant on Lenox Avenue that serves Indian cuisine.  “More people will be inclined to want to work.”

But some restaurateurs say the higher labor costs may mean they’ll have to shut down.

“I’m not against the minimum wage, but it’s hard, it is really hard,” said Seyad Roomy, owner of the Sri Lankan restaurant, Caffe Lanka, on Westchester Avenue in the Bronx. Roomy’s first restaurant has been open about a month and he’s already starting to feel the pressure from the higher labor costs. He works seven days a week, 16 hours a day and has yet to see a profit. He says he uses money from his own pocket to keep it running.

“We are not doing great. We are doing okay,” Roomy said. “The bills are piling up.”

Caffe Lanka has three employees: his brother, his son and Roomy himself. He pays his brother and son $12 an hour, but he doesn’t collect a pay check at the moment. And even though he has until 2019 to start paying $15 an hour, Roomy says he is concerned that he might not be able to pull it off.

“I don’t know whether we can afford it,” he said.

Another Harlem coffee shop owner also fears he and his co-owner won’t survive in the long run.

“Small businesses are already hanging on by a thread,” said Dean Elmatan, who owns and manages Cafeine.  “I think a lot of small business will end up closing.”

— Keydra Manns and Miamichelle N. Abad

Nothing Left To Save

Squeezed between a French cafe and a women’s luxury clothing store on the Upper West Side, M.D.’s  newsstand is little more than a small hallway with magazine-covered walls.  But M.D., who prefers to use his initials to avoid trouble with his employer, has worked in this tiny space for seven years, earning $11 an hour.  “It’s very hard work and long hours,” he said. “I’m just making my payments. I have nothing else to save.”

M.D. supports his wife, who is getting a degree in computer science, and their two young children. He recently bought a newsstand near Columbia University with his father, and he hopes he can continue to expand. “I’d like to buy more newsstands, but it’s hard because the rent is so high. Just this space is $6,000 per month,” M.D. said.  – Claire Molloy

Welcoming Higher Wages

Supreme Hardware has been a staple of the Upper West Side since 1988. Through the years, manager Kenny Marquez has seen the neighborhood evolve and the rents skyrocket.

Despite higher monthly payments for rent and utilities, Marquez welcomes an increase in the minimum wage to $15.

“I think it’s good for business. People will actually want to come into work,” he said, chuckling.

Marquez is not worried about rising wages hurting his business, he says, because the shop requires only a few employees.

“We can run the store with a minimum of three people,” he said.  — Claire Molloy

Times Are Tough

It’s the middle of the day and Mohammed Alam sits at a gray table on the left side of the store, eating lunch while customers go in and out of his store. Occasionally, he helps a fellow employee find something or answers a question in English or Spanish.
Alam has been the manager at the Legacy Home Fashion store for 20 years. The store, which sells household items such as bed sheets and towels, is one of many along Fordham Road in the Bronx. Alam said that in the 1990’s business was very good, but then it slowed down in late 2010. He blames the economy. There aren’t enough local jobs, he says, and people don’t have money to spend. He’s noticed that big stores have taken over small businesses and their jobs. High rent and utility bills don’t help either, he adds. “It’s very hard,” Alam said.
In his view, a higher minimum wage might be just the ticket to everyone’s financial stability.
“I think it’s good if minimum wage goes up everywhere, that means people have more money and they’ll spend more money, and business will be good,” Alam said.
The employees at his store, he says, make about minimum wage already—that’s $10.50 an hour for businesses with 10 or fewer employees. He declines to give the exact amount his employees earn, however. Business may be tough, but he still loves what he does.

He enjoys interacting with customers the most—and there’s nothing he really disdains. “If you don’t like it, everything is hard,” Alam said. — Miamichelle Abad

Paying Well

Nelson Ng, 62, is no stranger to the restaurant business. He spent his teen years away from his home in Hong Kong and in the Dominican Republic, working in other restaurants and learning the tricks of the trade.

At 21, he opened his first restaurant, got his visa, and finally made the journey to the U.S. “I always admired America, the dream, you know,” Ng said. “I always wanted to come here.”

Once here, he opened a restaurant, his goal, in 1982, and he called it Sabrosura. For 35 years, he’s been lucky to see his business steadily go up each year. That is, until recently. Starting last September, he said business has been decreasing a little.

He now employs 10 people during the week and about 15 on weekends. He pays them well over the minimum wage. The lowest paid employee earns $12 an hour, he says, and some even make up to $16 an hour on overtime.

If the minimum wage were to rise to $15 overnight, Ng said his restaurant would suffer. Some employees working at Sabrosura wouldn’t like being paid the same amount as someone who was starting out, and would probably quit, he says. But he’s not too worried and doesn’t think he’ll have to cut back on employees as a result.

“We’re okay because we are prepared,” Ng said. “We keep good food, good service.” – Miamichelle Abad

No Tip Needed

After a hearty Italian meal of bowtie pasta with meat sauce, lamb sausage and a whole crispy duck, a group of friends receive their check at Faun. It’s that awkward time after dinner when people have to agree upon how much to leave as a tip—18 percent of the bill, 20 percent, more? At Faun, it isn’t a matter of debate; this Italian restaurant in Prospect Heightsin is a gratuity-included restaurant, which means tips are folded into the menu prices.

In recent years, dozens of restaurateurs in New York—and in other cities, too, including San Francisco and Seattle—have switched to a gratuity-included system to give front-of-the-house staff, including servers and hosts, a steady and higher pay. Faun, which opened in 2016, is one of the latest eateries in the city to adapt a no-tip policy.

“We feel that it is a dubious business practice to advertise one price, but expect another,” David Stockwell, co-owner of the restaurant, said. “There are still challenges, but we try to make it work.”

Waiters working at restaurants with a tipping business model do have a consistent salary; it’s just a lot lower than most workers earn, sometimes as low as $7.50 per hour. Tips provide the bulk of the income that servers earn—and that amount, of course, can vary from day to day. Faun declined to say how much servers at Faun earn under the new model. (With New York’s new wage law, tipped employees at companies with 11 or more employees must be paid $8.75 an hour, or $8 an hour if they employ 10 or fewer workers.)

“Tips only come with sales and some night may be great,” Stockwell said. But “slow days potentially leave a tipped server earning less than standard minimum wage for the shift.”

That is part of the reasoning behind shifting to a gratuity-included system. The no-tipping model  has a downside, though. It can be harder for restaurants to make a profit, according to Stockwell. He explained: to offset the increase of payrolls and taxes, restaurants, his included, need to realistically charge 25 percent to 30 percent more on their dishes.  Higher prices, however, can discourage some diners. “One can only wonder how many potential guests never make it in the front door due to the perception of higher prices,” he said.

For now, the no-tip policy is not widespread, largely because the pricier menus may stop many diners in their tracks.  Steven Hall, a publicist in the restaurant industry for 30 years, does not believe more restaurants will make the switch to the new system, precisely because of that downside, unless it is a prix fixe meal. “There is a sticker shock when looking at a menu that is gratuity included,” he said. “At first glance that may intimidate some people. To all of a sudden see a hamburger priced at $30 scares some people away.”

Americans are part of a tipping culture and like to show their appreciation for service by tipping, Hall explains. The no-tip system can also be confusing to diners. “Do I tip here or do I not tip here?” he said. “In the long run people can use it as an excuse for not leaving a proper gratuity.”

Not all restaurateurs support the new business model, either. Del Frisco’s Restaurant Group, which operates two locations in Midtown, declined to switch to no-tipping, says Anthony Valletta, the northeast regional director of the restaurant group.

Valletta thinks avoiding tips may make some customers angry because they won’t be able to reward or penalize servers based on their work. “This has been a model that has worked for years,” he said. “We know there are flaws, but the tipping system provides incentives for waiters.”

At one of Del Frisco’s location in Manhattan, a waiter can make between $100 to $600 a shift and up to $100,000 a year when tips are included, Valletta says. “It’s hard to give an exact number because it fluctuates,” he said. “The big thing is employers need to rotate the preferred shifts to make everyone happy.”

Furthermore, he says, a gratuity-included model might be detrimental to the longevity of the eatery. He believes paying workers higher wages overall may have a negative effect directly on the bottom line. “The restaurant will lose sales in the long run and the quality of service will decline,” he said. “The staff will leave and go somewhere else to make more money.”

He says the term tip comes from the phrase “to ensure proper service” and gives the staff an incentive to deliver a memorable dining experience, but if the pay model changes guests may have to pay for good and bad service for the same price. — John Friia

The Future

Robots and touch screens to serve us

The Automat

The Automat was a coin-operated automated food system, and the earliest of its kind. It was popularized in America by Horn and Hardart, a restaurant in Philadelphia. It made its way to New York in 1912 with locations in Time Square and Union Square. Customers would insert coins, like in a vending machine, and a window would open giving access to certain food items. On the other side of the cubby was a door to the kitchen. Chefs and staff would refill each cubby routinely allowing a constant flow of fresh food. But with the rise of fast food in the 1960s, automats started to wane in popularity, and by 1991, the last automat in New York had closed.

Order Kiosk

In 2011, McDonald’s announced it would be adding 7,000 touchscreen kiosks to restaurant locations around North America. Many suspected that the Golden Arches planned to replace cashiers with automated systems instead. McDonald’s claimed that kiosks were and are not meant to replace workers, but merely make the ordering operation faster for customers with less chances of human error by cashiers.

A New Kind of Vending Machine

A new kind of vending machine: Launched in 2009, Coke Freestyle brought consumers a touchscreen soda machine that allowed for over 100 flavor combinations. Self-serve, as it is referred to,  is one of the first touchscreen food vending systems. Designed by Italian automotive design firm Pininfarina, it uses a cartridge-based system originally developed to deliver precise drug doses.

Nothing Personal

Nothing personal: Ichiran Ramen is a Japanese ramen franchise that promises one thing: no human interaction. Customers sit at seats restricting view to whatever is only in their space. After placing an order, a chef on the other side of the wall prepares ramen, opens a door, and serves customers. Because of the restaurant layout, attending staff is kept to a minimum. The restaurant restricts itself to mostly cooking and cleaning staff. Ichiran Ramen opened up a Brooklyn location in January of 2017

Sushi Train

Robata, or conveyor belt sushi, remixes the sushi eating experience. Unlike a normal restaurant, customers sit down at a bar and see a line of different items travel along a belt. Customers grab what they want to eat and pay for plates consumed. Conveyor Belt Sushi allows for a group of chefs within the belt to continuously add food for consumption, eliminating the need for much serving staff. Robata have also made their way stateside, and are popping up in major cities.

An Automat for the Digital Age

Eatsa is a modern take on Horn and Hardart’s Automat. Instead of coin operated cubbies, it’s been replaced with iPad ordering stations and transparent LCD screens. Swiping a credit card will give the system all relevant information. Customers customize their quinoa bowls and food is prepared in the back and slid into a cubby. Because staff is limited to a doorman, cleaning, and cooking, there’s a cost savings that’s passed on to the customer. Each bowl costs $6.95, but the company hopes to bring that down to $5.00.

Fast-food Automation Is Coming is a Tap Away

“Hello, I have been programmed to take your order.”

Automated technologies are slowly creeping into the food industry. It’s possible that you’ll soon be touching screens more often than you talk to people at restaurants such as McDonald’s and Chili’s. And it’s not only the large touch screens inside the golden arches. The touch screen in your pocket will also help streamline how we order our favorite meals and snacks.

Touch screens are just the beginning: coming down the pike are self-driving trucks that might deliver our pizzas and machines that may soon flip our burgers. As the New York minimum wage rises to $15 an hour by 2018, many economists argue that while the hike will benefit thousands of workers, others may lose their low-skilled jobs. Technology may help fast-food companies fill the gap, and as technology takes over, the number of low-paying jobs will likely diminish even more.

“Studies find that employment effects are likely significant following a minimum wage hike,” said Aparna Mathur, an economist at the American Enterprise Institute, a conservative-leaning public policy institute. “So this might be a policy that overall ends up hurting low income workers, rather than helping them.”

To make up for the loss in manpower, businesses will look to automation to help offset any holes in service. “The risk of automation is real,” said Mathur. “Many fast-food chains are considering doing this already, as are stores like Walmart and Target.”

That’s not to say there’s a gold rush towards automated technology. “Although chains are adopting its use, it is still a very small percentage of restaurants that use touch screens; less than 3 percent,” said Darren Tristano, chief insights officer at Technomic, a food services research and consulting group.
Some full-service restaurants, such as Chili’s and Olive Garden, have experimented with touch-order screen systems on tables. At one of these restaurants, for example, a server will take your order, but there will be a touch screen on the table for ordering additional items, including drinks. At most full-service restaurants, however, there still seems to be a demand for human interaction, says Tristano.
At limited-service restaurants, including McDonald’s, Wendy’s or Panera Bread, touch-screen kiosks are often the first thing you see when you walk through the doors. According to Tristano, it helps restaurants such as McDonald’s keep labor costs in check.

“One of the big advantages of touch screen is that it manages peak ordering times when customers exceed staff,” said Tristano. “The adoption actually enhances the customer experience because of the increased accuracy and speed.”

McDonald’s denies that kiosks are being placed to cut jobs. Tristano points out, however, that the screens do little to help kitchen staff who are more quickly inundated with orders.

Adding large touch-screen ordering systems also comes at a significant cost for companies, Tristano says. It’s a cost that’s high enough to offset any savings that would be had from reducing employment staff as a result of the new technology.

Other fast-food chains such as Domino’s and Taco Bell have instead opted to develop mobile apps to speed up the order process, which they believes encourages customers to keep coming back.
“More advanced systems that allow customers to order, pay and receive loyalty rewards will drive customer experience toward mobile devices versus point-of-sale terminals,” said Tristano.

For example, the app from Domino’s Pizza allows customers to see the entire pizza-making process, from when a pizza goes in the oven to when it arrives. For the moment, the delivery person is still a person, but the company is also experimenting with drones, self-driving cars and autonomous delivery robots.

“Certainly any restaurant that delivers can make great use of an app—Domino’s Pizza app is a great example of this,” said Jesse Schell, a professor at Carnegie Mellon University’s Entertainment Technology Center.

But Schell believes that companies are still in the nascent stages of making restaurant apps more engaging and game-like. He does see potential in McDonald’s yearly Monopoly game, in which prizes, including free food and cash, are doled out to restaurant-goers.

Using an app, companies hope, can further engage customers and bring them back throughout the month for a chance at winning. — Imad Khan