Q: Minimum wage is set to increase. What is the best way to discover how much to increase pricing and/or offset costs? 

A: The Washington Hospitality Association has designed and made available a calculator within the Hospitality Industry Survival Strategies HUB to help with building a strategy around offsetting or even benefiting from increasing minimum wage. The calculator has a number of factors to enter, in order to get the most out of it. 

  1. Enter Annual Sales – This is simply the total of sales for a full year, use the last 12 months. This is important in order to calculate the annual increase in prices needed to maintain or improve margins. 
  2. Slide the lever left or right to set Average Guest Spend Per Guest – This is an average of what a guest spends. By knowing annual sales and average guest spend, the number of annual guest visits is calculated. This is important in case you think a loss of guests is possible due to price increases or other factors. 
  3. Enter Annual Net Income – From this information total expenses will be calculated in reverse allowing total expenses to be increased for inflation and factored into the price increase calculation further down the calculator. 
  4. Enter Annual Number of Hours at Minimum Wage – These hours will likely be server, bartender, and buster hours for the year. 
  5. Enter raise – For state and small Seattle employers the rate will be $1.50 and for large employers there will be an increase based on chi, likely around $0.50. 
  6. Additional number of hours subject to increase – Some employees will receive a raise, either because the $1.50 increase jumps over the current wage or tightens it up to minimum wage too closely, or wage earners who are going to receive an increase regardless of minimum wage. 
  7. Enter Raise – This is the amount, on average, of those non-minimum wage earners receiving increases, likely kitchen, front desk and management. 
  8. Dropdown to Inflation percent on other expenses, includes rent – Generally costs increase at least annually on nearly everything including B&O taxes and rent. There are several percentage choices under the dropdown, select one. 
  9. Enter Mail Results – Place your email address in the box. 
  10. Press Email My Results! – This button is highlighted in red at the bottom of the calculator and will be pressed one all necessary adjustments are made to offset or profit from price increase. 

Based on all the information entered above, the price increase needed to maintain net income will calculate with some other interesting information. 

 

This number assumes there is no loss in guest traffic. If you believe you will lose some guest visits simply increase pricing more to cover those losses. 

 

While this increase is forced and uncomfortable, use this as an opportunity to tighten and strengthen operations. Most companies are going to increase pricing. Keep in mind service must improve on top. Far too often menu prices increase and service remains the same. Operators can fail to realize those receiving tips are receiving a substantial increase on the tip side as well. For example, if prices are increased on top on minimum wage, 10% on a 25% guest check average, a server is earning another $0.50 on top a 20% tip. This presents an excellent opportunity for sharing through tip out to the kitchen and support staff and a good way to shift some of the income from server/bartender to kitchen staff. 

 

The increase in minimum wage is daunting, but with the proper strategy and higher menu prices, higher minimum wage may spur additional profitability. 

For more information on improving profitability and driving performance, contact AMP Services a rbraa@ampservices.com. Rick Braa is the co-founder of AMP Services, and accounting and consulting firm specializing in helping companies grow profitability.