Does a Higher Minimum Wage Hurt Franchising?

The nationwide push to raise the minimum wage continues to gain momentum. The issue was brought to the forefront over the last 18 months as employees of quick service restaurant (QSR) workers waged a series of marches and protests demanding and increase of the minimum to $15/hour. President Obama talked about an increase to $10.10/hour in the State of the Union Speech this past January. 

Earlier this month, the Mayor of Seattle announced a plan to increase the minimum wage to $15/hr to be phased in over three to seven years depending on the size of the business. While none of the proposed increases have been formally passed, franchise business owners in the QSR sector as well as those with businesses employing people at minimum wage levels need to evaluate their businesses to prepare. 

The proposed wage increases, coupled with the Affordable Care Act (Obamacare) requirements, will potentially lead to higher costs, higher prices and potentially a reduced number of jobs… or will it?

That Depends On Whom You Ask…

According to IFA President and CEO Steve Caldeira, the proposed increases will have a resoundingly negative effect according to an IFA press release last year.

"Mandating increased wages would lead to higher prices for consumers, lower foot traffic and sales for franchise owners, and ultimately, lost jobs and opportunities for employees to become managers or franchise owners. The franchise industry is a proven job creator and career builder, yet efforts to double the minimum wage to $15 would clearly jeopardize opportunities for existing and prospective employees.” 

Mr. Caldeira was further quoted in a December 4th New York Times article that such a wage increase would lead to price increases up to 50% thus hurting the consumer.

Not Everyone Shares the Same View

Some will argue that higher wages have benefit both the economy as well as the business. According to Joel Benoliel, Senior Vice President and Chief Legal officer at Costco.

"If you have the best people in the marketplace working very hard because they’re being paid better, you end up spending less on labor, not more. There’s a fundamental misunderstanding among many employers who focus on how little they can pay. Our philosophy is that we actually pay less for labor per hour when we look at productivity and sales per hour."

The Present and the Future for the Franchise Industry

Regardless of personal or political beliefs, franchisees and franchisors affected by proposed wage increases will need to make the necessary adjustments to keep their businesses profitable. This will likely involve all parties sharing the burden in terms of higher prices for consumers, higher expenses for the business and likely reduced jobs for those seeking employment. Franchise systems will need to adjust and evaluate their business model to consider alternative sources of revenue. For those in the restaurant sector that could mean delivery and even catering services. Some models are even placing special emphasis on targeting the corporate lunch crowd.

While this debate can be polarizing, what is fascinating is the different perspectives from those within the business community. As stated above, some predict a doom and gloom for business and the economy while others argue the long-term benefits. As always… the answer probably lies somewhere in the middle.

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