On economic realities in food service & “living wages”

The fallout continues to mount as the cumulative effects the Notley government’s anti-business policies come home to roost.

With minimum wage hikes, hikes in stat pay for people who never actually work on those stat holidays, carbon tax hikes and new regulations piling on monthly, even restaurants that have managed to succeed for decades are beginning to fail.

This week’s closure was the Bear’s Den restaurant that operated in Northwest Calgary for 14 years.

What infuriated the hysteric left and Notley apologists with this closure was that the owner dared speak openly on what pushed his formerly prosperous business into closure. Yes. Government policies on all levels are pushing places out of business. The only thing I can fault this man with is that he neglected to mention how federal and municipal governments have been piling on small businesses as well. The blame in these deaths by a thousand cuts lands on all levels of government as none of them have been doing small business any favors of late.

The ignorance being displayed by Notley’s social media fartcatchers on this closure has been both striking and predictable.

Armchair restaurant managers spring forth like weeds and begin to explain all the reasons that these businesses keep failing and they work to understate the damage that is caused when these places close.

This clown is a prime example. He went on with multiple tweets about how the prices were too high and that it only led to about 12 people losing their jobs anyway. He of course took that common assumption that the owner of the restaurant was filthy rich and would retire upon a pile of money.

In reality, 26 jobs were directly lost from that restaurant alone. This closure also reduces revenues for the companies that serviced and supplied the restaurant and likely added up to at least another job or two lost.

Odd how those who always claim to be standing up for the little guy are so quick to dismiss the impact of job losses for these little guys.

In their lack of understanding of economic realities, many lefties conflate high prices with high profits. They assume that if a restaurant is upscale, the profits must be as well. Alas, the margins remain the same for food service businesses whether in upscale eateries such as the Bear’s Den or in a food court stall in a mall. They are incredibly thin.

I saw one comment where the person exclaimed upon looking at the menu:  “$14 martinis? No thank you!” As if that statement alone explained why this restaurant failed.

Head to any bar. I know first hand as a pub owner that we don’t pay a hell of a lot less for liquor than retail customers do. We need to mark that booze up. If taxes didn’t account for nearly 50% of the cost of booze, I promise you that you would get better prices. The market is competitive.

Either way, martinis are cocktails that are doubles and usually use premium vodkas or gins. They take time to mix and present and have a garnish. They range at best from $12 to $16 in bars. $14 was average.

The Bank of Canada thinks that as many as 60,000 jobs will be lost due to minimum wage hikes alone. Shall we dismiss this? Is this a desirable outcome? Are we somehow winning here?

 

What people don’t seem to get is what a profit margin is and just how thin those margins are for restaurants and bars.

According to stats Canada, the average profit margin in restaurant and bar lands under 4%.

To put it more simply, for the average owner they may see $4 for every $100 of product sold.

Think of it this way. It takes a hell of a lot of work just to run a mid size establishment that grosses $100,000 per month. I assure you that in pretty much every place of that size there is an owner/operator. It would never be profitable at that scale without the owner working full time in it. That owner would gross roughly $48,000 per year.

Not exactly the “rich fat cats” that some folks are working so hard to demonize. It is a lot of work for a relatively meager income.

I don’t begrudge any business a profit or a good margin. The entire purpose of taking that gamble to invest time and money into a venture is to make a profit.

If indeed folks insist on playing the repugnant politics of envy and really want to drag down the successful (and many indeed do want to do that), they are way off base in who they are targeting.

I will put this in the form of charts that even a Notley supporter should understand.

Here is what the average restaurant profit margin looks like:

Pretty damn skinny and I rounded up.

Let’s compare that margin with the mining industry:

Guess how mines can afford to pay better than restaurants (leaving aside the reality that mining is a much more dangerous and skilled trade than a role in a restaurant).

Rail transport has some splendid profit margins. Being an oligopoly that is heavily protected by the state helps of course.

Speaking of oligopolies, how about banks. Well Royal Bank’s profit margin ranged from 25-32%. There is good money in lending. Just look at how much the Alberta government is spending on debt interest.

Securities and financial services in general enjoy solid average profit margins around 40%. Insurance companies are up there too.

Now I don’t want to see those high margin industries dragged down. I am just saying that the vitriolic and envious left is really flying over the wrong target these days in their quest to ensure that nobody dares make too much money.

I (unlike the anti-corporate left) understand where pension fund growth comes from so no, I would never celebrate the reduction of profits for corporations.

The Calgary Chamber of Commerce established that the combination of higher property tax, carbon tax and minimum wages will cost the average restaurant $60,700 per year. That is more than the average restaurant owner makes.

Restaurant sales are indeed climbing in Alberta but unfortunately the increase in expenses is outpacing that sales growth. It doesn’t matter how high your sales are if your margins are in the negative.

This is simple math people. A restaurant can’t run at a loss for long. A restaurant owner in these situations has only two options when margins evaporate. Increased sales only mean increased losses.

We can raise prices and we can cut expenses.

Food service prices are terribly inelastic. That means we can’t raise prices very much before the associated drop in sales volume removes the benefit of the price raise. The industry is fickle and competitive. Consumers only have so much to spend and they will move on in the face of price increases that pass their budget. I guess if your goal is to drive consumers into eating at home more, this is a good route to go. Cold comfort for the unemployed workers however.

In cutting expenses we have limits as well. Many of our expenses such as utilities, taxes and lease payments are fixed. We can reduce food costs to a degree but most restaurants are already at peak efficiency in this regard. They have to be when dealing with 4% margins. Labor makes up over 33% of the expenses. While we can only cut that by so much while remaining in operation, it is our most flexible area to work with. Part time and lower paid staff may be shed while more work is placed on the remaining workers. Places may move more into a self-serve system which again costs jobs. As we saw with Tim Hortons, some prior benefits such as paid breaks or health benefits may be cut. We simply don’t have a hell of a lot to work with here.

Simply raising minimum wage is not enough for some of course. Many of the economically illiterate feel that every job whether in a starting position, unskilled position or part time position deserves what they determine to be a “living wage”.

What is a “living wage”? That all depends on how far out in left field the person proposing it is actually. It can range anywhere from $17 per hour up to $30 per hour.

This dingdong is a typical self-styled business expert.

“If your business model does not include paying employees a living wage, then you do not have a good business model.”

She indicates that anything less than this ambiguous “living wage” is “exploitive”.

Very nice comrade but of course utterly unrealistic.

Still, lets explore the viability of this “living wages” in the food service industry.

If this non-“exploitive”  business model does indeed exist it should be no problem finding all sorts of restaurants in the thousands across the nation who use it.

Look at this! There is even a Canadian site that works as something of a registry for businesses that pay a “living wage”. Excellent. Surely these establishments must number in the hundreds with it being such a great business model and all.

 

Hmm. I see a lot of charities. Government bodies such as the City of Vancouver. Some left wing activist groups and unions.

You know what is missing?

You guessed it. Restaurants. Not a single one among them.

How is this so? Did we not just hear that a living wage model is good business?

While this business model does appear to be quite popular among self-proclaimed business experts on the left, actual business people seem not to have embraced this stroke of genius yet.

Fear not. Perhaps this guide wasn’t comprehensive enough. Maybe all those living wage restaurants were so damned busy that they forgot to register.

In searching google I finally found some examples.

Here is a beauty. Bartertown Diner is a union shop and not only do they pay living wages, they have no management hierarchy. Every employee is equal in compensation and in decision making.

It just doesn’t get any more fair than this.

Let’s look ahead and see how this little socialist paradise worked out..

Aww shit.  Say it ain’t so! How could this collectivist Nirvana have possibly failed?

Oh yeah, the same way socialism always fails. Nobody wanted to work. Nobody paid the bills. Everybody lost their jobs.

OK OK. Maybe they were a little too idealistic. What if the outright Marxism was dropped and a restaurant simply adopted the “living wage” part.

Looks like Ritual in Vancouver did just this:

Groundbreaking! Brilliant! This is Vancouver too so there must be an abundant supply of folks who want to pay an extra 20% or so in order to patronize a place that pays “living wages”.

Let’s follow up and see how that all went…….

Aww shit…..

Their website is down and by all reports it appears that they went broke.

How is this possible with the brilliant model of “living wages”?

Maybe people really actually wanted to pay more but were constrained by the menu prices. The folks behind the Harvest Cafe realized this and set up a business where customers could choose what they pay. How could a place not  prosper and pay massive wages while tapping into all that natural altruism in society?

Hmm, their website seems to be down

Facebook site looks to be gone too.

Aww shit……

Somehow they went broke.

OK OK. Maybe it is a little too much to ask folks to pay what they can. Maybe if restaurants went without tipping, but raised the prices by the amount that would be tipped and claimed to use this new revenue to pay a fair living wage.

Sorta just re-branding a price increase and robbing the servers but lets see how that all went.

Earls in Calgary did just this. How could the managers who so brilliantly shit on Alberta beef while the bulk of their restaurants resided within Alberta possibly go wrong?

Aww shit…..

It didn’t even make it three months.

Damned customers clearly don’t know whats good for them.

The only models I could find that let customers pay what they want while the place claims to pay “living wages” are essentially charity soup kitchens.

They rely on donations and volunteers (people working for nothing?? How “exploitive”!).

Others rely on well heeled celebrity ownership for publicity along with donation and volunteer labor such as Jon Bon Jovi’s place

Sure helps if the owner has a few hundred million in the bank to backstop things if funds should run a little short.

 

Hey. I am sure Bon Jovi is a great guy and he doesn’t have to do a damn thing. This is a nice effort by him.

Let’s not pretend that this glorified soup kitchen is a viable business model that will change the face of the food service industry across North America.

We have to face it. Consumers want good product and service provided to them at the lowest prices possible. If the prices are too high, they simply won’t buy. It doesn’t matter how much they claim to want to support “living wages”.  That is why restaurants must manage with 4% margins. Not because they want to walk that razor thin line. They simply have to.

Yes restaurants will always come and go even if government leaves them alone. It is abhorrent seeing government intervention causing an inordinate number of establishments go out of business however.

Yes. Some of the most creative and the ones with the most capital behind them will survive and the weak will fall by the wayside. Mom & pop places will disappear and be replaced by large corporate chains and franchises who can utilize economies of scale in order to keep operating.

Fewer restaurants will exist, they will employ fewer people of course and the general cost of living will rise.

Is this winning? Is this a desirable outcome from piling taxes and regulations upon a struggling industry?

Some may think so.

Those finding themselves losing those ever so important entry level jobs, those servers who worked part time to supplement their income, those seniors who worked part time to supplement their retirement income and those students who worked part time to offset tuition costs may feel otherwise.

3 thoughts on “On economic realities in food service & “living wages”

  1. Off course a lot on the left go on feelings and idea everybody deserves a living wage. Yes it would be nice if everyone would have a living wage, but a low wage job is better than no job. Never mind in the restaurant industry, servers make most of their money off tips not wages so if you include tips in people’s incomes I suspect most servers are middle class if they work full time not lower income. And as an added bonus most servers don’t declare most of their tips so they pay less tax than those making similar incomes. So in reality restaurant closures is making middle income people low income, the exact opposite of what the left is hoping for. Most economic studies suggest the optimal minimum wage is around 45%-50% of the average wage so that would be $12 to $13/hour in most provinces although perhaps a bit higher in Alberta. In the US it is only 30% the average wage thus why a large underclass, but in France it is 70% of the average wage and France has consistently had double digit unemployment year after year so obviously we should aim to have it somewhere in between those two extremes.

  2. The level of stupid that exists in Canada has exceeded even my ability to comprehend. Economically, Canadians are truly ignorant. One aspect of a mandatory minimum wage is that level is still the bottom and all costs rise to reflect that level, no one gains a damn thing except inflation. Stupid.

  3. Great article Cory ! The NDP COMMUNISTS are messing with a ‘formula’ that has developed over decades and centuries, if not millennia. That ‘formula’ naturally determines how much customers will pay for a product. In reality, if someone wants to earn more money, they should EARN it. The only result of raising the minimum wage so dramatically, will be increases in prices for ALL products and services, not just restaurant meals. Same goes for carbon tax. EVERYTHING will goup in price. Magically, these NDP RETARDS ((!!!)), think that they can grab some extra funding from these ‘greedy capitalist business owners’ who won’t share the wealth with the low-wage earners, and then they – the NDP Bolsheviks think that all low wage earners will vote them back in.

    People are pissed off at the NDP. Make no mistake about it. We visited Montana’s on 130th Ave SE recently and there was ONE server working the bar AND all the tables, doing a good job of it, but behind for sure. We asked why there was only one server………”because the franchise owner doesn’t want to pay for more staff; minimum wage has gone up and it costs too much.”

    NDP = #EpicFailure

    Visit Waters Edge Pub and Jane’s Place in beautiful downtown Priddis. You will be impressed. I’m still getting over the euphoric feelings of dining there.

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