Blood From a Stone?

Blood From a Stone?

The restaurant industry evolves—and doesn't—in the face of steeply rising wages.

This winter, The Lowry restaurant on Hennepin Avenue closed for three days to install new griddles. The old ones had been rode hard; the new ones were state of the art, employing automation technology and an overhead heating element that cooks food on both sides at once—cooking times were halved, quality upped.

“We could never get our French toast right,” explains Blue Plate co-founder David Burley. “It would either be gummy in the middle or burnt outside. Now it’s perfect.” The griddles were expensive, but they will pay for themselves in a year because they need less monitoring. Over time, Burley thinks he will need fewer cooks in the Lowry’s cramped kitchen.

With several more dollars in minimum-wage increases on the horizon, Burley is content to pay his employees more, but thinks it will be sustainable only if he can find a way to do business with fewer of them.

The social justice community succeeded in raising minimum wages across the Twin Cities, but it could not control how restaurants—the most pervasive users of the minimum wage—run their businesses.

Whether tipped restaurant employees would participate in that near-doubling of the minimum wage was one of the more divisive battles in local government of late. The decision in both Minneapolis and St. Paul was “yes.”

In 2013, the state’s minimum wage was $6.15 (overridden by a federal minimum of $7.25), according to the Federal Reserve. Today, it’s $9.86 and indexed to inflation. In Minneapolis, it is $10.25 ($11.25 depending on the size of the business) and will rise 75 cents to $1 every July until it reaches $15 in 2022–24. That means minimum-wage employees in Minneapolis and St. Paul will have seen wages rise more than 200 percent in a decade.

I have no problem with a $15 minimum wage. People need a living wage, and our society doesn’t function effectively with the kind of wage disparities that exist now. But that doesn’t mean businesses won’t react to a steadily rising cost structure. And where I most expected a reaction was in the restaurant biz.

During the “tip credit” debate, the question was whether tipped employees should have the minimum wage capped (at $10, for example) if tips and wages combined already exceeded $15. The issue became emotional and at times irrational. Mayor Betsy Hodges argued that tips had been historically used to oppress women in the workplace. Some restaurant workers pushed back, arguing that a big raise for employees already making well above $15 in aggregate would cause businesses to close or shift to low-staff models.

During the debate, I discovered that many of the activists involved did not even understand the mechanism of a tipped minimum wage and kept insisting it would condemn people at society’s margins to making less than the minimum wage—which was never the case. It was hard to have a coherent debate under these circumstances, because, much like the climate change debate, one side countered data with beliefs.

Five years into a steadily rising wage base (driven by a changing minimum wage and a tight labor market), restaurants have and haven’t reacted. Most say they have raised prices; most have seen profitability decline. But perhaps the greatest surprise is how many have delayed substantive changes. Their willingness to endure erosion of profits in some ways undercuts the wage arguments. It’s puzzling since restaurants are known as low-margin businesses to begin with.

The government and activist community hasn’t taken the time to understand the issue, explains Brent Frederick, co-founder and manager of Jester Restaurant Concepts (P.S. Steak, Parlour, Borough, Monello). “We have servers [already] making $75,000 in wages and tips,” he says. He questions the wisdom of giving those folks a $5-an-hour raise, which worsens an already wide pay disparity with his kitchen staff.

Frederick says each of his restaurants have seen $30,000 to $50,000 in wage increases annually, representing roughly a 2 percent aggregate increase in costs. “Half of all [local] restaurants break even,” Frederick estimates. “Thirty percent lose money. People won’t talk about it because it’s a big pride thing.”

He says his restaurants have cut overtime, squeezed vendors, raised prices, and seen profits erode, but have not changed staffing for fear of affecting service quality. The operators I spoke to said they were reluctant to take on new, midpriced restaurant projects, the kind that are most exposed to high labor costs. Only high-price or low-staffing/quick-service projects were on the table.

“We’ve gotten tight with scheduling. We’ve eliminated front-of-house shifts,” says restaurateur Kim Bartmann (Tiny Diner, Barbette, Pat’s Tap, among others). “At the moment, I have zero profitability. I have been paying living wages and health insurance since 1993, supporting local farmers and vendors. But right now the only [midpriced] restaurants that make money are high-volume restaurants serving a commodity product.”

Bartmann’s business model and values will not let her degrade her food quality and sourcing to lower overhead. So she has few options. “It’s blood from a stone at this point.”

Adam Platt is TCB’s executive editor.