Seattle’s $15 Minimum Wage is Driving My Restaurant Out of Business
Note: This article has been edited, and re-edited for clarity and to clear up confusions.
As a second generation Chinese American, I've always felt like a product of the American dream: immigrant comes to America in the 80s, goes to college, lands a good job and creates a successful life for a family of four.
So when I told my dad that when I wanted to start a restaurant, I was a little surprised at his immediate reaction of, “Why in the HELL would you want to do THAT?!?” in his unique Chinese-Southern accented drawl of someone that learned English while attending the University of Louisville. Having graduated with a masters in electrical engineering, supported by evening shifts at the local Chinese eatery, my dad instilled in me from an early age that that white-collar work should be the pinnacle of one's ambition. Restaurant work, as he often said in Chinese, was for those who enjoy misery. It would turn out that my dad's advice turned out to be truer than I would have ever expected.
Seattle made national news in 2014 when voters passed the $15 minimum wage initiative. As per the norm, the internet echo machine blew up with talking heads on each side spewing rhetoric about what this would mean to the Seattle economy. The narrative from the perspective of business owners was all but lost, other than a poignant letter by famed Seattle restaurateur, Tom Douglas, who provided a rationale look from the trenches of a food service operator. The fact that Tom's letter can no longer be found on his own website, should speak volumes on the divisiveness of the issue.
As Seattle a small business restaurant owner, I'm going to publicly share what we made last year, because it's important to hear the voice of businesses like ours.
Total profit for 2015: $8,856.57
This purpose of this post is not be political, but to show actual economic effects of what happens when a rapid series of expenses are added into a business with low margins. Lastly, I would hope to show that there isn't simply an evil villain pulling the strings behind each business, but real people trying to make a livelihood.
A Little Background
To understand my story, I'm going to take a step back and explain how I even decided to get into the service industry.
For starters, I'm in my thirties and in the tech field. In my short lifetime, I've seen two serious market crashes that created great doubt in my mind on the wisdom of “buy and hold”. I understand compound interest and 7% annualized returns quite well, given that I know how to program quantitative statistical experiments.
That said, I also happen to be a fan of Nassim Nicolas Taleb, who wrote the book The Black Swan, a book on the theory of the dangers of unpredictable events. While not an economist, Taleb also happens to be an options trader who wrote a book on derivatives while also making 8-figures along the way. I made it to about page 20 before my brain tried to divide by zero and blew up.
What Taleb and I have in common, is a healthy respect of volatility. As such, my view is that if I'm going to take the standard investment route of a young earner by taking on more risk, I figured I would hedge my bets on a risk that at least was based on my own merit as opposed to the whims of the market.
Naturally, I picked the riskiest, most dangerous start-up with the highest risk of failure: the
misery restaurant business. Restaurants fail, but my belief was that a fundamental grasp (or lack thereof) of restaurant business math was likely far more correlated to success than one's own ability to cook. As it happens, I'm also a skilled cook, but I digress.
A few years ago, myself and a few partners found a small restaurant that fit our profile. The restaurant had existed at the same location for over 10 years with a modest, but steady revenue stream in a stable location. It was a little tired and needed some TLC however, which factored into us purchasing the business for below market price. This was necessary, as we had no financing and had to make a 100% cash purchase.
For those thinking that financing a restaurant purchase is easy, the reality is that banks are risk adverse and won't loan to anyone without a history of successfully operating a restaurant. Getting a loan for young entrepreneurs like us was essentially a catch-22; we can't get loans because we don't own a restaurant, we can't own a restaurant because we can't get a loan. As such, we pooled our cobbled savings, retirement funds and used family loans to finance the purchase.
We went with a fast-casual franchise for the stability of a brand, training, existing procedures and generally higher margins. Without a food service background, we didn't want to jump in over our heads and overplay our hand. None of us were terribly excited at the idea of paying a royalty, but we viewed it as a price premium for reduced volatility until we could venture out on our own concept down the road.
Our franchise, as most, required us to take a two-week, on-site training course at the franchise headquarters. I was one of the few (other than an insurance salesman) that had no food service background. Truth be told, I felt that the training was almost unnecessary, as it covered basic business concepts and how to adhere to the cookbook. To me, restaurant business was very much common sense: hire and train good people, control costs, upsell, follow the recipe book and most importantly, don't do anything to jeopardize our new investment.
A Crash Course in Restaurant Economics
In our first year, our small restaurant made a modest operating profit. As owners, we put in 30 to 35 hours a week into the business, especially in the first few months, but it tapered to about 20 hours a week after that. Averaged out as owners, we were probably paid close to $15/hr for our sweat equity. However, after one-off expenses such as franchise fees, legal fees, training, repairs and tenant improvement, we actually ended up actually losing money, which wasn't that unexpected, as we knew this going in.
Our hope was to get the restaurant to become less hands on, by training and building up a manager from within the ranks, so that we could eventually recoup our investment, then turn a profit. Based on historical sales, we had expectations that it would be 3 years to recoup our costs, then the next 3 years could double our investment, for an annualized return of about 33%, not including our own time we put in.
Many people think that restaurants are some type of hugely profitable enterprise, especially if I say a number like 33% return. The reality is that small restaurants are “profitable” on paper, but are usually only profitable because of the sweat equity that an owner puts in.
One franchise operator (we'll call him Mr. Kim) earns about $120,000 per year, which sounds great, until you realize that Mr. Kim and his wife work 7 days a week, 14 hours a day. No holiday, no vacation, no sick time. They employ exactly one employee.
All said and done, Mr. Kim's true wage is $11.78 per hour. If Mr. Kim does well, it's because Mr. Kim works harder than 99% of the population. I have no qualms admitting that Mr. Kim puts even my own work ethic to shame, as I “only” work about 80 to 90 hours a week.
The reality is that after owner salaries are paid, most restaurants are profitable to the tune of 3% to 5% per year. This takes people by surprise, but there are very real expenses when operating a restaurant. The breakdown is as follows:
- 25-40% food cost
- 30-35% labor
- 15-25% rent plus utilities
If you add up the low side, it equals 70% expenses, leaving 30% profit. If you add the high side all up, it actually equals 100%, leaving little profit. If you've ever wondered why the steak or lobster costs so much at the fancy restaurant in downtown, it's because the margins are thin and expenses are high. Tom Douglas stated that his profit margins were 5% and he has some of the most popular restaurants in Seattle.
Starting a restaurant is a form of gambling. You put a large amount of money up front and hope to make your initial investment back in the next few years. As it stands, most restaurants fail during the first or second year, because they can't get enough traction or repeat customers during this incubation period or they simply run out of cash. It's a risky business, because you have to generate immediate cash flow, otherwise your business is burning through cash keeping your rent paid, lights on and staff to stand around waiting for customers.
The Effect of a 60% Wage Increase
On January 2016, Seattle minimum wage is $13/hr, which represents a 40% increase in our labor cost from the prior wage of $9.32. Come 2017, it will be a 61% increase.
When we started our business, our labor cost was right around 25% and our store profit without owner salary was about 33%. When minimum wage increased to $13/hr, our labor bumped up to 35% and cut our bottom line by 10% down to 23%. Next year, our labor cost will bump up to 40% (increase of 15% from 25%) and our bottom line will be 5%.
To put things into perspective, the average American household in 2013 spent $3,000 or 6% of their budget on gasoline at $3.50 per gallon. If the gas budget increased to 21% (increase of 15% from 6%), but the exact same amount of fuel was purchased, that would be the equivalent of $12.25 per gallon gasoline prices. This is the type of shock that restaurant owners are facing, yet the public would have a meltdown if politicians suddenly imposed a 350% gas tax. For Seattle, this is somehow perfectly acceptable to push this type of sticker shock on us restaurants in 3 years.
In previous years, we paid over the minimum wage by a 10% margin to attract and retain talent. We have to reduce this margin to make ends meet. However, mopping floors at $13/hr suddenly becomes a lot more attractive than washing dishes at $13/hr if there is limited upward mobility (i.e., fewer and smaller raises for a job well done). The only true way we can rely on our employees not leaving for greener pastures is making our workplace more enjoyable (something we try to do already) or by hoping that the job situation deteriorates so that they feel lucky to have a job. It's a bad thing for business owners to hope for.
The hardest part is wage inflation. We are lucky that our shift leads, assistant managers and managers are fully understanding of the predicament. That said, when we have to hire new faces, it will be almost impossible to ask someone to perform the same functions as “normal” worker for the same pay. Our only recourse, as we've seen many other businesses do, is that senior employees outside of the city limits seem to be very willing to commute for the higher pay and be appreciative of the wage bump. As such, I can only imagine that employment within the city limits will drop dramatically for minimum wage workers by the time the $15/hr minimum floor is implemented.
Speaking of city limits, the difficulty in increasing prices is that 5 minutes away, the Seattle city boundary ends. This means that we are competing with restaurants that will have 60% lower labor costs who aren't forced to raise prices to make ends meet. Every time I have an inkling of feeling sorry for ourselves, I think about the restaurant owner one street away from the city limits, where he/she is forced to complete with untouchable lower price points.
As such, most Seattle restaurant owners are gingerly raising prices hoping not to lose customers and are digging into profits to make it work. Those with sit down service can at least go from a tip system to service charge system, at the risk of alienating their best servers, however. Among small business owners, there's already blood in the streets, as a flood of mom and pop restaurants are going up for sale trying to avoid the oncoming train.
Come next year, when minimum wage of $15 an hr goes into effect, that is when the real economic experiment begins. That's when restaurants can no longer cut hours and have to raise prices by another 10-20%. Will customers balk at this price or will the general lift in wages throughout the city enable people to afford to pay more while eating out?
I really don't know, but we're all going to find out soon enough.
Who is Really Hurt by the $15 Minimum Wage?
I wrote that a restaurateur will try to recoup their initial investment and then sunset into profitability. Unfortunately, we have come to terms that we won't even recoup our investment. Our savings and retirement funds going into the restaurant will be gone. Two of us just became proud fathers last year and another is about to have his first this year. I thank my stars that we still have day jobs and I still have my ecommerce businesses.
The final kick is that since the 2008-2009 crash, commercial leases almost always require a personal guarantee. In the event that we, the tenant, cannot pay our lease, our personal assets (read: our homes) are on the hook. Even with a failing restaurant, we would be better served continuing to bleed money instead of letting the landlord come after us, short of negotiating a buy-out or other arrangement.
If and most likely when we eventually close the restaurant, we're going to be laying off a team of top-shelf employees. They are hard workers and I simply wish I could continue paying them while making a living myself. As it stands, we're more or less operating a private charity now.
Onlookers will tell us that we're fools for getting into the restaurant industry, but I have no regrets. We had a handful of unexpected repairs and expenses that made things worse, but if not for the minimum wage hike, we would probably be succeeding. We are succeeding with our second restaurant, which coincidentally, is not located in Seattle.
The thing that gets me about the minimum wage increase is that it's often framed in terms of racial bias. Having been an entrepreneur for over a decade, I've met plenty of Caucasian business owners, but the food service sector (or at least my single observation) seemed over weighed toward minorities. A quick Google search revealed that a survey by The National Restaurant Association shows minority and women restaurant ownership expanding by over 50% from 2007 to 2012.
I mention this observation because the boogeyman of the minimum wage debate is Wal-Mart and McDonalds, corporations that conjure images of rich, white men in board meetings. While affluent white males have become common targets of classicism, the actual truth is that many minorities and women are far more represented as restaurant owners that employ minimum wage workers. Many operators are new immigrants, with no other job opportunities and many of whom happen to own a franchise.
For that reason, there is one quote from the minimum wage debate that stood out:
“.. franchises are treated as large businesses because they receive the benefits of being associated with the larger franchisor network of many more than 500 employees… As a result, franchises have distinct advantages over the typical independent small business—training, product development, and marketing support—to name just a few.” -Office of Seattle Mayor Ed Murray
At best, this statement from the mayor's office indicates that it does not comprehend the situation. It also invalidates the personal effort that each franchise owner puts into his or her business, plus the reasons someone would chose a franchise over starting an completely new business. I guarantee the mayor that Mr. Kim has no “distinct advantage” other than he works his ass off.
Franchises are one of the few businesses categories that can still qualify for SBA loans, as the franchises are proven models. It also paints the cross-hairs on a disadvantaged portion of the population that utilizes the franchise model because the barriers to entry are low.
Collateral damage will take place by discriminating against franchises. By taking aim at the McDonalds and Burger Kings, we also target random bystanders like Menchies, Baskin Robbins or local chains like Dick's hamburgers. Last I checked, no one I know has anything bad to say about frozen yogurt or the terrible working conditions of scooping ice cream. Yet these are the businesses that have 3 years to adapt or die.
At the end of the day, I don't have answers to the minimum wage question. I can say that I believe inequality is a major issue facing our country. I do believe that anyone putting in an honest day of work shouldn't be figuring out how to feed themselves or put a shelter over their head. At the same time, why are business owners not included in that very same logic when we put more work and more money in than the employees we hire?
I have resigned myself to the fact that sometimes there are no answers, only events that we could not have predicted. It frustrates me not because of that fact that I have invested time and money in a failed business, but that the sole reason I did was so that I could avoid Black Swan events – only to be hit square in the face with one.
It turns out that I really should have given Wall Street my money instead of putting it into the local economy, because it would have been a heck of a lot less heartache.
*Grant's opinion are his own and do not represent the opinion of anyone else, including his business partners, employees, franchise or Mike. If you are a small business or restaurant owner, I invite you to comment below as to your thoughts and to share this post as well.
My question to Mr. Chen is simple. When a business fails to provide a living wage, it falls to the government and the tax payers to make up the difference though welfare programs. Why should the people continue to subsidize Mr. Chen’s uneconomical business through taxes, shouldn’t Mr. Chen cover the cost of his business, not the people?
“When a business fails to provide a living wage”
then you have to get a roomate or two, or another job.
Your alternative is no job and %100 dependence on the government, why do you think that is a better idea…
you can’t force the customers into the restaurant if the prices are cheaper the next town over anyway. No matter how you slice it you are sticking it to the people if you raise grocery prices to pay for the out of work servers. There is no end to it.
So we either have a bunch of poor people working who depend on the government for basic needs or we have a bunch of poor people not working who depend on the government for basic needs? Your argument presumes that no one will operate any business. Mr. Chen’s business would not be viable but for government subsides. If his business closed as it should, as as he said himself it is uneconomical, then at some point a new business will open that will be viable. Other countries have proven that a minimum wage that is also a living wage is possible, so you present a false dichotomy.
It is also willing to note the OP has engaged every comment except mine, where I challenged him to operate a business on his own without using my tax money to help him. It’s fairly clear from his lack of response that Mr. Chen is totally okay with getting government help, but not okay with helping his employees.
Since you want an answer, I’ll engage you, but we’re going agree to disagree. Never did I say I’m against an increased minimum wage. Your view that I somehow enslave my employees on subsidies is quite the stretch. Many of my employees are students. I somehow doubt they are using government services. In fact, I care about my employees far more than your internet intellectual high horse could comprehend.
I didn’t say you enslave your employees. When you pay a wage under the living wage you force the tax payers (me) to make up the difference. While I understand you may have a transient population, the avg age of a fast food worker is 26, and government policy can not make exemptions for individual business.
You also haven’t answered the question, why should we the tax payers continue to subsidize your business? Your response has been to insult my argument, rather than engage.
Yes, the tax payer. Businesses do pay taxes. We pay payroll taxes, workers comp, unemployment, state, local city tax. In Seattle we also are mandated for PTO for sick leave. Owners pay taxes on our own salary, as we are not exempt. We also generate sales tax for doing business. Having a lease, we also pay our share of property taxes. After expenses, any remaining profit is taxed at the corporate level.
Does this mean we hate taxes? Not at all. Taxes keep the system going. Workers comp protects employees.
Your argument is the service industry is subsidized. The restaurant industry employs a huge swath of the population. Say the industry as a whole puts in a $15 floor. A $10 burger, new wages factored in, would require a business to increase that burger to $15 to stay afloat.
Last year, $700B was spent dining out. To keep the status quo of employment and businesses, that figure would need to increase 50% as well by another $350B. There is thus the force of upward pricing pressure as well as volume pressure.
The reality is that there’s not that much money to go around. People can’t just pull $350 billion more out of their pockets for a food budget. A higher floor will contribute to extra expenditure, but the lower income brackets spend the least on dining out, let alone with 50% higher prices. There might be a slight lift. I would bet there would be a sharp drop.
As a result, 30% of restaurants won’t survive. Maybe to you that’s good, since they’re subsidized, as you put. The industry employs 15 million people. When those restaurants go out, that’s 5 million out of work, while the other 10 million are doing better.
If you have an answer for where 5 million people will land with work, then let’s raise the floor. Manufacturing has been decimated already due to cheap overseas labor. Retail is slowly dying as foot traffic levels are going down. It’s the vicious cycle. You may believe markets are markets, so someone will come in and take advantage of the new flood of workers. I say that industry would already exist at the “subsidized” prices of today if there was one.
Things aren’t great now for minimum wage workers, we can agree on that. You see businesses like me as holding people back to get fat and rich. I see you wanting to launch the nuclear option, without any idea of the collateral damage you would unleash on the very people you’re trying to help.
No my argument is that YOUR business is subsidized, not the entire industry. You’re looking for a handout so you can keep paying people below living wages. As a tax payer I find that to be unacceptable.
I also don’t understand why a 50% increase in wages would lead to a 50% in prices as wages are only one part of your costs. Even according to your own math, wages make up only 35% of your costs, a 50% increase in that would be an overall increase of 17.5%. If your business can’t support that, your business isn’t competitive. Sorry.
Internet troll demands author responds with arguments. Author responds. Internet troll doesn’t address any of arguments. Standard.
I have a solution. Pay employees minwage, but keep all tips. Workers with low tips are telling you they arent engaged.
In what world does someone paying less then a “living wage”, mean that the government makes up the rest? In the real world of people with logical thinking they either find a job that pays more or they work 2 or 3 jobs. Kind of like I did when I got paid minimum wage when it was something like $6.75 an hour. Instead of complaining about how much my employer paid me, I chose to work 2 full time jobs as well as having a small newspaper route, until I eventually found my way into a higher paying job. I don’t understand this concept of a “living wage”. How does this living wage equate to a minimum wage which will pretty much be the same eventually around the country. For example right now I live about 20 minutes outside of Philadelphia where rent and housing prices are absurd. We are choosing to move 40 minutes away, to the Lehigh Valley. Where an equivalent apartment of which we are in now will drop from $1600 a month to just under $1100 a month, also for example the price of gas drops about 10 cents a gallon. Yet the supposed magical “Living Wage” aka. Minimum Wage of the federal government and the state of Pennsylvania remains exactly the same. The cost of the average American nowadays is ridiculous and in no such way should be deflected on to the business owner. It is not their fault that people choose to spend their money on non sense such $100+ monthly cable bills, $400 a month car payments and $100 smart phone bills. You cant take the greed of a few business owners and say well look at that all these guys are just plain selfish and care about nothing but themselves, because it’s not true. Not to mention that these employee’s that continue to live off of these low wages for the rest of their lives are the one’s that chose to remain motionless. There are jobs all over the place that will pay you well about the minimum wage. If you chose not to chase them, the fault rests with you. I moved 4 hours away with 3 kids for a base rate increase from $20 to $30 an hour. I was not happy with my pay, so I chose to change that. Not complain about it and say it’s everyone else’s fault that I don’t make what I feel that I deserve.
What do you do for a living?
Do you own and/or run a business?
Do you have employees?
From your posts I’m assuming your answer to all of the above questions is ‘No’, in which case I’d suggest you try building/owning/running your own business before telling someone else how to run their business.
“When a business fails to provide a living wage.”
What a self-righteous, ignorant comment. If a business fails to pay a wage equal to the market value of the employee, that employee can find work elsewhere; and that’s just ONE of the risks a business owner has to take. Maybe you should climb down off your moral high horse, John, and try running a business instead of carping from the know-nothing sidelines.
Clearly, John has NEVER owned a business where he employed people or had to meet payroll.
I was in the restaurant business as a GM for 10 years, and after I left I called on restaurants as a salesman for another 10. While I mean the good citizens of Seattle neither ill will or harm, it was clear from the outset that your experience, Grant, was predictable. To be denied the ability to eat out at one’s favorite eatery would be the appropriate result for supporting the absurd notion of a living wage.
And BTW, I am 66 years old and too poor to retire. I barely scrape by as it is, trying to work odd jobs until my SS benefits increase another $500 monthly by age 70. Yet, I utterly oppose such absurdly idealistic socialist notions as a living wage.
John’s “argument” that you seek gov’t subsidy to pay the “living wage” he imagines is SO necessary is – frankly, there’s no other word for it – the height of stupidity. He clearly knows nothing of what he speaks.
Too bad, Grant. If you like the restaurant business (as I did) then you should get out of Seattle. Go to a city which still understands the meaning of reality and common sense.
No restaurant needs a union or a minimum wage law. Good service earns great tips. Frankly, if I was young and waiting tables I would have fought this bill to the point of testifying against it. I made far better than $15 hr waiting tables. NO good waiter would support such a bill; it would cut income for great service and boost the income for the undeserving only.
“When a business fails to provide a living wage, it falls to the government and the tax payers to make up the difference though welfare programs”…
The government shouldn’t be in the extortion business, extorting from the productive citizen and giving it the loser-parasite…
“When a business fails to provide a living wage, it falls to the government and the tax payers to make up the difference though welfare programs”
Why is it a business’ responsibility to provide a “living wage”? Their responsibility is to the consumer – wages are agreed upon contracts from both parties. Furthermore, if a business can’t afford to pay $15/hr that’s a reality that cannot be avoided. What is a “living wage”? Why is it the responsibility of the government to “make up the difference” (whatever that means)? Those with low skills cannot live comfortable lives compared to those with high skills. That’s just a fact of life. I had low skills and worked MW jobs for years before I worked my way up and could build my resume. They need work experience to gain those skills and the MW deprives them of that. Raising wages artificially sounds nice, until it hurts those it’s meant to help.
John – You’re incorrect in assuming that it is Mr. Chen’s business which is being subsidized by welfare programs when in fact it is the workers who are being subsidized. In any transaction there is a buyer, Mr. Chen, and a seller, his workers, and to determine which party is being subsidized look at who’s use of resources would change should the subsidy no longer exist.
If welfare programs were to stop, Mr. Chen would still be able to purchase labor at the same price for which he is purchasing it now and his business would still be able to sell their products just as they are now. So Mr. Chen’s business would still be able to pay for the resources it needs while selling enough of the products it produces to make a profit. The workers, on the other hand, would still be able to sell their product, e.g. their labor, for the same rate they are now but they would no longer be able to buy all the resources required to provide them with what you call “a living”. Therefore it is the worker who is receiving the subsidy and not the business.
You could argue that if welfare programs were to stop the workers would be forced to go and find jobs that pay a higher wage and therefore Mr. Chen would not be able to purchase labor at the same price. If that is your argument then I’d ask why aren’t those workers currently going out and finding those higher paying jobs right now? Why would they decide to work for less money now even though they have skills sets for which they could get paid more money?
John – Even if Mr. Chen were the one receiving the subsidy, how is it that he would be “forcing” you to provide that subsidy? If you were to send less tax money then you owe to the gov’t on the basis that you don’t want to contribute to the welfare program subsidies, who would eventually show up at your door to claim the extra tax money you owe under threat of fine or imprisonment? It would definitely not be Mr. Chen.
Since when is a business required to provide a “living wage”? And a “living” wage is different from city to city, town to town. Sorry, but if you find that what you’re earning isn’t enough to pay your living expenses, then it’s ultimately up to you (the individual) – not the business or government for that matter – to make it happen!
John, your argument that everyone working under a living wage is on welfare needs evidence. I worked many minimum wage jobs in my life and have never once received any kind of welfare.
This is why franchises should not be bought. Do not blame Seattle for your short comings of understanding that while Franchises come with a brand that there is a reason why they do not self operate.
If you had the correct mindset you would have started from the ground up instead of buying into the suckers game. Franchisees normally have 3+ franchises to offset, you have one and that is where you did not do your homework. Welcome to the real world.
Oh and I am 37 and did live in Seattle for 27 years.
Let this be a general lesson to people that think a franchise is a great idea, it really isn’t ever.
Thank you for your comments.
How easy it must be to tell people which opportunity should be pursued after the fact.
An individual wanted to pursue the upward mobility of investing in a business franchise as opposed to the go-it alone route you advocate.
Perhaps, you should try to start a restaurant business without the protection of a franchise system. Endure the regulatory morass in any of these crazy minimum wage cities and see how things turn out. Look at the Cat Café in New York City, it tried to start up a business, followed all regulatory agency advisories, invested the capital and then six days later, shut down.
A franchise is a great way to mitigate risk. For those that do their homework, it can be a great way to get started in business.
That is simply not true. I bought a Chuck E Cheese franchise in 1997 and build two more in the Seattle area. All of them are profitable and my home store alone supported my family and employees until Oregon decided to index the minimum wage far above the national average. That took some of the fun out of it, but it still continued to produce.
The identity of the franchisor makes all the difference. Check E Cheese corporate created market areas upon which no other Chuck E Cheese was allowed to infringe, kept advertising and promotions up-to-date and promoted continual upgrades in the food and entertainment value of the stores.
If your franchisor is smart and committed to growth and longevity, it can be a great ride. The problem is that being a franchisee is like sleeping with a lion. If the lion is smart, no one can hurt you – – except the lion.
While I agree with your general points about the wisdom of buying a franchise in any industry, that reality doesn’t change the absurdity or the injustice of the Seattle law which rewards those who provide poor service and cuts the income of those who excel at it.
This law is so typical of the whining left and the also-rans it coddles and supports. I am a veteran of making a very good living from tips paid by customers exceedingly pleased with my efforts to serve them. $15 an hour would have been a comedown for me.
Watch as Seattle’s restaurant scene slowly degrades in quality, and the variety and availability of good places to eat declines. Some may hang on awhile, but nothing is forever. Eventually even good places close after a 30-40 year run (if they maintain their quality the entire time, which is not usual), and with this unnecessary minimum wage in place, the incentive to open new places has been seriously eviscerated.
But you can always come to Philadelphia or Baltimore for good restaurants worth supporting. We’re pretty liberal here, too, but we’re not stupid enough enough to take aim at both feet with a shotgun and then pull the trigger.
If you only made eight grand in profit last year, your business was failing before the minimum wage increase. I say this as someone who’s worked in the industry for over thirty years, there’s nothing profitable about eight thousand dollars a year in profit.
Hi Lee, thanks for the comment.
Our profit margin is in the teens. We had a few unexpected one-offs related to the industry, but left the narrative the same. As you are in the restaurant industry, you know, as we do, that the one-offs need to be factored in as well. To clarify, the eight thousand was also after the wage increases were set in motion.
But you fail to look at, or allow for fair comparison, any other issues that might also factor into your struggles.
What type of franchise? If one bought a Jimmy John’s about five years ago one would have a unique business new to the Seattle Market. Not anymore.
Where is it located? If one opened a franchise near a major construction project and foot traffic has disappeared that would effect your sales.
What is your market share in your location? If one opened a franchise restaurant in the many parts of town with multiple convenience restaurants (pho, teriyaki, fast, cafe, food truck) already in place or that have also opened since that would diminish your profitability. Is there increased competition in the vicinity of your establishment? You don’t want the reader to know.
From the tone of your article a franchise was much less likely to fail within the first five years before the recent wage laws. This is simply not true. Your claim would have us believe that there are no factors except the minimum wage and equipment related issues. Your conclusion, “Minimum wage is driving our restaurant out of business” is not supported in any way by the facts you have related.
In your mind, it appears that you are the most fortunate franchise owner in the history of Seattle because unlike thousands of entrepreneurs who opened and failed with franchises before the wage laws changed, you alone were INCAPABLE of failure were it not for labor cost increases. It can only be the increased wages. There can be no other explanation. Or so you would have us believe.
I appreciate the comments Kevin, former restaurateur.
You’re right, I didn’t dive deep into P&Ls or traffic counts. Our location is a well known and stable location, with consistent traffic. No new construction and competition is steady. We serve a niche market. We are not a fad brand, though our brand is still in good standing. There are many years of history at our same location. YoY gross has climbed each year 5-7%, avg tickets have gone up, COGS have remained within 1.5 points. Labor and a few unique one-offs have been the true variation.
Your attitude is surprising since I’m quite aware that I’m new to the service industry and have lots to learn, let alone a magical immunity to failure. Take away what you will.
Grant, I hope you and your partners figure out how to struggle through this transition and make this work. After all, that’s what successful entrepreneurs do. And if you do, I hope you come back and explain how you did it.
Also, have you seen the recent study out of Cornell?
“Have Minimum Wage Increases Hurt the Restaurant Industry? The Evidence Says No!”
Thanks for the support Goldy. We are definitely not going to sit down and will do whatever it takes.
I haven’t seen the Cornell study. My brief research on the opinion of economists is that it’s generally been split down the middle with half saying that it’s a good thing and the other half saying it isn’t. My take away is that if it’s that divided, then the jury is out until the real data is in. If there’s one very good thing to come out of the Seattle minimum wage hike, it’s that economists should be able to make some rational arguments based on what happens here in the next few years.
“lose” it all.
I appreciate your blog post and am disappointed in the comments you have received. There seems to be a lack of trust from fellow commenters that you completed thorough analysis and were able to reasonably conclude that labor costs were primary drivers of your current issues. I’m giving you the benefit of the doubt simply because you did not politicize your post and because I don’t think you would have taken the time to put yourself out there and to write this were you not sure of the facts. Personally, I think it was a thoughtful reflection that did a good job illustrating your journey and your current struggles.
I don’t think I would have made the same financial decisions that you and your friends did, but given the terrible timing (in a macro sense) of the start of your career, I can certainly see what led you there.
I’d like to tip my cap to you for going against the grain and taking a risk like this. I admire that you’ve been able to create some jobs and employ some students along the way. Surely such people should be encouraged by government to do this, but it seems your municipality has chosen to demonize small business owners instead.
It’s a shame that you’re struggling and you deserve far better than to be shafted by factors you cannot control. I wish you and your partners the very best as you try to navigate the coming year. I also wish the same to those you employ and would have employed in the future. It would seem to me that a smaller minimum wage would be desirable to no wage, but like you, I try to leave the analysis to those who claim to know what they’re talking about.
Thank you for the kind comments Clay. I knew posting the perspective of a business owner would likely attract some opposing views, but the level of vitriol that I’ve received from this (especially on private emails) has been eye-opening. I would never have thought in a million years that people would cheer and gloat over someone just trying to make an honest dollar. I rationalize it by assuming that no one truly knows the sweat equity of running your own business until you’ve actually done it.
At the end of the day, while we’re going to write this business down at a loss, the lessons in running a lean operation gave us the perfect crash course that made our second venture quite profitable. The reality is that we simply decided that we couldn’t operate our business model in Seattle and are doing just fine outside the city while paying a good deal over the minimum wage at the same time. It’s amazing what we can do when we’re not handicapped at a 40% labor disadvantage against our peers.
hi Grant, I’m re-posting your article on my FB–in the pitiful hope that it it may educate someone in reality. The first time I posted it, I included my own snarky comment, to which my uber-left friend immediately responded in kind. So I took it down. Anyway, I found it interesting how you mentioned getting away from Wall Street and going into business instead. Contrarily, I would be scared to death to start any business; but believe that the easier way to make a buck is the market–done properly, of course–whatever that means.
All I got out of this is that businesses can only profit off of paying employees as little as possible. Don t own a restaurant, people need to realize that restaurants shouldn t even exist in any economy, or rather it won t for much longer. We re living in a consumer nation built by our grandparents generation.
Great story and show that things just happen in life and a lot of things
are out of our control. Have a startup that needs help.
Please email me back when you get a chance
I don’t understand the critical comments – Grant doesn’t present himself as God’s gift to restaurateurs, but presents some real world notes to file in the discussion – better than another Forbes piece. Some of his comments bring up very good points, such as the minimum wage law hitting restaurants differently and different *kinds* and *models* of restaurants differently, including the higher number of minorities who might use those models and be employed by those models.
Some of my thoughts. (quotes paraphrased)
1) “If Grant fails, his restaurant will be replaced” – uh, no, Seattle might optimize on a lower # of restaurants or X franchise restaurant at this wage scale, or there might be new city regions that can’t support so many restaurants.
2) “Grant is subsidized” – so is everything in America – whether US military keeping our oil prices low and propping up Boeing’s industry that helps fuel Seattle, the streets to get to work or deliver food, bus-rail-ferry services, Earned Income Credit, the local university that provided education & jobs for its campus and surroundings, etc.
3) A “living wage” depends on the local economy (2009? you’ll be happy to survive), the acceptable margins and work put in of the restaurant’s owners, owner/employees’ cost-of-housing-and-living,..
4) “Grant should have known better” – he did know better, but one of his cost inputs went up unexpectedly, to go along with some others that went up unexpectedly. He already said restaurants were risky, and a trifecta just hit him – but because of the industry, he can’t even just back out or declare bankruptcy.
5) If you think Grant made mistakes, it sounds like he’s better educated and prepared than perhaps most in this industry, who often times will shift from being owners to being store managers – if those jobs exist. (but ironically, with a per hour wage hike)
6) US industry depends on risk takers, usually at smallish margins. If the base costs rise significantly, fewer people will burden the risk. It’s pretty obvious. And that will result in fewer businesses and less employment, and then more subsidies from government for unemployment expenses. Maybe those making $15/hour will then have to pay more in taxes.
Anyway, most people doing small businesses aren’t looking for riches – aside from those VC incubator aspirants who hog the front pages – they’re either trying to double down on what they know how to do, or enthusiastic about something and they want to get it out, sometimes at marginally higher profit, sometimes not. Dig into the profit too much, and they’ll take Option B, as any Econ 101 text will tell you.
I am saddened that so few understand the bigger picture that is being described –
The great benefit of the 15.00 per hour wage is a higher overall cost of living – that will increase beyond the new found buying power a 15.00 per hour wage brings.
But short sighted people who never grasped how the cycle of income and purchasing – that of a service based economy – which is what we have – how it actually works.
Yes – kids work there for less than 15 per hour – and they get a raise – great for them.
Every other person in the assorted supply chains that sustain the city ALSO get raises – so EVERY aspect of the city’s economy sees a price increase.
Yet the only winner is the government – because those raises come with a price tag.
The federal state and local taxes will take between 1/2 and 1/3 of the raise.
The loss of health insurance premium subsidy will consume between 1/3 and 1/4 of the raise.
The loss of out of pocket cost subsidy will result in over 6K deductible per person – so now anyone with health issues sees LESS in the pocket.
Any existing subsidies and federal or state assistance for utilities, rents, food, housing costs are removed – and the in pocket amount is even less as that shortfall has to be made up.
But NO ONE’s taxes will go down because of less government dependency.
The crowning centerpiece has been described but missed by so many who are critical of the article.
Not just the food costs in this establishment will go up.
Every cost of products or services that includes any below 20.00 per hour wages will ALSO GO UP, since they all get raises, and all of those prices are forced up to cover the added costs.
All of the supplier employees also see a raise – the delivery drivers see raises, the warehouse persons and stocking clerks, the picker who pull the supplies for the hundreds of restaurants and dining places will see raises.
The people they all go to for services will also see raises.
And the people they go to will also see raises.
And each rise is a business owner’s decision to either give a raise, or lay off.
Look at those self checkout lines 3 or 4 per one service cashier now
and tell me where the displaced union cashiers went.
Remember that when you push the touch screen to order a meal,
pump your own gas,
was your own windshield
all of those were someone else’s jobs once upon a time.
So the great benefit of the 15.00 per hour wage is a higher overall cost of living – that will increase beyond the new found buying power a 15.00 per hour wage brings.
And has been admitted by those who push for the wage – there will be layoffs
and they do not care, as long as they get theirs
And so 31K per year will soon not be enough – because it’s not the price of the burger increasing – it’s the increases in all aspects of living there that will get you.
I am so sorry for you! Get out, get out and let all the non-business owners pay the extorted prices for food that will occur! Take all the taxes and wages that you pay with you. Now instead of an hourly job for 10 or 11 dollars, there will be none for 15. The people complaining to you will be the first to complain about the high prices of dining out and surcharges! Good family owned restaurants will all be run out of business and all that will be left are big chain restaurants that heat up crap in their microwaves and charge a fortune for it.
There won’t be any one reason why a business fails, but the vast majority of franchise offering simply aren’t good economic propositions. There are some ways franchising can make sense, but most franchisors have unrealistic expansion plans and cannot provide the value to their franchisees to justify the fees they will then exact for years after their initial start-up assistance has been delivered.
This is probably the most “it actually makes sense” kind of post I’ve seen on on this subject. Best part… I didn’t have to go digging through some weird web design to find it. Awesome! Please keep posting new material!
I have 11 chinese restaurants within a 2.5 mile drive of my house. I’d be ok with 2 of them closing down so the other 9 can pay a living wage. The problem with the restaurant business, there are way too many restaurants (supply) for the amount of customers eating out (demand). So all of you are fighting a piece of that pie. The market stabilizes by either the owners screwing over their employees to stay in business or less restaurants stay in business in order to pay livable wages.