Retailers, restaurants find ways to cope as minimum wages start to climb

It's about to get more costly for businesses to operate in the nation's second- and third-largest American cities.

The cities of Los Angeles and Chicago both have local minimum wage ordinances going into effect July 1 that will increase the mandated hourly wage 5 percent to $10.50 per hour from $10 previously. On the same day, both San Francisco and Louisville, Kentucky, will also see new higher minimum wages in their cities. San Francisco's hike will boost the hourly rate 6 percent to $13 per hour from $12.25 previously, while Louisville's minimum wage will rise 6 percent to $8.25 per hour from $7.75.

Overall, researcher Evercore notes that four counties and seven municipalities nationally will get a jump in minimum wages between July and October. Among them are two counties in Maryland — Montgomery and Prince George's — where minimum wages are set to soar nearly 13 percent to $10.75 from $9.55 on Oct. 1.

Some employers — particularly those in the retail industry — are increasingly adopting technology to soften wage inflation pressure. McDonald's, Panera Bread, Wal-Mart and other major retailers are leading the way and using kiosks and other technology as they generally reduce the number of personnel dedicated to cashier functions.

"Restaurants are finding creative ways to cope through technology and price increases while increasing general consumer service levels," said R.J. Hottovy, an analyst at Morningstar in Chicago.

In the case of quick-service chains, the added labor expenses and the costs of the automation technology such as ordering kiosks might be borne by the fast-food franchisees although sometimes the franchisor helps, the analyst said.

"We are most focused on… ordering kiosks or ordering tablets," El Pollo Loco CFO Laurance Roberts commented last week during a presentation at Jefferies Consumer Conference. "So, instead of having a cashier station, you have one with the cashier, but then the other one you may have one or two ordering stations that are done via tablet."

Another trend within the restaurant sector is more emphasis on menu and recipe simplification, especially within the quick-service space and casual-dining operators such as Darden Restaurants, the operator of Olive Garden. The goal here is to save money by reducing food waste.

California is where the biggest overall wage impact will be with the cities of Pasadena, Santa Monica, Emeryville and Berkeley also having higher minimum wage hikes going into effect. That follows California Governor Jerry Brown signing a bill in March that will lift the statewide minimum wage to $15 an hour by 2022. L.A. and San Francisco's local wage measures mean they will reach the $15 hour minimum wage earlier (L.A. by 2020 and San Francisco in 2018).

Major U.S. restaurant chains with significant exposure to the California market include Jack in the Box, BJ's Restaurants, the Habit Restaurants, Denny's, Del Taco Restaurants and El Pollo Loco, among others.

In the case of Del Taco, about 77 percent of its revenue in the latest year was generated in Southern California, according to the chain, which has nearly 550 restaurants in 16 states.

Also, mandated sick leave benefits in California allow employees to earn at least three days of paid time off annually. New L.A. city rules require employers with 26 or more workers to provide for six days a year of paid sick leave, while San Francisco currently has a rule requiring employers with 10 or more workers to provide 72 hours of sick leave benefits. For small businesses with fewer than 10 workers, employers must provide 40 hours per year.

Some of the restaurants are passing along the increased labor costs through menu price hikes. For example, Del Taco estimates that a 50 cent wage hike in 2017 and 2018 would require an about 1 percent annual menu price increase to cover the total $1 hourly wage impact in that period.

Morningstar's Hottovy said he estimates there will be a 1 percent to 2 percent increase on average in menu prices from some of the chains impacted by the higher labor expenses.

"It's something that is obviously a concern. They should find ways to offset it," he said. He and others caution that there are undesirable risks since competitive pressures can limit the ability to raise prices particularly for fast-food operators.

The climb in wages is a double-edged sword for discount chains such as Walmart, known for having more sensitivity to low-income customers. In late February, Walmart increased wages for more than 1.2 million employees. While the higher wages can pressure labor costs, the trend of rising wages nationwide can boost sales growth by putting more income in the hands of people working minimum wage jobs.