Wichita owners: Minimum wage increase would be tough for business

Jon Suddeth once told a newspaper he was an idiot for buying a restaurant.

He was joking, mostly. But the owner of Delano Barbeque Co., 710 W. Douglas, knew how tough the business could be – and now, a year later, some of his anxieties have proved valid.

It’s easy to sympathize with the plight of low-paid workers, their struggles to make car repairs and buy clothes for school. But the businesses that employ those workers also sometimes struggle to make ends meet, and raising the minimum wage would make a big difference in whether they survive.

The move for a minimum wage increase from the current $7.25 an hour is gaining momentum nationally.

Since 2013, President Obama has called for raising it to $10.10 an hour. In April, Senate Democrats tried to pass a bill phasing in an increase to $10.10 an hour, but it was defeated by Republicans who said the economy was still too fragile.

But the governments of several cities around the country have voted to raise their minimum wages, calling it a move toward more social justice for low-paid workers.

Some of the movement is also coming from big business. Six years into the economic recovery, Wal-Mart, McDonald’s and others – facing high employee turnover and complaints of poor customer service – announced pay increases to hire and retain better employees. Wal-Mart raised its lowest wage to $9 an hour this year and will move that to $10 an hour in February.

Battle of philosophies

There is still plenty of debate over the issue, particularly in lower-cost, lower-wage areas such as the Midwest and South.

Conservatives argue that raising the minimum wage would hurt thousands of businesses and shrink the number of jobs, while liberals say that the current minimum wage doesn’t provide a living wage and raising it would boost the economy by creating more spending.

Economists come down on both sides of the issue because the effects are complex.

The nonpartisan Congressional Budget Office in February 2014 issued a report that concluded that raising the wage from $7.25 to $10.10 would push millions of working poor families above the poverty line, but most of the money would actually go to families already above the poverty line – sometimes far above – who happened to have a member working for minimum wage.

And businesses, faced with higher wage costs, would eliminate 500,000 jobs.

Dan Murray, Kansas state director of the National Federation of Independent Business, said he regularly surveys his members, mostly small and locally owned, and they overwhelmingly hate the idea of raising the minimum wage.

Businesses want to get what they pay for, Murray said, so if wages rise, owners will employ better-skilled workers for fewer hours. The lowest-skilled workers, who already face high unemployment, will lose out.

“The irony is that there are a lot of people who think it helps the low-wage earner and, in reality, it has the opposite effect,” Murray said.

But don’t tell Mike Draper that raising the minimum wage hurts businesses.

Draper owns Raygun, clothing shops in Des Moines and Kansas City, Mo. He starts his part-timers at $9.50 and his full-timers at $15 or $16, but raising all of his workers to $15 per hour wouldn’t be difficult, he said.

His part-timers earn about 7 percent of his budget. Increase that by 30 percent and it comes to an overall cost increase of about 2 percent. It’s not that big a deal, he said, and there would be more people who can afford to buy his merchandise.

“They will shave expenses elsewhere ’cause that’s what you do in business,” he said. “We are able to do what we do because we keep other expenses low. We keep the cost of displays low, we keep my salary low, we keep travel costs low.

“There are so many ways to cut expenses on your balance sheet. Don’t believe anyone who says they can’t.”

A busy lunch

It’s a weekday lunch and Delano Barbeque is jammed.

About 60 people are talking and digging into their barbecued brisket, pulled pork and smoked turkey, with sides of french fries, barbecue beans and Texas toast. Workers are making sandwiches and refilling silverware holders.

Michelle Suddeth, a co-owner with her husband, Jon, estimated their wages average $8.60 per hour.

Delano Barbecue is housed in one of those century-old brick buildings on West Douglas. The dining room has concrete floors, and the brick walls are covered with corrugated steel and framed photos of Wichita’s history. There’s a big-screen TV above the counter.

Michelle Suddeth is working the front, handing out trays of food from the kitchen, but Jon Suddeth doesn’t usually work at the restaurant. Once a manager for Heroes, BG Bolton’s and Gobi Grill, he became a district sales rep about five years ago for Ben E. Keith Foods, selling food to restaurants and cafeterias in the area.

They were cautious when the owners, Scott and Terri Webb, told him they wanted to get out of the business. They had seen a lot of restaurants go under, but they saw a lot of upside to this one.

A year later, they’ve raised sales by 40 percent from the previous owners, partly by staying open on Thursday, Friday and Saturday nights, but food and labor costs are higher than they expected. Delano Barbeque is profitable, Jon Suddeth said, but not hugely so.

So the prospect of raising the minimum wage concerns them.

How much can a business absorb?

Jon Suddeth figures it this way:

He pays for about 220 hours of labor a week. If the minimum wage rises by $1 per hour – and they raise all employees by that much – their labor costs would rise $220 a week or about $11,500 per year more in labor costs.

The average profit margin for a mom-and-pop restaurant is about 4 to 7 percent, according to RestaurantOwner.com.

Their sales this first year are between $400,000 and $600,000. If they turn a 5 percent profit, a $1-per-hour raise would cut it in half and a $2.85-per-hour raise would put them in the red.

“At some point, it’s not worth it,” he said.

And, he noted, a lot of restaurants aren’t profitable now. That number would certainly increase if labor costs went up.

Is it possible to pass the cost on to customers by raising prices?

Hourly employees make up about 20 percent of a quick-service restaurant’s costs, according to RestaurantOwner.com. For each $1 rise in wages, the price of sandwiches would have to rise about 20 cents.

That’s doable, Jon Suddeth said.

One of his customers, Sharon West, agreed. She and Terrie Schaapveld were eating lunch at Delano Barbeque. They estimated the price of their lunches at about $8 to $9.

Was it worth it? West paused from her smoked turkey sandwich and fries.

“For this, yeah,” she said. “For McDonald’s, no. That’s fast food.

“This is a hometown place. It belongs to the community.”

But that decision gets more difficult if Suddeth had to raise prices closer to $1 more per sandwich.

Schaapveld said she probably would pay 50 cents more, but $1 might start to affect her decision.

“We’d need to get McDonald’s more often,” West said.

Are all businesses that tight?

Not all businesses are so tight.

RestaurantOwner.com shows that a chain restaurant averages profits of 12 to 15 percent before corporate overhead and taxes.

Jim Laube, founder of RestaurantOwner.com, said restaurant chains not only use their size to negotiate better deals on food, but they have systems in place to cut waste and guesswork on the best way to operate.

And the fact that Wal-Mart and McDonald’s think they can work a significant pay increase into their cost structure – although it hurt profits – is revealing.

But, Laube said, the independent restaurants that he works with don’t have that luxury. It would force them to raise their whole hourly wage structure, not just the lowest paid.

That would raise the labor costs for restaurants, too high to be absorbed. They would have to pass it on to customers.

“Most independents operate on such razor-thin margins that if it was to go up 10 or 15 percent, they would have to raise prices,” he said.

Jon Suddeth agrees that there may be some room, but not much.

“I don’t think a dollar would hurt,” he said. “But I can’t increase prices higher than people can afford.”

This story was originally published September 5, 2015 at 4:24 PM with the headline "Wichita owners: Minimum wage increase would be tough for business."