@TBPInvictus
If you’re just joining us, here’s our story thus far:
Some on the right took a fairly benign article out of a Seattle publication and twisted it to fit their agenda, i.e. that the increased minimum wage there would spell disaster for the Seattle restaurant scene as eateries closed in rapid succession. Their hopes were bolstered – or so they thought – when one (that’s “1”) pizzeria closed, with its owner citing the wage increase. I chronicled that story here, here, here, and here.
I began keeping weekly tabs on restaurant-related NAICS codes for Seattle, the latest of which looked like this (as of July 22):
When it became crystal clear that Seattle restaurants were not closing as forecast, another narrative needed to be found. This is not to say that the Seattle story has dropped off conservatives’ radar, but restaurateurs and their patrons in the pacific northwest have just not been cooperating and it simply cannot be the case that a higher minimum wage can work.
Which leads us to a research report on Chipotle Mexican Grill (NYSE:CMG) from William Blair analyst Sharon Zackfia. Zackfia, as part of her coverage, surveys CMG’s business on an ongoing basis. In a recent report, this is what she wrote:
Very importantly, note that Zackfia speculated – “We believe” – on the reason for the price increase in San Francisco. Her speculation notwithstanding, the report found its way into the hands of Mark Perry, who’s never one to let facts or truth stand in the way of what he thinks is corroborative evidence. Perry immediately posted an article titled “Who-d a-thunk it? SF minimum wage increased 14% and local Chipotles just raised prices by 10-14%?” (It should be noted that there are no – zero – Chipotle franchisees. All stores are 100% company owned. They do not, as yet, franchise. So decisions about pricing are made at corporate, not on the local level.) Perry’s article was immediately seized upon by like-minded ideologues – see here, here.
Chipotle held its quarterly conference call last week pursuant to an earnings release. The call contained some interesting mentions of how minimum wage legislation is impacting (or not) their business model. There is no better source for information about a company than its own senior management. So let’s have a look. All emphasis added.
First, as to labor costs:
Labor costs were 22.6% of sales during the quarter, an increase of 80 basis points compared to last year.
They are seeing some wage inflation. Chipotle is also known as an above-average (wage-wise) employer (as we’ll see below):
Hourly labor rates including our hourly managers increased 4.2% in the quarter, the fastest we have seen in many years. There has been a general increase in wage rates in many of our markets and because we desire and expect to attract and reward only top performers, very important for us to stay ahead of the curve and pay attractive starting wages. We also continually monitor the pay of our top performers already in our restaurants as they progress through the manager ranks to ensure we’re paying fair wages in light of their significant contributions and so this is also a contributing factor to the increase in the quarter.
Not to make a direct comparison to, say, big box retailer Costco, but I’d venture that a much smaller percent of Chipotle employees are paid at minimum wage than at its competitors/peers, as indicated in this comment:
We typically pay above minimum wage in all of our markets, so a normal increase in local wages usually has little effect on us. But in some local markets the minimum wage has been or soon will be pushed well above our national average rate.
Here’s where things start to get interesting:
In the San Francisco Bay Area for example, the minimum wage was recently increased to over $12 an hour. This increase coupled with higher occupancy and other operating costs excluding food costs contribute to an overall cost of doing business of 30% or more higher than our average Chipotle. But our menu prices in the San Francisco area were until recently only about 4% above the typical Chipotle and were lower than most competitors in the area. So as a result of looking at all of these factors, we decided we were underpriced in San Francisco and we recently increased prices by 10% in the 10 restaurants within San Francisco and by 7% for the 74 restaurants outside San Francisco in the Bay Area.
Read that very, very carefully: Chipotle’s cost of doing business in the Bay Area is “30% or more higher than our average Chipotle,” yet “menu prices in the San Francisco area were until recently only about 4% above the typical Chipotle and were lower than most competitors in the area.” Is it any wonder they raised their prices? They’d have been crazy not to – they were, as noted, clearly underpriced in the area. Note also the mention of “occupancy costs.” As I’ve mentioned previously, I think it’s entirely possible that rapidly rising rents are going to play a much bigger factor in fast food pricing than minimum wage will.
These relatively modest increases effectively pass along only some of the higher cost of doing business in that area. Because only 84 restaurants were affected, the impact on the overall company will be about 30 basis points on an annual basis. We’ll take a similar approach when the overall costs of doing business in a market are escalating on a case-by-case basis, whether these higher costs are driven by legislative changes or by market forces. As an example, although the minimum wage in Maryland recently increased to over $10 an hour, our overall cost of doing business are reasonable there. And so we do not plan to increase our pricing in those restaurants.
Compare and contrast the situation in San Francisco to that of Maryland, mentioned above, where the minimum wage also rose recently, but where the company’s cost of doing business is more reasonable and they therefore “do not plan to increase our pricing in those restaurants.” (Read about Maryland’s increase here.)
There are some additional structural costs, higher costs of doing business that we will look at next year like we did in San Francisco. But just because minimum wage is increasing in a market doesn’t mean we’re going to raise prices. The example that I gave in Maryland is a great example. Another one is in Chicago. Chicago just recently implemented higher minimum wage, and we don’t expect to raise prices there in the near future, probably not at all this year. And so we’ll look at it market by market and there might be some cases where when you look at all of our higher cost of doing business that we might deem that it’s necessary to take a price increase in those markets. But I wouldn’t expect that to be a significant add-on to our comp or a significant add-on to the menu price increases.
And with that, it would appear that conservatives will have to move on to yet another city, as neither Seattle nor San Francisco will have them. Bottom line: Chipotle’s price increase in the San Francisco area was, as one would expect, the result of several factors; to claim otherwise is simply to be dishonest. The firm flat-out stated – see above – that increases in the minimum wage do not automatically trigger higher prices to consumers. Will facts and/or the truth stop those with an ideological agenda from latching on to absolutely anything to “prove” their case? Unlikely. After all, there are never any consequences, no penalties, no loss of credibility. Just on to the next falsehood.
UPDATE: See also this excellent piece by Goldy over at Civic Skunk Works.
“Some on the right …”
Stopped reading there.
Too bad. You missed a really good post, if I do say so myself.
“Chipotle spokesman Chris Arnold confirms that this is largely the case. In San Francisco, where Chipotle operates 10 restaurants, the 14 percent minimum wage hike that took effect this year contributed to a 10 percent price increase on the menu. In the East Bay, where Chipotle has 74 restaurants, the company raised menu prices 7 percent “in part to offset” steep wage hikes in Oakland (36 percent) and other municipalities. “California, and San Francisco in particular, have a high cost of doing business,” Arnold writes in an email. “In San Francisco, for example, our occupancy costs are about double the Chipotle average as a percentage of sales, and our menu prices there are right around the average for Chipotle restaurants around the country, so increases to wages can have a greater impact than they might elsewhere.”” from http://www.slate.com/blogs/moneybox/2015/07/08/chipotle_raises_prices_in_san_francisco_in_part_to_offset_minimum_wage_increases.html
Haven’t you moved too far in the other direction as a result of ideology? You’re correct, there’s not 100% correlation between wage hikes and end-market prices. Many factors affect price! But at the margin, a wage hike has resulted in higher prices.
I don’t understand the point about franchisees you went so far out of your way to make. Yes pricing decisions are made at the corporate level. Does that mean prices are set universally across the country? Does that mean changes within the cost-structure in specific markets do not effect price?
Maybe he/she did but had you not made it accusatory and political with a huge sweeping generalization in the first sentence, you’d have likely increased the likelihood of your message being better received.
I am on the fence in regard to increasing minimum wage (i.e. costs) will not have an impact on business in general but when an opinion is framed in a political way first I will discount it as well.
By the way, your analysis talks only about aggregate costs and does not address how those limited increases were achieved in detail.
Also, its curious that Chipotle (in San Fran) decide now was the time to normalize their prices to the local market. Why did they wait until the minimum wage increase? Why not last year, next year??
Finally, you state: “The firm flat-out stated – see above – that increases in the minimum wage do not automatically trigger higher prices to consumers. ” You are right in that regard but those increases in wages may have cost an employee or two their job or working hours in order to maintain some level of profitibility. Anything is possible; managment said, “But just because minimum wage is increasing in a market doesn’t mean we’re going to raise prices.” They may cut hours or employees. Is that a possibility?
Again, I don’t believe I have the absolute answer on this subject but I will wait until some time has passed and look at many more observations to make a definitive decision. You, it seems, will rely on your political (confirmation) bias.
@hack …
“… but those increases in wages may have cost an employee or two their job or working hours in order to maintain some level of profitibility.”
… consider the possibility that NO business hires employees out of charity, they all do so because, AND ONLY BECAUSE, those employees are necessary to support a targeted level of business activity.
This is why product price increases are done only as a last resort, as THOSE can certainly drive away customers, and reduce the level of business activity. In the case of Chipotle in SF, that seems unlikely, because Chipotle, a moderately high-end fast food place, was operating with prices that were below the market average in that area. They were leaving money on the table, nothing whatsoever to do with business costs or employee wages.
But so long as a certain level of business activity is targeted, NO employees will either lose their jobs or suffer reduced hours (without introducing the additional complicating factor of automation, which is a whole ‘nuther discussion). Job losses result from reduced business activity, which may come from increased product prices, but not directly from increased wages paid to employees.
There are just as many reasons why increased wages would increase business — in restaurants, employees might bring their families there to eat more often, in auto manufacturing, employees might be able to afford the products they are producing (e.g., the experience of Henry Ford [http://www.npr.org/2014/01/27/267145552/the-middle-class-took-off-100-years-ago-thanks-to-henry-ford]), or it might be that high turnover is costing the company more than the cost of an overall wage increase. A company is a complex machine, with many moving parts. Simplistic explanations of how companies work are probably wrong.
While it is possible that wages could be increased to a level that forces product price increases to maintain profitability, very few business owners operate with margins that thin. There are simply too many factors that can reduce margins and drive the companies into operating losses.
Sounds like you have your own political agenda, NoKidding.
Agreed, good post. Thanks for taking the time and effort to do it.
It seems like it would be easy to do a study of price increases or not within a city or within an industry to see what the real monetary effective of raising minimum wage would be. Why do we not see any of these studies?
Chipolte’s point about already paying above minimum wage in some markets so minimum wage has no effect on them should be instructive to other employers whose business model seems to depend on paying as little as possible and relying on the taxpayer to pay the rest of their living wage costs indirectly through food stamps, etc.
Research can get in the way of a good narrative. Best to avoid doing the research.
“Just on to the next falsehood.”
I wish.
Instead, what will happen is the falsehood will be repeated virtually forever, rightwing politicians will quote it, and a large portion of Americans will believe it.
The internet, instead of making us more informed, has been used to make us less informed about what is true and what is false. I don’t think the people who created it anticipated this result.
No, it was created as a way for scientists at government labs to exchange information, but it has become just one giant advert.
““Who-d a-thunk it? SF minimum wage increased 14% and local Chipotles just raised prices by 10-14%?””
I guess only an ignorant person like Zackfia who think that the wast majority of cost in that business comes from wages. Reality is that very few businesses that employ mostly minimum wage workers have salaries as their main cost. So even if they fully transferred the increase into prices it would never give you the same % increase in prices as in minimum wage.
Thank you for a breath of mathematical sanity.
If “some on the right” means Republicans, how does the “party of business and businessmen” screw up something like this? Correctly attributing costs, as I remember from my own business experience, was fairly important….
Excellent post: Thanks.
Tend to agree with GeorgeBurns: repeating zombie lies appears to be penalty-free in this day and age and hacks like Zackfia would obviously prefer repitition in that case since it takes less effort than concocting a new lie.
Look, would a $0.01/hour minimum page affect anything? No.
Would a $1000/hour min. wage? Yes.
So you do agree with the basic thesis. You just think $15/hour can be accommodated today without large scale layoffs. Fine.
As for myself, I continue to scale back labor as soon as I can automate functions (20% decrease in last 5 years).
That analysis — though incomplete, missing components, and subtlely biased — worked great in ancient Greece 5000 years ago. Today, we rely on studies and actual data versus theoretical philosophical analyses. And the data overwhelmingly shows that modest increases are a net economic positive.
Socrates sends his regards . . .
When the cost of something increases it will eventually be passed on! Barry, you site Management’s own comments to support your view. But what did management say if that in a city that is predominately Left Leaning it is the most expensive to do business. To the toon of >30% then other cities. Certainly this isn’t just higher the minimum wage and does speak to the success of businesses and S.F economy. It is much more nuanced then to be easily explained. However, if S.F, Seattle, L.A or D.C are causing an increase in stores costs, it is inevitable this get’s passed on. You mention that 84 stores in S.F of the 1700 Chipotle has have greater costs due to overall higher costs (wages, rents, etc.) and this currently is being absorbed by those operations where the costs are lower outside of the Left’s Cities. If the the decline to profit is 30 basis points for 84 stores, then what happens when you implement this across a wider amount of stores. You’ll have to raise prices or cut back on other services, staff etc. “Just because the minimum wage increases doesn’t mean we’re going to raise prices” Really…lets see what happens over the next year when other stores are forced by politicians to raise wages on businesses. To argue that they won’t raise prices or cut something is a Cognitive Foible.
Why does an argument by someone from the right cause you to write something? Your own argument says that S.F(liberal left) has >30% costs compared to other cities. This is offset by other stores. I’d recommend the other stores be cut off from the cost sharing of S.F and let’s see how…”flat out” wrong the argument is that raising wages won’t impact the need to raise prices or move out of S.F.
Simple Finance
The part you are missing is that the more you sell the less profit per unit sold is needed. When minimum wage people make a little more money they are more likely to purchase products from places like Chipotle.
@DeDude -“the more you sell the less profit per unit sold is needed.” Businesses aren’t run to reach some “necessary” level of profit. They are run to generate the maximum number of dollars possible.
“When minimum wage people make a little more money they are more likely to purchase products from places like Chipotle”
The idea that mandating the number of dollars restaurants should pay their employees would result in higher sales to the restaurant specifically seems an odd argument. Labor costs may only be ~20% of the average restaurant’s revenues, but I doubt these employees would spend all their incremental wages on dining out. What we are doing is penalizing businesses which employee low wage earners, possibly to the advantage of the broader economy (though perhaps not). 1) Is that optimal? 2) Is that the type of decision a government should be making?
How do rising prices allow you to sell more? If the unit sold is more it’s usually from scaling out lower cost items not rising!? The opposite is then occurring using “the part I’m missing”. They are selling less and at less a profit. Unless they pass on costs to consumers.
I don’t think there’s a viable study done independently that I’d trust which concludes that the more money someone who has very little is now going to go out and spend it on higher priced Burrito’s. Sorry, no one is more likely to do anything that someone thinks just to prove a point on the internet. I ask myself. Would I do what you say is more likely? The answer is No. I guess it’s all the other people besides the people I know who would say the same thing. It’s not logical to spend your increased wages to net yourself out to $0. And if that’s your argument then why do the wage increase? If the effect is is $0. All you’ve done is raise prices for others so chipotle employees can….well, eat Chipotle! Great Policy
“Businesses aren’t run to reach some “necessary” level of profit. They are run to generate the maximum number of dollars possible. ” There is something wrong if the business model depends on the taxpayer indirectly picking up some of the cost of doing business through programs like food stamps.
In 1971, the minimum wage equaled 43% of the median wage. Today it is about 30% of the median wage. If the minimum wage had remained in a constant relationship to median wage it would be $10.08/hour today. So minimum wage has actually declined. This is the troubling issue hardly anyone is talking about.
What should the minimum wage be if median wages had remained on pace, and the minimum wage remained 43% of the resulting median income?
@guest101 and Zig Zag,
Yes businesses will increase prices to obtain as much profit as the market will allow. But the question was whether they will “need to raise prices” because of the increased labor cost. If they sell more they will not NEED to raise prices even if they may want to.
The increased income for minimum wage earners in the restaurant business (and in retail and services) will give low income people more to spend in their discretionary budget, if history is any guide, they will spend, not save, that money. That is why the predicted “disasters” (closed businesses and lost jobs) fail to materialize whenever a municipality or state raise its minimum wage. As Invictus data show there is actually a growth in number of restaurants – but those are facts, don’t let them destroy your narratives.
This is the United States. it is irrational to think that facts matter.
Apples and oranges, but research and statistics from a recent BLS study with McDs specifically cited:
http://www.msn.com/en-us/money/markets/raising-fast-food-hourly-wages-to-dollar15-would-raise-prices-by-4percent-study-finds/ar-AAdBrYe
I suspect but cannot prove that thinking the BLS is righty or lefty might be a “cognitive foible,” in case someone retorts. Labor costs in any business is but part of total cost, so only the component cost is affected by the percentage increase (and I’m stating the obvious, I know.) As mentioned, if it helps these folks get off the public assistance train and make their employers pay their own way, we all benefit. Course if you have to cough up and extra 31 cents on a $7.00 meal, boo hoo….
Large swings in wages may effect small to even no changes in product price — and very little or very big changes in profit. If labor is 10% costs and ups its price 50% (5% more cost), sales and profits may suffer only 5%. Conversely, If labor costs are 15% and a firm can squeeze down 5% (33% cut) of that the firm may double profits at the same product price. A titanic economic battle going out almost completely out of sight of the ultimate consumer. :-)