By Izzy Kharasch.
If you have clients in the hospitality industry, or who are contemplating investing, be forewarned: Times were tough pre-pandemic and, looking back from today’s perspective, those were “the good old days.”
According to the U.S. Bureau of Labor Statistics, “prices for food and beverages are 20.2% higher in 2023 vs. 2020.” Keep in mind that this has dropped since the peak in 2021-2022.
Labor has gone crazy, too, making profits ever more elusive. A few examples: California minimum wage in 2018 was $11 per hour, and just went to $16 per hour January 1, 2024, but for restaurants that minimum wage will be $20 by this April.
Labor and Labor Dollars For The Next Two Years
The hourly rate will continue to increase in several different ways. California has raised “regular” minimum wage to $16, but they have created a fast-food minimum wage of $20 beginning in April. This will force every restaurant near a fast-food operation to raise their wages just to keep employees. Look into what your state is planning for minimum wage over the next 5 years.
Another thing to consider is that many states are raising the Tipped Minimum Wage, which is a lower hourly wage for servers, bussers and bartenders, or getting rid of it entirely. Let’s say that a state has a minimum wage of $10 per hour. The tipped wage is $5 per hour but with tips at the end of the shift that employee has averaged $18 per hour, which exceeds the state minimum.
Look very closely at what your state, city, or county plans to do with the tipped minimum wage over the next 5 years, as this will have a huge effect on cost/profit. California, as an example, has removed Tipped Minimum Wage altogether and now restaurants pay servers $16 per hour PLUS tips. In Denver, the Tipped Minimum Wage is rising to $15.27 per hour provided they earn at least $3.02 in tips.
The Cost Of Food
As I mentioned earlier, the price of food is now 20.2% higher than just a few years ago. It certainly feels a lot higher, and the reason is that food took an incredible jump between 2019 and 2021.
An example is chicken wings, one of the most popular restaurant items across the country. In 2019, a restaurant was paying about $45 per case, but within a year that same case jumped to $150, more than three times the original cost. The price of that product and many others has come down from its peak, but we still are feeling the effects of skyrocketing prices during that period.
Wholesale food prices will go up anywhere from 4.9% to 5.2% this year alone. Consider that many restaurants in the past two years have had to raise menu prices by more than 20%. Restaurants will continue to battle raising prices by reducing portion sizes.
Fees
For a number of years, restaurants (and many other industries) started to pass along the credit card fee of 3% onto the customer. I have seen many of my clients go from a net profit of 10% down to less than 5% over the past few years because of labor and food costs. While many guests think that restaurants are being “cheap” or “petty,” they don’t realize that by passing on credit card charge, the restaurant that does $1 million in sales can drop $30,000 to the bottom line.
My forecast for this year and years to come will be that the restaurants/hospitality industry will continue to try to pass fees and surcharges on to customers. We are already seeing restaurants with “health insurance fees,” “employee well-being fees,” “tap water fee,” and on and on.
The last thought from me on this topic is that while the cost of labor will remain high, finding labor will continue to be the industry’s single biggest struggle.
In the very near future, your clients will be bringing you some very tough problems and they will need some very good and innovative advice on how to survive. Bone up on industry knowledge in order to help them.
Izzy Kharasch is president and founder of Hospitality Works, Inc., a bar and restaurant consulting company. Over the last 30 years, Izzy has helped more than 700 foodservice operations worldwide improve their operations and profits. Izzy is currently focused on increasing profitability for all of his clients. He can be reached at 224-688-3512 and Izzy@hospitalityworks.com.
Thanks for reading CPA Practice Advisor!
Subscribe Already registered? Log In
Need more information? Read the FAQs
