Did you know that, in 2018, minimum wage workers in 18 states received the New Years gift of a larger paycheck? While on the surface level this seems like great news for workers, what exactly are the repercussions for restaurants?

Four of the biggest effects of the minimum wage increase on the restaurant industry include the great shakeout of restaurants, the spike in prices, the push to implement more hands-off technology, and the ripple effect.

1. The Great Shakeout

Will a $15 minimum wage force restaurants to close? A recent study investigated the relationship between the minimum wage and restaurant closings and found that increases in minimum wage could force restaurants out of business.

“A $1 increase in the minimum [wage] leads to a 14% increase in the likelihood of exit for a 3.5-star restaurant…but has no discernible impact for a 5-star.”
Higher minimum wages (red line) especially affected lower-rated restaurants, but the impact almost vanished for higher-rated restaurants. (Luca and Luca, Harvard Business School)

In other words, as the LA Times rephrased it, “the higher minimum wage does drive restaurants out of business— but chiefly restaurants that weren’t very good to begin with.”

Running a restaurant comes with such a high risk. What if the dishwasher breaks? What if an angry customer makes a racket? What about the food and labor costs? With it already being so hard to run a restaurant, it’s only going to get harder with the minimum wage hike. There’s no way around the harsh reality: restaurants are going to close.

2. The Spike in Prices

$10 coffee may be right around the corner. To get a better picture of the impact of the minimum wage on prices, we must take into consideration the economics behind it.

Economic theory suggests that minimum wages have both positive and negative effects on employment.

  1. Quit rates fall, which results in a reduction of employee turnover costs
  2. Employees are more satisfied with their job, which results in higher productivity

New York was one of the states this year that raised its minimum wage to $15 this year for the fast-food industry. University of Massachusetts researchers and the Fiscal Policy Institute’s modeling shows that this may be possible without any reduction in employment levels, but it does result in a nearly 12% increase in the prices of fast-food items.

A $10 coffee might not be that crazy of a prediction after all.

3. The Push Towards Technology

Higher payroll costs will force employers, already heavily burdened by thin margins, to automate parts of their work.

We are already seeing the rise of self-ordering kiosks and virtual restaurants.

i) Self-Ordering Kiosks

By introducing kiosks, a restaurant reduces the number of front-of-house staff needed. Cashiers are no longer needed because kiosks can accept the payments. Furthermore, order accuracy will increase because the customer is in charge of selecting and submitting their order. Staff can also better focus on getting product out and fulfilling orders.

Not only do in-store kiosks reduce labor costs, they provide a better customer experience.

ii) Virtual Restaurants

Virtual restaurants, otherwise known as “ghost” restaurants, are restaurants with no physical location. Store decorations, signage, front-of-house staff… all of that is no longer needed. They simply fulfill online orders.

Virtual restaurants have found their place in cities with high-rent. While most fast-casual restaurants in these locations are restricted by their seating and waiting space, these virtual restaurants completely bypass the worries of owning a brick and mortar business and all the overhead expenses associated with it.

There are even platforms that help restauranteurs open these virtual restaurants such as .Green Summit Group’s Melt 350 and Mac Royale.

iii) Voice Ordering

The progress in-store kiosks and virtual restaurants have made is incredible. However, the recent surge in popularity of voice assistant like Amazon Echo’s Alexa or Google Home’s Assistant is rapidly outpacing the growth of both combined.

Digital savvy restaurant franchises like Starbucks, Domino’s, and Panera have taken notice and have begun to offer voice-activated ordering options. While they currently only offer a reordering option, the potential for voice in food ordering is enormous.

Small-to-medium size brands are also adopting this technology with the help of AI companies like Bensen, which makes voice ordering accessible to restaurant brands of all sizes.

4. Ripple Effect

When minimum wage workers get a bump in their salaries, this increase carries itself upwards to management in a ripple effect. Imagine a newly hired cashier who was once making $10/hour now making $15/hour, much more than you had once paid your best, most experienced employee. It’s only reasonable to think a general manager who was previously making around that number would require the same increase in salary, if not more!

As the result, restaurants will be forced to lay off employees, which they can only do to a certain extent before quality is affected. At that point, they would be forced to charge higher prices.

The reach of the ripple effect goes far beyond the inner workings of the restaurant, reaching the farmers, wholesalers, distribution, and all parties involved who depend on low hourly wage employees to bring the food from cultivation to the masterpiece on your plate.

The verticals with which you get your morning cappuccino delivered to you will all be affected. What effect will this have on your favorite coffee shop? What effect will this have on you?