Restaurant industry expert Kevin Burke today warned that a minimum wage increase to $15 per hour from $7.25 per hour would add approximately $300,000 per year in crew wage expenses to the prototypical quick-service restaurant (QSR) establishment – leading to the closure of thousands of quick-service restaurants (QSR) and the loss of thousands of jobs.
“High minimum wages would increase QSR expenses, drive already thin profit margins into negative territory and leave small business owners and operators with one of two choices: layoff employees or close the restaurant altogether,” said Burke, a trained economist and managing director of the boutique investment banking firm Trinity Capital. “Furthermore, the resulting loss in employment opportunities and income would be materially counterproductive to an economic recovery that continues to face many challenges.”
Burke’s comments come in the wake of recent protests outside of nearly 1,000 leading QSRs petitioning for a wage of $15 an hour, and on the heels of the Seattle City Council unanimously passing an ordinance that gradually increases the minimum wage in the city to $15, which would make it the highest in the nation.
“As one who regularly analyzes QSR profit-and-loss statements, I can assure you that this unprecedented increase in employment cost would lead to the immediate closure of thousands of restaurants nationwide,” he said.
As an example, according to Burke, the average annual revenue for a Top 50 QSR concept is approximately $1 million for freestanding locations. Approximately 700 hours per week are required in order to generate this revenue.
These establishments typically spend approximately 30 percent to 32 percent of their total revenue on labor, which generates pretax cash flow (EBITDA) of approximately 9 percent, or $90,000, he said.
The $90,000 must be used to pay for, among other items, principal and interest on outstanding debt; federal, state and local taxes; and store remodeling and maintenance and, “at the end of the day,” the after tax profit for most of these establishment is approximately 2.5 percent, or $25,000 per store, Burke said.
“Given that the vast majority of fast food establishments are owned by family business operators with five or less locations, and taking into consideration the significant financial risk, effort and time required from these operators, there is already little, if any, room for sudden substantial cost increases,” he said.
“Yet, increasing the minimum wage from $7.25 per hour to $15 would add approximately $300,000 per year in crew wage expenses to the typical QSR establishment in this example,” Burke said. “Obviously, with only $25,000 of profit on a $1.5 million asset, the industry does not have the capacity to absorb a 100 percent crew-level wage increase.”
Burke noted that the restaurant industry is the second largest employment pool in the nation after the government.
“It would be devastating to lose this significant portion of the employment base when the economy already is not producing enough job opportunities,” he said.
Trinity Capital provides financial advice to middle market businesses regarding mergers and acquisitions, leveraged and management buyouts, debt restructuring and private placements of debt and equity. The firm, a FINRA-regulated financial advisor, combines Wall Street experience and investor relationships with boutique client service and has deep sector expertise in restaurants, consumer/retail, food and beverage, and other industries. Trinity is headquartered in Los Angeles with offices in Boston. For more information visit www.trinitycapitalllc.com.