Minimum wage hike takes a chomp out of hospitality industry profits.

The timing and size of the $1.50 rise in the minimum wage couldn’t come at a worse time for a sector being hit very hard over the past three years.

The increase on April 1 could be the final straw that breaks even more hospitality operators who have been running at a loss for way too long and are just hanging on.

Most of them have very little wiggle room to allow them to keep their doors open after three years of Covid effects, followed by significant increases in fuel, staff, and ingredient costs (particularly fresh) and a lack of supply of vital products such as eggs and CO2.

The cost and shortage of eggs is an excellent example of the pressure operators face because it’s a basic that adds to the service cost. So suddenly, serving a Kiwi burger with egg for lunch is more challenging, and when you can, it costs more.

Add that to the cost of other goods such as cake, bread, cooking oil, and other raw ingredients, and you’re reaching a point where the rising cost of even a simple meal will put some consumers off.

If operators have any reserves left (and that’s doubtful), the Government’s 7% increase in the minimum wage – the most significant increase in 17 years but which is being overtaken by inflation – will take the final bite out soon after April. Not only that, but they have just seven weeks to prepare for it.

The irony is the move designed to bolster the minimum wage to help people through times of rapidly rising prices will itself push up prices.

That’s the reality; anyone who tells you anything different doesn’t understand basic economics. Higher wages will be passed on to someone somewhere, and for hospitality and accommodation, that means prices and room rates. There is simply no room to absorb them and keep the fries.

Let’s also not forget increases in the minimum wage are followed by demands from other staff seeking to keep pay parity. With a large part of the industry already paying above the minimum wage, this will cause employment stress as most operators do not have enough cash to increase everyone’s wages.

To say this increase is unlikely to impact unemployment significantly is not to understand what’s happening out here in job land. Businesses are being caught between a rock and a hard place: either pay more and take on even more debt or don’t hire staff and close down. It’s as simple as that.

The double-edged sword in this is the threat to current custom due to consumers’ price elasticity, who may choose to dine out and travel less, causing further revenue issues for operators, biting further...

For those operators who can struggle, medium-term survival could likely consist of reduced trading hours, especially at weekends and public holidays, as they try to cut costs and spin out what’s left of their reserves.

Have no doubt the sector wants to lift the wages of all its workers – and has been doing that along with boosting skills and career development – but it needs support.

The Government has forgotten wages and salaries across the sector have continued to increase despite some of the most challenging trading periods in living memory. Our 2022 remuneration survey of our businesses shows the average hourly rate rose by 8.9% over the previous year, with the average salary up 10.5%.

Those increases reflected the fierce competition for staff, as operators offered more to attract talent, and were almost double the average increase across the whole economy over the same period. And it hasn’t stopped. But this higher-than-expected minimum wage rise will hurt businesses, particularly small hospitality and accommodation operators, who make up 70% of our industry.

If we put the costs into an example of a burger sold today for $17.50 versus 2019, it becomes abundantly clear today’s impacts of rising costs of produce, inflation and, importantly, the rise in the minimum wage. Pre-Covid in 2019, a $17.50 burger would net the business a whopping 9.3% profit, that is, $1.41 per burger sold. In 2023, the outlook is vastly different. A $17.50 burger bites the business’s revenue by 11.5%, resulting a loss of $1.75. The increased minimum wage will only impact this more drastically and result in higher store prices, reduced trading hours and closures.