LFTL: Initiative 82 Has Passed
The midterms are over and DC is now officially the first major city in more than two decades to upend the entire compensation structure of its restaurant industry. Despite the best efforts of opponents, Initiative 82 passed with a predictably robust margin and the DC Council won’t overturn this Initiative, unlike in 2018.
You might be expecting this month's Lessons From the Line to be a thorough breakdown of I-82's implications, but while it's true that this is an incredibly important topic (restaurants outside of DC take note: the groups backing this law are coming for *you* next), the long and short of it is that there just aren't that many specifics to unpack yet - we've simply entered the long awaited second phase of this process.
Over the coming months, the DC Council will decide how it will implement I-82 and whether it will adjust other laws to address complexities arising from the Initiative. Open questions exist. Will they speed up the implementation in an effort to rip off the bandaid? Will they stop taxing service charges and auto-gratuities? Will there be any support for organizations and workers who are hurt by the law? All of these need to be settled over the coming months, and in the interim there is no particular hurry to rush things: tipped minimum wages will increase by 65 cents at the turn of the year, but the big changes don’t start until the summer of 2023.
We’ve been preparing for this for nearly a year now: I’ve had hundreds of individual conversations with clients touching on the implications of the law, worked with colleagues in the industry to lay out some of the alternative compensation model strategies via webinar, and, most importantly, just observed. While others were saddled with the unfortunate task of tilting at windmills (few in the DC industry ever thought there was a realistic chance of stopping the law from passing), we’ve been carefully monitoring early efforts to adopt some of the alternative models, and we’ve seen the challenges. Many early adopters of the Service Charge models have run into predictable problems that many of their peers warned about: most of these organizations have dramatically reduced compensation to service staff, experienced unsustainable turnover, and they’ve had to come up with complicated sales incentive plans to re-motivate FOH staff. The back of house staff have benefited little in most of these cases, and they’ve faced real business sustainability challenges. It’s tough.
The good news, however, is that this isn’t a foregone conclusion. There are some restaurants that do just fine with non-tipped models. It just turns out that this isn’t a mere math problem - it needs a totally new approach to labor and scheduling, so there is a lot of careful work to do to change to the new paradigm.
At Harmony, we recognize how difficult this challenge will be, so our plan is to closely monitor these developments over the coming months, see how the DC Council decides to implement the law, and then lay out our recommendations and a variety of labor model adjustment resources. Some of you need high level advisory, some just need to know the rules, and others need a hands-on approach. Each of our clients is different. You can rest assured, however, that your Harmony Team will be there for you.
Matt Hetrick, CPA
President and founder of Harmony Group Inc.
Last Bites
COVID Still Causing Havoc in the Labor Force
As our clients struggle to fill restaurant roles, COVID is still playing a huge role in labor pressures. While the outward signs of the pandemic’s effect on life have thankfully waned, COVID is still persistent in causing disruption to the labor force. According to research and statistics, 630,000 more workers missed at least a week of work in an average month than before the pandemic. Additionally, 1.1 million workers avoided work due to COVID concerns and 500,000 dropped out of the workforce due to lingering COVID symptoms. These disruptions have contributed to the upward wage pressure and is a reason the Federal Reserve seems committed to raising the federal-funds rate.
A Tale of Two Cities…
While it seems most of the global economy is gearing up for a recession, the high end of fine-dining restaurants are becoming even more exclusive or “paywalled.” These restaurants are more akin to private clubs – not open to the general public and require membership for dining. Big players are opening these restaurants in buzzy cities like New York, Chicago and Miami. More casual restaurants are also leaning into “patronage style” programs that use NFTs to grant holders special privileges and access such as priority reservations and special parties. As costs rise, restaurants are getting creative about aggressively monetizing their best customers – something that can be done at all levels of dining.
iRobot
Pioneering fast casual salad chain Sweetgreen announced they are rolling out tests of fully automated restaurants next year. The “Infinite Kitchen” would be a fully automated makeline and the company says it will tighten portioning and cut labor in half while improving quality. Nowhere has the rush to automation been more frenzied than in the pizza space as companies compete to have the best pizza making robot (and seek to forget Zume burning $375M on pizza robots). How customers respond to robot made food (or drinks) remains to be determined but given the labor pressures on the industry be on the look-out for more and more automated solutions.
Now You Can See Ghosts (Ghost Kitchens)
When reading about ghost kitchens a brilliant quote about crypto currency from Matt Levine comes to mind: "It is not original to me, but one thing that I think and write a lot is that cryptocurrency enthusiasts keep re-learning the lessons that regular finance learned decades ago, and that you can see a lot of financial history replaying itself, sped up, by observing cryptocurrency." The warehouse location, non-customer facing, delivery only ghost kitchens that exploded during the pandemic now understand the value of density and foot traffic and are seeking to reinvent themselves as food courts with digital ordering and delivery – a very 1970s invention.
DC Grant Alert
As we communicated to DC Clients yesterday, a new $8M grant program has been announced. The grants are for restaurants, retailers or entertainment small businesses with less than $5M in gross receipts in each of the last four years that have experienced revenue loss during the COVID-19 pandemic with priority going to restaurants that haven’t received prior rounds of funding. Awards will range from $5,000 - $45,00 but we're guessing something in the middle to lower end due to the size of the grant pool. Applications open November 28th so keep an eye out for further communication from Harmony.