While the minimum wage rise took a toll on many small businesses, particularly in hospitality and retail, Christchurch company Switch Espresso absorbed the increase almost without breaking a sweat. Its founder talks to Alice Webb-Liddall about how other businesses can do the same.
Post Christchurch earthquake, life is rapidly surging back into the city. Along with that new life has come a lot of food outlets whose financial survival depends on the finest of margins. With the rise of the minimum wage, those margins just got tighter.
Hamish Evans runs Switch Espresso, a coffee roastery with three cafes in Christchurch. Evans opened his first outlet in 2006 and Switch is now a key player in the Garden City’s booming cafe market.
“You don’t have to go to the same place twice a week, you can go between restaurants and cafes and bars. But everyone has to really try hard, particularly with customer service and product to ensure they stay in the market,” he says.
“We’re already oversupplied more than we were before the earthquake, so there’s more choice than ever. And it’s great for the consumer because they get so many new concepts and products and experiences, which is exciting.”
To stay at the top of a fickle market, cafes not only have to be competitive with their goods, but also with their wages. Ensuring valuable staff don’t leave for competitors is essential.
“[In Christchurch] we have a perfect storm of businesses trying their best to survive and naturally we have been starting to have to fight to get good people by paying more. Since the earthquakes, we’ve noticed a steady increase in wages for cafe workers,” says Evans.
On April 1 the minimum hourly wage increased by $1.20 to $17.70, its biggest ever single increase. The increase gives full-time wage earners an extra $48 a week before tax, and small businesses have had to adapt to make room for this extra cost. The minimum wage rise increased Switch Espresso’s annual wage costs by around $67,000. And although they don’t have a huge team, raising the lowest wages means everyone else gets a bump too. All the way up to their head chef.
“If we didn’t do that the rubber’s going to hit the road in about six months when other businesses haven’t pushed these other wages up and their staff go ‘oh, they’re paying a bit more’ and ‘oh that seems like a better company to work for’,” says Evans.
That small adjustment in wage might make a huge impact on a business’s profitability.
Kiwibank’s commercial manager Michael Scannell says it’s crucial businesses are thinking about the wider effects the wage rise will have. Other employees won’t want to see the margin closing between themselves and minimum, so it might not only be those on the lowest wage who are expecting more money.
“Even if you’ve got four staff, it might only be one person who is going to be affected, but the other three could ask for a pay increase to offset the one that the juniors just had. So it’s about making sure that your business is going to be sustainable when you’ve got to make these changes.”
Scannell says it’s a difficult time to start a business, but it is not impossible if owners are diligent about their numbers and put time into researching their market.
“Before you start you want to have a very good understanding of the area, how many people you’ll see per day, what your costs are going to be. You’ve really got to do your due diligence, make sure your accounts are in check and make sure you have good advice around the financial plan you’re going to have.”
Switch Espresso managed to absorb the rising wage cost by ensuring other costs were being well-monitored. Evans says he was inspired by a line he heard while watching the All Blacks play.
“It was halftime and the commentator said ‘let’s look at the numbers, the numbers don’t lie’.”
“You can operate a business and think you know what’s going on but that’s largely driven by emotions and feelings, that goes so far, but when it comes down to it you need to know your numbers,” he says.
“You need to know what your wage percentage is for your turnover, including KiwiSaver, ACC, holiday pay, all those hidden costs, and if you don’t know your numbers, you’re blind.”
Scannell says if a business doesn’t know their basic numbers then they’ll never be able to easily absorb not only rising wages but the ever-changing costs of goods and the consumer market.
“If you don’t know what your breakeven is then you are pretty hamstrung. You’re putting your finger in the air and saying, ‘yeah, I guess that’s okay’, but these days that’s not good enough. If you want to be able to sustain your business then you need to really understand, or get someone who knows how to understand, what the figures are telling you.”
Sophie Gilmour, an owner of hospitality consultancy company Delicious Business, says most businesses will automatically put up all their wages to account for wage rises, and there are plenty of other opportunities for employees to bring up their pay.
“In hospitality, the wage is reviewed more frequently than other industries, so there is potentially more opportunity to raise wages.”
She says the industry works differently to many others because a lot of workers are hired unskilled and trained on the job. And that means it’s an industry that has a relatively high number of minimum wage employees.
Gilmour often works with businesses trying to organise their numbers so that they can maximise the information they are getting from them. “We encourage any business to do an audit of their costs and revenue. It doesn’t take ages if a business has the numbers there.”
She says once a business knows their limits they are able to better understand how to manage their costs, and when change inevitably comes they can be ready to respond to it.
“Businesses can move from table service to counter service to save on staff costs, or close on Mondays and Tuesdays so they are only servicing the busiest days and the days that turn the most profit for them.”
Evans says wage rises sometimes inevitably fall onto the consumer, and that “any good business should be adjusting their prices on a regular basis because that’s a reality with product shifts and costs.”
But there are also tricks to protect the image of your brand. Gilmour points out that charging higher prices for consumer goods doesn’t have to affect customer perception if businesses are smart about it.
“Raising the price of your chips but making your soup cheaper can bring in a huge amount of money if you’re shifting a lot more chips every day than soup. It means the perception of your business doesn’t become ‘expensive’, you just shift the costs around a bit.”
The hospitality industry will continue to be one of those most affected by wage prices as the government aims to raise the minimum wage to $20 by 2020. Encouraging businesses to seek help in understanding their numbers and encouraging staff to see hospitality as a career will help small businesses prepare for these changes.
“It’s the lower-end businesses that are potentially already struggling with that extra cost that [the minimum wage rise] may have an impact on. So it’s really important they know their numbers so they can see if it’s something that they can sustain,” says Scannell.
At Switch Espresso the ethos is “happy staff work harder”, and the wage increase has certainly made Evans’ staff happier. Hard-working happy staff mean the customers are happier too, and that’s where the profit comes from.
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“If you’re adapting and changing on a regular basis you’ll be able to actually absorb these big changes. And if you’re still offering a quality product and friendly service and interesting environment, your customers and your staff are going to be happy and satisfied.”
And that’s how your business survives.
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