The customer data platform built exclusively for multi-unit restaurants.
It's been three months since AB 1228 went into effect, raising the minimum wage for multi-unit brands operating in California by 25%.
Since then, operators have dealt with the impact in different ways: cutting staff, kitchen automation, kiosks, or outright exiting the state.
In this 15 minute deep dive with James McGehee, CFO at Dave's Hot Chicken and Partner at Results Thru Strategy, James covered how one of the fastest growing brands in the country has quickly adapted to offset the P&L impact of a higher minimum wage.
We covered:
Here are the key takeaways from the session:
Data from SignalFlare.ai shows that brands have raised prices anywhere from 8-14% within California. But what matters more than price increase is how that flows into average check since because that's what you really retain. Dave's specifically increased price by 8.5% over the last 12 months, with an increase in average check of 6.5%.
"It's not how much you increase - it's how much you retain."
As we covered in our LinkedIn Live on the consumer value equation with Ian Courtnage, price is generally the easiest - and first - lever a restaurant pulls to offset any changes to their prime costs. While Dave's has done that as well, they've also gone a step further, creatively tweaking several aspects of the "production side" of the restaurant, including cleaning crews, switching from plastic ramekins of sauces to packets, and automating their oil filling and cleaning process.
As an example, employees don't like cleaning toilets. Hiring a cleaning crew to do so does incur an upfront expense, but you make your team happier while also shutting down the restaurant - and hence gaining some efficiency - faster.
Instead of having two frontline folks filling ramekins with Dave's sauce all day, James transitioned to sauce packets, introducing a way for guests to take their premium sauce with them "on the go." You then also free up those folks to actually engage and serve guests, instead of just filling containers of sauce.
There are so many small changes brands can implement to improve both the employee experience and the P&L, while maintaining an excellent experience for your guests. All you have to do is look and get a little creative.
Don't overly focus on the margin percentage. Instead, protect the profit pool, payback period, and return on invested capital. All the operational tweaks mentioned above free up valuable dollars that have helped Dave's maintain their two year payback period for franchisees. At the end of the day, the dollars that a franchisee can take home matter more than just the margin percentage on the P&L.
It's starting in California, will then spread to other major metro areas. The rising minimum wage will impact restaurants across the country. Operators need to start thinking about what levers to pull - outside of pricing - sooner rather than later. Improving the productivity of the business will reap benefits long-term if and when prime costs go up further.
You can watch the full video above, or read the transcript below (edited for clarity).
Abhinav Kapur: James, pleasure to have you here.
James McGehee: Glad to be here.
AK: Please introduce yourself, the brand, and provide a high-level overview of AB1228. What is it, and how has it impacted the industry?
JM: Yeah, so let me start with myself, then I’ll go into Dave’s, and then we’ll talk about AB1228. I’ve been in the industry since 1993, 31 years, and have done nothing else besides finance, accounting, systems, and support for high-growth groups. Dave’s Hot Chicken started in East Hollywood with four founders and partnered with Bill Phelps, who started two small companies called Wetzel’s Pretzels and Blaze Pizza. I’ve been fortunate to be with Dave’s since store one. We just opened up store 207 and plan on opening about 40 to 50 more this year and about 100 to 120 next year. We have a pretty full pipeline of growth over the next couple of years.
AB1228 was our attempt to right-size the cost of living in California, taking minimum wage from about $16 an hour to $20 an hour, a 25% increase on one of your two prime costs. Within the industry, it’s about a three to four percent impact on the panel.
AK: Wow, just like that, a sudden jump basically the first week of April, a 25% jump on one of the main prime costs.
JM: That’s exactly right. To put it in perspective, Dave’s average wage went from about $17.80, we were above minimum wage, and now our average wage is around $21.20. Just think about your average employee making a little over $40,000 a year.
AK: We've seen brands like Kura Sushi, Rubio’s, and most recently OneTable talk about labor cost increases as one of the contributing factors to bankruptcy. Can you talk through how the industry has adapted to this increase?
JM: It actually started last year, where people started taking price at a more accelerated rate. There’s no saving your way to a higher labor efficiency model to make up for all of it. Everybody had to take price in California. We took price anywhere from eight percent on the low end to twelve to fourteen percent on the high end.
AK: How does that fit in the context of the industry? Your price increase of 8-12%, how does that compare to other brands?
JM: For us, we took an 8.5% menu price increase. We have a partner, Mike Lukianoff over at Signalflare.ai, who helped us do a case study and analyze some of our key competitors. We found that it’s not only how much price you take but how much you retain. For example, Chipotle’s core menu price items raised anywhere from 10-14% over a trailing twelve months, but they only flowed through about 5-6% percent on the average check. At Dave’s, we took 8.5% and have proven a flow-through of about 6.5% of that 8.5%.
AK: From that standpoint, you’re raising the cost of the headline item by 8%, but you’re seeing the average check overall go up only 4-5%. That’s the retention piece you’re talking about?
JM: Exactly. The way we priced that 8.5% wasn’t to maintain a certain level of cash flow percentage but to maintain the same level of cash flow dollars. The one thing I focus on heavily within my role at Dave’s is how to protect the return on invested capital, which in layman’s terms is how long it takes to pay back the investment.
AK: Even though there might be a decrease in the margin, the thing that matters is absolute dollars at the store level.
JM: That’s correct. At Dave’s, we’re fortunate to have an AUV of about $3 million, and we pay our investments back from a franchisee perspective in two years. It’s a spectacular return, which is why I’m a franchisee as well.
AK: That’s great. Pricing is obviously an important lever. In what other ways have you been able to get creative to maintain the margin dollars.
JM: You have to get a higher level of productivity out of your staff while making it a pleasurable experience. I use the term "meaningful labor." In our early days, our seventh store was Northridge. We used to put Dave’s sauce in plastic ramekins, which required two people full-time, twelve hours a day, filling ramekins. Not a good use of labor. We switched to Dave’s sauce packets, similar to what you see at In-N-Out. It’s a very premium-looking packet, and the guests loved it because they could take the product away easier. This immediately saved us half of our prep labor on the sauce packets.
We also pre-brine our chicken, which helps with tenderness and juiciness. We took that out of the store level and pushed it back to our manufacturer, who could do it in 500-pound batches. This saved us half of our prep time. Another example is our oil management system from RTI Restaurant Technology Inc. It allows us to automatically fill and empty the friers, saving our employees tremendous amounts of time and reducing the risk of slips and falls in the back of the house.
AK: I love those examples. Often, the warning about cutting staff or labor comes up, but you and the team have found ways to make every other part of the business more efficient without hampering the guest experience.
JM: Exactly. We also have a cleaning crew come in, which allows us to close a restaurant in 45 minutes instead of an hour and a half. This pays for the cleaning crew, they do a better job, and our employees are happier. It’s all part of the production system of a restaurant, but we never want to change that guest-facing interface.
AK: What advice do you have for operators at other concepts who are either headquartered in California or have a meaningful footprint within California?
JM: This isn’t just a California issue; it starts in California and spreads to the rest of the nation. Take a critical look at the production process. Every brand has labor optimization pieces. Look at the tasks people dislike the most and find ways to improve them. For example, a dishwashing machine costs about $145 a month but can save you four to five times that amount. Making your employees’ lives better helps with retention and overall sentiment, translating to guest satisfaction and sales.
AK: Great parting words. I appreciate you sharing your time with the community. Thanks again.
JM: You’re welcome. Take care, everybody.
The customer data platform built exclusively for multi-unit restaurants.