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Tuesday, February 17, 2015

The Minimum Wage, Small Stores, and Raw Numbers

Borderlands Books in San Francisco announced their impending closure in reaction to the minimum wage being raised within city limits to $15 per hour.  No store simply closes in 60 days, absent some gross failure scenario -- the odds are good that they were approaching a lease termination and evaluated their numbers looking forward, and realized the higher minimum wage would make their labor costs unsustainable.  In particular, they faced a need to grow at 18% to 20% just to break even on the changed cost of labor.  Realistically, nobody in small retail grows like that sustainably.

This post isn't going to address the political arguments involved.  Some believe businesses have a social responsibility to soak up the loss until the "new normal" presumably arrives, in which existing minimum-wage earners spend substantially more money and a rising tide lifts all boats.  Others believe that it is impossible to get blood from a stone, and small businesses will opt to close or reduce  operations to find a new sustainable scope.  Whichever side you are on, odds are good you aren't interested in the other side's concerns.  Jerk.

But seriously, this post is going to show you some raw numbers instead.

A normal week at DSG requires 150 hours of staff coverage.  This is in the scenario where I don't work any front-of-house hours, focusing instead on procurement, HR, accounting, bookkeeping, actually going out and getting product, triage for bought collections, and so on, things that generate more revenue per hour than me personally being at the register.  So the staff is needed for covering the point.  One staff member is present for most of our opening hours, and two staff are present during Friday evenings, Saturday afternoons, rush hour evenings, and other busier times.  Three staff are virtually never present together in a normal week except possibly at a shift overlap on Friday evenings during the busiest hour or two.  

In general, DSG runs a fairly tight labor allotment.  Yes, I could "get away" with only one guy during some of the doubled-up times, but experience has proven we fail to serve customers adequately at busy times when understaffed, creating a negative experience and ultimately delivering an underwhelming bottom line.  I am more than happy to "make people wait" during the weekday mid-day because that's the norm and the expectation.  If we have 14 drafters and 20 Legacy players on a Wednesday night, that's a level of business that justifies a second staff member in coverage.  We've also run analytics on our opening hours -- there isn't a lot of waste there.  We do get customers right at ten in the morning most weekdays.  We do get customers all day Sunday, if sporadically.  The hours that were underperforming for us -- early Sunday morning, late Saturday night -- have already been cut from our schedule.

So, 150 hours.  My staff was earning an average of $8.50 per hour.  The Arizona minimum wage was $7.65 per hour.  To be competitive and attract good employees, $8.00 was the starting wage.  Some staff members work as fulfillment specialists and earn a bit more, others earned their way to wage increases by performing over time.  $8.50 x 150 = $1,275.  Double that and you get $2,550.

DSG has a labor budget in a pay period including two "normal" weeks -- no prereleases or Pro Tour Qualifiers or Comicon or other such special events -- of, let's call it $3,250 in staff labor.  That does not include me, because I don't get paid until everything else has been paid.  I'm essentially on pure commission.  That's also rounded off for simplicity.  But it's essentially accurate.

Payroll taxes chomp away the first $850 of that.  Down to $2,400.

Oops.

We've already broken the budget.  How does it get made up?  Bahr covers the point during some hours.  Yep, I pick some weekday mornings when I have projects I can address right from the front counter, such as running inventory reports out of Light Speed and using them to build orders, or curating our Facebook or Twitter pages, or posting to this blog, or heck, sorting cards.  I do those while in coverage, and if I don't get much of it done because we had customer traffic, it's not the end of the world.  That probably means we made some sales.  In practice, however, I end up covering a lot more of the difference personally, because of staff calling out sick, being unavailable for a shift for personal reasons, or what have you.  Whenever the point isn't covered by a hired employee, who do you think covers it?  That would be me.  And the time I spend in coverage is time I am not spending generating more revenue and growth backstage.

On January 1, 2015, Arizona raised its minimum wage to $8.05 per hour.   Immediately I cannot compete for employees at $8.00 per hour because I cannot even offer that.  Also, any new employees that come on board are going to start with a wage increase that my existing staff had to earn.  If you want to see an employee get resentful real quick, just give away to a newcomer something that that employee had to work hard and impress you in order to accrue.  As a result of business judgment, my staff ultimately received a 25-cent-per-hour raise, the cost impact of which I reduced (but could not eliminate) by adjusting some other non-cash perquisites.

So, 150 hours now, and the staff earns an average of $8.75 per hour.  That's $1,312.50, or $2,625 in a pay period.  Only a $75 difference!  That shouldn't be a problem, right?  But it is.  That budget does not have a lot of room to maneuver.  $75 is slightly less than the wholesale price of a box of Magic: the Gathering cards.  With regular twice-weekly turns on that product, we'd be talking about ~$300 per month, or the price of our data pipe.  That's taking the net out every time and assuming 50% margin, which is not the case for MTG anymore (WOTC raised wholesale pricing by 4% in late December 2014).  In reality we're closer to $3k than $3,600, or roughly half of the fraudulent chargebacks we had in 2014.  However you want to allocate it, the bottom line is that the extra $75 makes a difference.  Yes, we can lose a few bucks here or there but ultimately you can't be leaving money on the table week in and week out our you will bleed a death of a thousand cuts.

We were already under on our coverage budget, as illustrated above, and now we went under further.  My ability to make up the difference in personal coverage only goes so far -- during December and January I really overdid it and covered too many hours at the register solo, leaving revenue-generating work undone backstage by necessity.  The reality is that we had to reduce the labor hours to meet the existing budget.

Using round numbers, we had to drop my staff down to 140 total hours per week.

Now, that's not a huge deal.  Nobody got laid off.  Nobody lost their job.  And my staff has been real champs about it, taking the additional time off to enjoy their hobbies and friends and not being resentful, at least within earshot of me.  But you can see how a small increment like this simply eliminated value from the economy.  My staff was willing to work at the wages they were being paid.  The government made a change, and in coping with it, I had to take work away from them in the grand scheme of things.  They got more money per hour, so their spending presumably stays the same, but mine does not, nor does that of the other owners, because it's pure loss for us.  And that means both my own personal expenditures and those of the business, which are far greater.  That means less money circulating and a tiny but real shrinkage of the local economy.  Just a little bit.

Will they spend more?  Maybe.  It's hard to know, and it's going to be even harder to measure.  Whatever growth there is will certainly be washed out in the numbers of normal business movement up and down each week.  In business, you don't have what you can't count.  Accordingly, to a practical extent, there will be no sales-spending benefit from the increased wages going out.  To the extent that their spending occurs elsewhere with vendors who, unconstrained by MSRP, did simply raise prices, it amounts to complete loss on my side of the ledger.

So maybe you laugh off that increment.  OK, fine, you don't think that moves the needle, you don't understand how an economy scales, whatever.  But what happens when they raise the minimum wage by more than forty cents next time?  Egads, what if it went to $15?  My store would be grossly unsustainable at that labor rate.  I would close at the next opportunity unless I could determine a way to monetize substantially more things than I currently do.  Competition from Amazon would have much more of an impact.  The industry's reliance on MSRP would prevent me from the most obvious recourse of raising prices across the board to absorb the loss.  I may reconfigure the store, incurring costs to do so, to make it more feasible to stay in single coverage during more hours.  That reduces sales, though, which has the same macroeconomic effect as reducing hours.

Dither and dart though I may, the real more probable outcome would be closure.  Borderlands Books determined the same thing.  I suggest that they are not going to be the only canaries found dead in this coal mine by the time the impact of these changes becomes more prevalent.

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