US restaurants to swallow wage increases

Moves in the US to lift minimum wages will hit restaurant company profits because of the difficulty in passing the costs on to consumers, a Moody's report said Thursday.

The report estimated US restaurants could see their profit margins cut by 1-4 percent, depending on their exposure to higher wages and the implementation of the change.

The hit would be "considerably higher if mounting public pressure for a $15 minimum wage becomes a reality," Moody's said.

"Casual dining" chains such as Darden Restaurant's Olive Garden and Bloomin' Brands' Outback Steakhouse will be especially hard hit by a "mounting tide" of wage hikes because their restaurants are usually company-owned, the report-said.

Fast-food chains like McDonald's and Wendy's will also face profit pressure, but the higher wages will be felt more by franchisees.

On Wednesday Los Angeles, the second biggest US city, passed an increase in its minimum wage from $9 to $15 an hour by 2020. That followed a similar move by Seattle one year ago.

Other states and communities have also passed, or are weighing increases to statutory minimum pay, after years in which inflation eroded the spending power of US workers.

But only a few have moved toward the $15 target that worker groups are calling for. The official federal minimum wage is $7.25 but the White House has instituted a minimum of $10.10 an hour for people working on any new government contract.

Proponents argue that the increases will elevate workers from poverty and boost economic growth through increased consumption.

Major retailers, including Wal-Mart Stores and Gap, have also announced plans to lift wages.

McDonald's said in April it would hike pay for 90,000 employees in company-owned restaurants, though that does not affect the majority of its restaurants, which are owned by franchisees.

"Most restaurant operators will struggle to pass on higher costs without hurting traffic," Moody's said.

"Consumer spending at restaurants remains soft and most operators have been relying more heavily on discounting and promotions to increase traffic. Consumers are already spending more on everyday needs such as rent, healthcare and higher education, leaving less for highly discretionary spending such as eating out."

Workers in the food preparation and serving-related occupations comprise 22 percent of US employees who make at or below the minimum wage, according to US labor data. Workers like waiters can earn less than the minimum wage if they make up the gap in tips.

In addition to the direct hit from higher wage costs, restauranteurs could also face pressure from workers already paid above the minimum who will want to maintain the wage gap with more junior employees, Moody's said.