Small Business Owners

by blakegriffinenc

A few times throughout this blog, I have mentioned that raising the minimum wage to $15 an hour would be harmful to small businesses and franchises due to cost increases. Many people, including some commenting on this very blog, have mentioned that this all evens out in the end, because consumers will have more money to spend at small businesses. The fact of the matter is, small businesses will be hit much harder by a wage hike because they do not have the economies of scale, or the market reach that a large company does.

Economies of scale is defined by Investopedia as “the cost advantage that arises with increased output of a product.” An example of this: A small company may order 5,000 units of a specific product, and they pay the supplier $1 per unit ($5,000 spent in total). A large company would order much more, because they have more cash to spend on inventory, and much more demand to meet. A large company could place an order for 50,000 units and get them for much less than $1 per unit, because they are ordering in greater amounts. Not only does a large company have more distribution and market reach, they also have higher profit margins on their products. Because of this, they can afford to eat the profit loss caused by an increase in minimum wage. They may make less money than before, but they will stay in business and continue expanding.

This can severely cripple small business, especially those which sell to only the local market. Take a small, brick and mortar paint supply store, for example. They only sell to people who physically walk into the store. Because of this, they order less inventory, and pay more for it, so they have smaller profit margins. They also only sell to the amount of people who visit their store, whereas a large company will sell to distributors, wholesalers, customers, and businesses who need bulk supplies. Not only do they sell less product, and have smaller profit margins, they still have to compete with the large companies who sell mass amounts of product all over the internet. Perhaps you can already see how raising their payroll costs by 106% is the last thing they need, and could possibly be the end of their business. They can either lay off employees, or they can up their prices to compensate for the payroll increases. The problem with the latter option is that they now have no room to compete with large companies which sell online, or may even have products available in the local market at big box stores such as Wal-Mart.

The Employment Policies Institute (EPI), very recently conducted a study of small businesses to see what they would do in the event of a wage increase. For the sake of the study, businesses were able to choose multiple things they would do to combat the wage increase. The results are as follows: For franchises, 65% said they would reduce staff, 64% said they would reduce hours, and 54% said they would use more automation. For non-franchises, 51% said they would reduce staff, 46% said they would reduce hours, and 37% said they would use more automation. EPI also detailed in their study that “90 percent of franchise hotel owners said they are likely to raise room rates compared to 70% of non-franchise hotel owners.” Virginia Chamlee, a writer for popular food blog Eater, recently spoke to a franchise owner and documented his thoughts on the matter. Patrick Pipino, the owner of an ice cream chain in New York, told Chamlee “I’ve run the numbers and we can make it right up to [a minimum wage of] $12 an hour. Above that, it’s anyone’s ballgame. Essentially, to go to $15 an hour, we would have to raise our pricing structure $1 on every item in the store.”

This is one of the areas of the minimum wage debate that is rooted into fact, and not so much into opinion. The fact of the matter is that when small businesses are faced with rapidly rising wages, they must adapt and make a move to compensate for the rise in expenses. The method of compensation can come from multiple sources, rather it is increasing prices, or decreasing labor hours – something has to be done. Some small businesses may be able to continue operations, while others will be forced into dissolution.

Works Cited

Chamlee, Virginia. “How Minimum Wage Hikes Could Affect Franchisees.” Eater. N.p., 09 May 2016. Web. 07 July 2016.

“Economies Of Scale Definition | Investopedia.” Investopedia. N.p., 18 Nov. 2003. Web. 07 July 2016.

“Employment Policies Institute | What’s in a (Brand) Name?” Employment Policies Institute. N.p., n.d. Web. 07 July 2016.