The announcement in the summer that the government of Ontario is planning to raise its minimum hourly wage to $15 over the next year or so generated a significant amount of media attention across the political spectrum.
Last September, Alberta passed legislation to increase its minimum wage to $15 by October 2018. Ontario's legislation is similar and involves the following timeline:
| Date | Minimum Wage |
|---|---|
| Current | $11.60 |
| January 2018 | $14.00 |
| January 2019 | $15.00 |
Franchising is already facing pressure from increased competition, increasing real estate costs and ongoing tax changes. A 32 percent increase in the Ontario minimum wage in less than two years will dramatically affect franchise cost structures.
The message that both Alberta and Ontario are sending is that the increase is going to happen, even if the phase-in period is extended. Other provinces are likely to follow in the next few years.
Depending on the type of franchise and its cost structure, the minimum wage increase could reduce gross margins by up to 3 percent, requiring franchise systems to explore two types of solutions to mitigate the impact:
- Tactical options – targeted actions to achieve specific results
- Strategic options – wide-ranging strategies to effect change across the business
Tactical options
The simplest answer to increasing wages is to reduce employees, but this option does risk negative customer experiences due to staff shortages. To reduce this risk, some franchise systems can expand their use of self-checkout, price checkers and digital signage.
Instead of reducing headcount, franchisors/franchisees can optimize the hours that their employees work. Measuring customer traffic on an hourly, daily, weekly, monthly and seasonal basis can identify periods when fewer staff are needed. Additionally, staffing algorithms can give preference to lower paid staff to reduce the average wages per week. Done correctly, optimizing shifts to match demand can maximize labour savings and minimize customer service impact.
The traditional concept of brick-and-mortar locations is already under pressure with more business shifting to home delivery, click-and-collect, uberEATS and other hybrid options. Minimum wage hikes just might be the trigger for franchisors to reassess hours, to match evolving customer behaviour.
In addition to labour-based savings, franchisors can focus on other perennial cost reduction areas such as shrinkage and facilities expenses. Another area that some franchise systems overlook is the cost of procurement, including multi-layered merchandising departments and inefficiencies in non-merchandise spend. Even trade spend levels with vendors can be renegotiated.
If the cost-saving measures above don't seem sufficient, there is always the option to pass some, most or all of the wage increase along to consumers. Price increases can be simple, across-the-board actions or more complex programs involving higher mark-ups, fewer promotions and differentiated pricing by location, day of week or time of day.
Strategic options
Beyond self-checkout, there are ways to use technology to fundamentally alter a franchise system's cost structure, including state-of-the-art ERP and POS systems, predictive data analytics, AI/machine learning and robotics in distribution centres.
It is often true that governments take with one hand and give with the other. This may be the time to dig into oft-ignored government programs that fund job training, and into various federal, provincial and municipal tax incentives.
Outsourcing is nothing new — many franchise systems have outsourced back office functions to gain cost and service level certainty and keep their focus on customer-facing parts of the business. Today, it has gone beyond accounting and bookkeeping assistance to include IT services, human resources and fulfillment.
It may seem dramatic, but consolidation is a proven path to cost reduction. Owners of franchise systems need to decide if they are buyers or sellers. Buyers will need to identify targets, manage bids and finance acquisitions. Sellers will need to identify and differentiate between strategic and financial buyers, enhance the value of their businesses and manage their post-transaction proceeds.
These options can be implemented individually or in combination. The challenge will be determining which provide the best payoff and which to implement first. BDO can help you make those critical decisions and help you realize key cost reduction gains with a structured program that we can also manage on your behalf.
For more information about BDO's franchising services or to discuss how to get started, please contact us or get in touch with: