Understanding the Fuss About Tim Hortons

Ontario’s minimum wage increased 21% January 1, 2018.  Prudent businesses have already developed plans for how to mitigate the impact of the increase. Some solutions have been more popular than others.

Already there have been public call-outs of owners who are thought by some to be offside in how they are dealing with the impact of the change.  Some are weathering the storm, others are quickly backtracking, and others are still trying to figure out their next move. Read How to Mitigate the Effects Of Ontario’s Minimum Wage Increase. 

 

 

The reality is, businesses exist to provide value and make money.    In the process, they provide jobs and opportunities for employees. If an employer is not earning a reasonable return on their investment for any reason they will not remain in business long.

Salary costs are often the single largest cost to a business.  The impact of the minimum wage increase will vary by industry.  To get a better understanding of the impact let’s take a look at a case study using a company that has a 60% labour cost and predominantly employs minimum wage workers. This means for every $1 sold, 60% of the revenue is labour related.

This is our case study showing a snapshot of their financials before the minimum wage increase:

In the above, the business has $1,000,000 in annual sales.  Their labour cost is $600,000 (60%), other costs are $300,000 and their remaining profit is $100,000.

Now we take a look at the numbers after the effects of the minimum wage increase:

 

 

 

 

The only change above is that the labour cost has increased 21% (now represents 73% of the total sales).  This single change has taken a business that was profitable and now brought it into a loss position.    Obviously this isn’t good so what is a business owner to do?

Options  can include:

  • increase prices
  • reduce hours
  • reduce number of employees
  • reduce benefits
  • reduce other costs
  • automate processes

Most employers will likely use a combination of these options.

Returning to our case study, if our business owner chose to increase prices in order return to the same level of profitability then our numbers would now look like this:

Keep in mind, our business is not selling any more volume they have simply increased their prices by the amount necessary (12.6%) to maintain the same level of profitability.

In the case of Tim Hortons, price increases of 12.6% would look like this:

 

 

 

Of course a business owner choosing this route would have to consider whether their customers would be accepting of a 12.6% increase.  And in the case of Tim Hortons, this is not a decision that that franchise owners have – their pricing is mandated from their head office.

Ultimately  they had to do something  as has been widely reported in the media.  I suspect in time we’ll see some pricing increases and increased automation.

In the meantime, as business owners consider their next move, they need to be mindful of the potential impact and ramifications of their decisions.   You must carefully strategize how you are going to educate your employees.   That is, how are you going to sell it to them?  An effective strategy can significantly improve your likelihood of success.

 

Like this?   You may also like: 10 Mistakes to Avoid as a Business Leader

We help business owners solve problems.

Graham Acreman, President | Stellacon Business Solutions

(613) 263-1010

Email: info@stellaconsolutions.com

Web: stellaconsolutions.com

ALERT: How Ontario’s Minimum Wage Increase Will Affect Your Business

Ontario Business Owners – are you ready for disruption? If not, you could be facing a knock out.

business challenges

Ontario is now less than 6 months away from unleashing one of the largest disruptors that many business owners will ever face – a substantial increase to the minimum wage.

For many business owners, particularly those in lower wage industries (think retail, general services, non-trade blue collar, etc.) there is a big hit coming and you need to be prepared.  If you didn’t already know the General Minimum Wage will be increasing from the current $11.40 to $14.00 on January 1, 2018 and then to $15.00 in 2019.  This represents a 32% increase over the next 18 months.

Have you taken the time to figure out how this is going to impact your business?  Have you strategized about how you are going to handle it?  Failure to do so may lead to dire consequences including the loss of your business.

In case you think this is a case of crying wolf, let’s take a look at a couple of real world examples:

For purposes of a simplified illustration, we’ll make the following assumptions:

Revenue = $2,000,000 per year and remains flat over the next 2 years

Non-labour expenses (all other expenses) increase 2% each year

In Example 1 below,  the 2017 “Labour cost” = 40% of revenue.  All other business costs = 50% of revenue leaving the owner with a 10% profit. In 2017 this will equal $200,000 pre-tax.

Example 1

Effects of Minimum Wage Increase

Moving forward to 2018 with flat sales and a 2% increase in non-labour costs together with Phase 1 of the minimum wage increase, the 10% profit has evaporated and the business has taken on a small loss.  In 2019, this business owner is now losing almost $100,000.

Minimum Wage Increase

Let’s look at another example with a business that now has a 60% labour cost:

Example 2

Minimum Wage Increase

Again, in 2017 they have a $200,000 bottom line but one year later that 10% profit is wiped out and you have almost a $100,000 loss. One year after that there is a $200,000 loss.

Minimum Wage Increase

Now you may be thinking, “I have some employees working at minimum wage but many are being paid more than that. After all,  I give my employees an increase every year”.   That may be true. The reality is, every business owners impact will be different. But consider the following pay structure which is based on starting your employees at the current minimum wage and then providing a 5% annual increase:

Salary Scale

With the effects of the minimum wage increase Jan 1, your new starting rate becomes $14.00 per hour.  Your challenge is, all of the rates on the above pay structure are below the new minimum – you will need to increase everyone.  And, do you think your employees with 2 years or 5 years tenure are going to be happy being paid the same amount as a new hire?  You’ll need to make some further accommodation here too.

The minimum wage increase won’t affect every business but it will affect many businesses.  As a business owner, you need to understand if it will impact your business and if so, to what degree.

Read Now: How to Mitigate the Effect of Ontario’s  Proposed 32% Minimum Wage Increase

Need help with your business? Want to increase performance & your bottom line?  Contact us today:
Email: info@stellaconsolutions.com
Web: www.stellaconsolutions.com
Tel: (613) 263-1010minimum wage increase

Why Would I Hire a Consultant

Businesses hire consultants for 4 main reasons:

1) They require subject matter expertise that they don’t have in-house.

2) They require additional bandwidth to facilitate an initiative.

Business executives talking

 

3) The business owners and/or management are seeking independent, strategic validation of a course of action they plan to take. In this case it’s about getting a second informed opinion.

4) The owners and/or management are seeking a 3rd party scapegoat for an unpopular course of action they are planning to take (“The consultants recommended this course of action”) or don’t want to take (“The consultants advised against it.”).

Ultimately, consultants are hired on the basis that they are going to provide tangible value from either a financial, operational or political nature.

Need help with your business? Want to increase performance & your bottom line?  Contact us today:
Email: info@stellaconsolutions.com
Web: www.stellaconsolutions.com
Tel: (613) 263-1010