Written by Scott Carrothers, CPB
Foolproof Bookkeeping Inc.

Let me put some caveats on the table, so to speak, before we dive into this. 

1. This article isn’t getting into any moral discussion of living wages, fair wages, or any other conversation around what people should be paid.  It is simply a breakdown of why restaurants are struggling now, and how and why the business model is changing.

2. The numbers I’ll use to illustrate my point are for demonstration purposes.  There is a wide range in salaries across geographic regions and business segments.

3. This is not an essay on economic cycles and how minimum wages help drive inflation.  Those conversations require much more analysis.

Not long ago, a good friend of mine closed his restaurant after operating for five years.  He reopened a few weeks later with a scaled back concept and one quarter of the staff he had before.  It was either that, or declare bankruptcy, loss his house, loss his life’s savings, go find another job and financially start over, at 50 years old, with seven years of bankruptcy headaches ahead of him.  Now, he at least has a chance of avoiding all that. 

In 2019 I was living the good life as the VP Finance of a restaurant group.  We’d never heard of Covid.  Restaurants were a difficult but reasonable business to be in.  The minimum wage for a dishwasher or entry level cook was $14 an hour.  For a server, it was $12.20.  That meant that a full-time dishwasher made $28k a year.  And each step up came with an increase in pay.  Prep cooks, line cooks, senior line cooks or Jr Sous Chefs, Sous Chef, and Head Chef.  Whatever the title it meant that whoever was at the top in the kitchen was being paid $55k on the low end to $100k on the high end.  There were outliers of course, but not many. 

For the front of house, it meant that a full-time server was being paid $25k a year.  You might have senior servers or ‘key holders’, a couple of floor managers, maybe a separate front of house manager, and a GM.  In many locations the GM would essentially be the front of house manager, and on par with the Chef.  But in some locations, the GM ran everything.  Working our way up the salary range meant the GMs were paid anywhere from $55k to $120k.  Smaller locations usually paid less, and you’d need to work in a large, busy location or good size, full-service hotel to make top dollar.  

But those days are gone forever.  On Oct 1, 2024 the minimum wage rate for both positions in Ontario goes to $17.20.  That’s an annualized increase for kitchen staff of 4.6%, only a little higher than inflation.  And I think most people accept that kitchen staff were under-paid for many years.  Especially if you happened to be a kitchen worker like I was when I started back in 1994.  But the increase in minimum wage has pushed up all the other wages in the business.  You can’t have an entry level, unskilled dishwasher making $35k a year and a 10-year veteran Sous Chef making $45k.  No one will take those jobs.  And, in fact, many people did leave the industry. 

The annualized increase for servers over the same period has been 8.2%, far outpacing inflation.  That’s a 41% increase in those wages over 5 years!  If you’ve ever worked in a restaurant, or had a friend who was a server, then you know that the bulk of their money comes from tips.  When the Ontario Government scrapped the server minimum and lumped them into the general minimum wage category in 2022, most of the servers I knew were indifferent about it.  An extra few dollars an hour, that had taxes, CPP, and EI withheld, meant very little compared to the cash they were taking, and not paying tax on, from their tips.

But it meant a lot to restaurant operators. 

Imagine what it would cost to buy a new pair of Levi’s now if their labour cost had risen, across the board, by 31% over 5 years and the cost of the raw materials had risen 26%.  If we use an example restaurant where Prime cost meant 30% labour cost and 30% food cost, on $100 in sales, the restaurant would spend $30 on labour, and $30 on food.  That would leave $40 to cover overhead like rent, utilities, insurance, kitchen supplies, equipment, pest control, waste removal, credit card fees, bank fees, office and admin, constant repairs and maintenance, and so on. 

With the increases in costs, that same $100 sale now costs $39.30 in labour and $37.80in food.  Leaving only $22.90 to cover all the overhead.  That’s a 42.8% drop in contribution margin, or cash available to cover overhead.  Something clearly had to give.  And what has given so far is menu pricing. 

You can find new efficiencies, buy cheaper cuts of meat, tweak recipes, reduce staffing hours, and all the other myriads of things restaurant operators must do week in and week out.  But a blow like we’ve seen with wages and cost of goods is largely being passed along to the customers.  And customers are pushing back. 

The number of restaurant visits is dropping.  It costs more every time you go out, so you go out less.  For the restaurants, the higher menu prices have meant higher revenue, but lower profit.  In Canada, over half of all restaurants are running at breakeven or a loss. 

The current model isn’t sustainable, and the knee-jerk reaction of just raising prices has passed.  Now restaurants are looking for new revenue streams.  They are looking at their niche, their ideal customer, and how to be top of mind when those people decide to eat out. 

Minimum wage in Ontario is now legislated to increase every year.  You can expect to see more of your favourite restaurants close, rebrand, and change direction completely.