Scary Math - What the $15/hour Minimum Wage Movement Means to You
By Anthony Analetto
I finally did it. Ever since reading a news story a few months back regarding California passing a law to raise the minimum wage to $15 per hour by 2022, I had been planning to sit down and calculate what the impact means to hand washes, a full-serve, and even express-exterior tunnels. Be forewarned that the following paragraphs contain some gruesome figures. What’s worse, although California may have been the first to sign the minimum-wage hike into law, a quick search online shows that the trend seems to be gaining traction across the country. As of January 1, 2015, 29 states, plus the District of Columbia, had already set their minimum wage above the federal hourly rate of $7.25. That said, let’s take a look at the numbers that should motivate any sane car wash operator to pay close attention to this potential threat to their livelihood.
CALCULATE YOUR FULLY BURDENED LABOR COSTS
It’s ironic that California, the state infatuated with hand car wash tunnels, is the first to legislate them into extinction. The math may be scary, but it’s pretty straightforward. Let’s start by calculating the fully burdened wage of a $15 per hour employee. Every business incurs additional costs such as taxes, benefits, and supplies that roll together into the actual burdened cost of labor.
First, each full-time employee is paid to work 2,080 hours per year, which is equal to 40 hours per week times 52 weeks. Now you have to subtract any paid time off from that total. On average, often after a year of continuous employment, most car wash operators will give about 10 days, which equates to 80 hours of paid leave to retain their best talent. So now the full-time employee paid to work 2,080 hours per year will only deliver 2,000 hours of labor. If I read correctly, however, it looks like the California law will also mandate a minimum of six paid sick days. So, you may have planned to give 10 days of vacation, but now can only give four days due to this new requirement. Sadly, this penalizes your truly dedicated employees who are rarely sick, but these types of regulations are becoming increasingly common and must be accounted for when calculating your fully burdened labor costs.
Next, insurance, taxes, and other payroll expenses vary from state to state, but average about 20 percent. So 2,080 hours multiplied by $15 will result in $31,200, which then has to be “burdened” or multiplied by 20 percent for a total labor cost of $37,440. Now just divide $37,440, which is your actual cost, by 2,000 hours of actual labor, resulting in a fully burdened minimum hourly rate of $18.72. Multiply that by 8 hours and each employee costs you $150 per day. In reality, you’ll have managers and veteran staff that are paid more than the minimum, but that number is painful enough for the following example.
VALIDATE YOUR EXISTING BUSINESS MODEL
If Benjamin Franklin were still alive today, it’s likely his famous quote, “In this world nothing can be said to be certain, except death and taxes,” might have also included increases to the minimum wage. Face it: Congress initially set the wage at 25 cents per hour in 1938. It’s not a mystery that it will go up over time. The only mystery is why a business fails to plan accordingly for the inevitable. Like it or not, California’s move to increase the minimum wage is likely to create national momentum for other states to follow. Whether it happens in five years, or in 15 years, every business owner, in every state, must have a clear understanding of the impact of a $15 minimum wage on their operation. For the California hand wash example, I’ll estimate that the average business employs 20 people per day. At $150 per person for 8 hours, labor costs $3,000 just to open the doors. That means if you charge $20 for a full-service wash, you’ll have to wash 150 cars just to pay your labor. Now add in all your fixed and variable expenses, stand back, and decide if your existing business model meets your investment requirements.
If you are in California, you have some decisions to make quickly. If you are located elsewhere, the clock is ticking. You have between five and 15 years to implement the necessary changes in each of the following categories.
Reduce Your Labor Requirement
Using labor to wash, rinse, dry, or shine the exterior of a vehicle is a fool’s errand. For brevity, I’ll assume that you long ago fully automated the wash process. Here I’d like to bring up some other areas where updating your use of technology can shave precious minutes from daily tasks. Can customers sign up for a wash club from your pay station or manage payments on your website? Have you automated your preventive maintenance program? Dig deep to identify ways to leverage technology to automate both your service and customer interaction. Then research funding options to make them happen.
For the hand wash example above with 20 people, I’d estimate about $400,000 to convert to an automated tunnel. Ignoring loan fees for simplicity, if you continue the full-serve but eliminate six staff from the wash process, you’d save $900 per day (6 X $150) and pay back the investment in 445 days ($400,000 / $900). If you instead convert to an express-exterior tunnel and eliminate 18 staff, keeping just one to guide customers onto the conveyor with a second for safety, you’ll get a daily savings of $2,700 (18 x $150). At that rate, the $400,000 investment to convert the site is paid off in only 148 days ($400,000 / $2,700).
Improve Your Labor Efficiency
Improving labor efficiency starts with making smarter hiring decisions. Evaluate your recruitment activities. Are you receiving a flow of applications from your website from potential candidates? Have you established interviewing procedures to identify candidates with a strong work ethic and a personality that lets them work well with customers and colleagues? You may need to increase the amount you spend on employment advertising. You may need to get additional training for yourself or your manager to become better interviewers. Whatever you do, make sure you have the procedures in place to only allow the best talent you can find walk onto your property. Once you’re hiring effective staff, evaluate your training programs to ensure they work accurately, safely, and leave your employees with a smile on their faces for customers to see. Combine that with proactive policies to retain your best talent and you might find that you don’t mind paying $15 an hour to a dedicated team that contributes value to your business.
Improve Customer Retention
Do you currently track vehicles and leverage a loyalty program to incentivize a future wash with coupons printed on the receipt? Are you leveraging a towel exchange program so customers have an added reason to come back to your wash? What about social media: are you engaging customers online, building a base of positive reviews, and managing your online reputation? When faced with increasing labor costs, it’s natural to first look at automation. Once you’re done with that, however, don’t forget the other side of the profit equation. When faced with escalating costs that are outside of your control, investments to acquire and retain customers may be the better path in the long term.
Increase Average Ticket
Notice that I didn’t simply say raise prices. Instead, focus on moving people to higher wash packages and increasing your average ticket. You might evaluate additional pay waxes or other services in your top package to increase its conversion, price, or both. You might look at updating your menu, or even investing in some of the new digital options coming out that allow you to easily test different menus to identify the most effective design. Retail prices, like the minimum wage, go up over time, but it’s a lot less scary to raise the price of your base wash once 80 percent of your customers are picking a higher service level. Now that’s the kind of math that helps me sleep at night.
Good luck and good washing.
Washing cars for over 30 years, Anthony Analetto serves as president of SONNY’S The CarWash Factory, creator of the Original Xtreme-Xpress Mini-Tunnel, and the largest manufacturer of conveyorized car wash equipment, parts, and supplies in the world. He can be reached at Aanaletto@SonnysDirect.com or at (800) 327-8723 ext. 104.