The World's Unsexiest Business
adding a little sizzle to the convenience store industry
If you do business in the state of California and have a sizable minimum wage workforce, I’m sure you’re well aware that as of July 1, the state minimum wage increased to $12 for employers with 26 or more employees. But a rather large looming question is it ultimately going to benefit the minimum wage earners? I’m inclined to say maybe with a strong bias towards no. Given my lack of a truly enlightened academic perspective on the issue, I'll leave the nitty-gritty minutiae to a legislators versus labor economists forum.
Speaking to my ‘no’ bias, from a pragmatic entrepreneurial point of view, I will add that in all well purposed idealism, the measure is seeking to narrow the gap between rich and poor by a bottom up approach. I’d also like to make it entirely clear that I personally support any restoration of a middle class.
But that doesn't mean the intended recipients of the bump in pay will see the increase in its entirety. After all, with declining margins in brick and mortar businesses (where a large chunk of minimum wage labor exists), what's the incentive for the business owner to not cut overtime followed by a reduction of wage hours? And then when wage increase become so financially punitive, a last ditch effort comes into play for which eventually the business succumbs to labor force downsizing--ultimately realizing to the perilous fate of a closure. The last step that’s alarming yet largely ignored is a consideration of how purchasing power could plummet as the measure works its way through the greater economy.
Consumers haven't felt the pinch of (non-tax related) sizable convenience store price increases for a while. And the inflation story? According to the Fed, that's simply dead in the water. So how do you manage to stay profitable, keep your employees happy, put more in their pocket, and most of all, remain in business? There seems few other ways than merely passing costs onto the consumer.
For a convenience store that operates 3 employees round the clock with a 24 hours 7 days per week schedule, a $1 increase in hourly wage equates to an additional outflow of $2,160 per month (or $720 per staff member). To be able to absorb the labor cost increase, that’s a whopping reduction of 4.32% in monthly gross margin. If passing on the cost is considered, that would mean an average increase of 12-15 cents to the average product price (assuming tobacco/OTP sales are factored in).
*Assume that a convenience store generates $50k monthly revenue @ 35% gross margin.
In my upcoming book, I discuss approaches which detail how to tackle the product price distribution increases effectively circumventing the need for artificial intelligence or machine learning based solutions.
Just in case you thought lightning never strikes twice, there's the Los Angeles county sales tax rate increase slated for the same day. That levy will push the rate to 9.25% which means it’s that much closer to the line in the sand of 10%. Let’s be entirely honest here--just because the money goes to the county doesn’t mean consumers are happy about paying for it. With two forces that seem to be brewing the perfect storm of small to mid sized business disaster, how should you strategize?
For product prices which have been calibrated to whole numbers or half dollar increments, this presents an algorithmic quandary--’delta’ tolerances for increases and psychological price hurdles need to be considered.
For example, a popular snack item is currently priced at $2.76 so that when an 8.75% (county + state sales) tax is factored into the checkout, the total price to the consumer becomes $3. Considering at least 45% of purchases for this item are (surprisingly) in cash, change is easily (and more quickly) dispensed in dollars circumventing the need to mess with coins. Now with an increase in the sales tax rate, how do we go about calibrating this increase? Without any adjustment, it becomes $3.02. So do we eat the 2 cents to the tune of nearly $1500 per year or raise the price to the nearest nickel ($3.05) slowing down cash transactions by returning anywhere between 80 and 95 cents in change (assuming 1-4 of these products are purchased)? The additional 5 seconds of customer waiting incurred by the transaction slowdown surely doesn’t merit eating the 2 cents. That’s for two reasons:
a) we’re not going to lose a customer for irregular pricing
b) 5 seconds isn’t 5 seconds too many for the customer. But it is 5 seconds times at least a 1000 transactions which means a tremendous amount of lost productivity for the employee.
So it does diminish efficiency. We have yet to decide which way we’d like to go since we have about 14 hours to decide. Eleventh hour decision peril?
As of July 1st we decided not to raise prices :)
The Value Added Tax (VAT) digression should be mentioned at this point. Maybe Europe truly has gotten the model right with VAT. The primary benefits? No sticker shock with a 10% bump upon check-out. The price stated on the shelf is the final price. Tax isn’t paid until the item is sold down the supply chain (money actually exchanging hands). It can also be subtracted from any future taxable liability so that if you’re reselling a product you’re never taxed twice. How many times have you made a last minute purchase for your store from a retailer for which you couldn’t get out of paying the tax only to resell the same product thereby collecting even more tax?
Drawbacks? The VAT rate is 20% but there are some generous exclusions for most food. Also, the tax owed to the government is susceptible to paperwork manipulation. But so is the money when it reaches the state’s coffers. Fewer middlemen means fewer people in the supply chain and therefore fewer abilities to profit from supply chain arbitrage. But isn’t that what disruption is all about--cutting out the middleman? And more investment in technology infrastructure will greatly reduce the ability to employ manipulative tactics.
Since I’ve mentioned some self defeating drawbacks, the one that's noteworthy and largely affects small business owners is not being able to perform DIY accounting. In the US there are plenty of entrepreneurs who will gladly do their own books leveraging the easiness of behind the scenes API linkages between major POS manufacturers and popular accounting platforms such as QuickBooks and Xero.
In fact, comparing the complexity hurdle of trying to build a solution around our in-house built accounting system, we decided to link our QSR Square POS back end with Xero to the surprise of saving us much time in reconciliations and verification.
To close this section out, the financial record keeping of VAT (among other tax regulations) in the United Kingdom has indirectly given rise to more accountants per capita than in US. Although, I’m not sure whether a society that has an abundance of accountants is a good thing...
Perhaps culturally, the Brits seem to embrace nothing more than a final price at checkout. While Americans might fight it, they do very little to usher in reform. Given that there’s no federal equivalent of a goods and service tax, the pseudo feudal (federal-state) relationship is almost impossible to reform as individual states can assert their own self interest in governing their own fiscal revenue schemes.
Since you’re faced with the above ‘costs’ of doing business, understanding the limitations and hurdles followed by eventually somewhat embracing them should beget a more forward looking position on finding the right solution.
Ultimately, price doesn’t become an issue if transparency is perceived through the following measures:
As a socially conscious (aren’t we all?) entrepreneur, I’m a huge advocate for preserving free market capitalism alongside laissez-faire economics AND the preservation of a strong middle class. Whether it’s a top down or bottom up approach, I think both the employers and employees have got it difficult. But each group shouldn’t be made out to be pariahs in the struggle for votes. Ahh but the perils of political tomfoolery.