Ode to Groucho
"Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies."
- Groucho Marx
San Francisco Restaurants in Crisis
I told myself when I began writing these occasional letters from Incanto that I would do my best to share the passions, emotions and realities of launching and running my dream restaurant. I have so many topics to choose from that sometimes this letter is delayed simply because I don't know which subject to explore next.
Lately, however, a single subject has monopolized my thoughts during both my waking and (unfortunately) non-waking hours. That thought is whether or not the latest predicament to befall San Francisco restaurants will spell our doom in 2004.
I know that sounds alarmist. Of course restaurants will survive in San Francisco next year and the year after that. But there is a very real battle quietly being fought about how many restaurants there will be in San Francisco, what types of restaurants will survive, and how they will charge you for their services.
What has me most concerned about this situation are conversations I have had with some of the most accomplished restaurateurs in San Francisco, whose restaurants have been fixtures here for ten, fifteen, and twenty-five years. I won't name names, other than to say that you have probably eaten at their restaurants and greatly admired their talents. Recent political developments have these experienced restaurant people fearing that some of their great restaurants will not survive and that San Francisco is on the verge of becoming a second-rate restaurant city.
The Latest Blow
The travails of San Francisco restaurants in the last three years are well documented. First the dot-com bubble burst, deflating not only the stock market but also the local economy. Then 9/11 happened, which damaged tourism and deepened the already difficult recession. The utility crisis has raised commercial electricity costs by approximately 45% in the last three years. Commercial liability insurance is up 60% in two years, workers' compensation insurance has almost doubled in the same time. In 2003, beef prices have increased by 40%; the discovery of mad cow disease in Canada and the Atkins diet are blamed. All the while, San Francisco diners have been more cautious about dining out, seeking better values and lower prices. And they have a city full of nearly empty restaurants to choose from on most nights.
The latest burden placed on the shoulders of San Francisco restaurants is Proposition L. Proposition L originates from a good and noble idea: those who work here should be able to afford the basic costs of living here. Because San Francisco is one of the most expensive cities in which to live, Proposition L proposed increasing the minimum wage in San Francisco to $8.50 per hour, the highest minimum wage in the United States. Mayoral candidate Matt Gonzalez has literally ridden Proposition L as his pet issue all the way to the Tuesday December 9 run-off election against Gavin Newsom.
What's the Big Deal?
It is fair to say that independent San Francisco restaurants, such as Incanto, are the backbone of San Francisco's small business community. Restaurants in San Francisco employ more than 40,000 people as cooks, dishwashers, hosts, bartenders, bussers, and servers. Many of the workers in these restaurants earn the California minimum wage of $6.75 per hour. Many of these workers also receive tip income that doubles, triples, or quadruples this base rate of pay. Much of what we diners take for granted about restaurant service in San Francisco is based on this "tip economy." Although tip income is recognized as wage income and is taxed by both the California and federal governments, under Proposition L it will not be applied toward the new San Francisco minimum wage law. The laws of 43 states, plus the federal government, provide for a credit for tip income to count against minimum wages, but in San Francisco and in California, we don't make this exception.
So what's the big deal, you may ask? Shouldn't San Francisco restaurants simply pay the new minimum wage, adjust prices as necessary, and get on with business? Didn't they survive the increase in California minimum wages over the last two years? Why are San Francisco restaurant owners complaining about giving people a living wage?
Killing the Golden Goose
There are two reasons. First, the timing is terrible. This mandated wage increase comes at a time when San Francisco restaurants are struggling for their survival. In 2001, the average San Francisco restaurant earned a 4% pre-tax profit margin. In 2002, that figure declined to 2.5%. This year, the Golden Gate Restaurant Association estimates that independent restaurants in San Francisco are earning an average of 1% pre-tax profit.
In the meantime, costs are rising. A 26% increase to the minimum wage rate, for example, will raise Incanto's total payroll-related expenses by 8-9% next year. In turn, this will increase total bottom-line costs by 3-4%. This degree of cost increase will drive the average restaurant in San Francisco from marginal profitability straight into red ink. San Francisco restaurants simply cannot absorb another economic blow of this magnitude. The obvious solution, a sizeable price hike, is unappealing as it comes at a time when we are trying to give the dining public a reason to dine out, not stay at home.
There is a second reason, more complex to explain but also more important to me and to most other restaurant owners to whom I've spoken. The fact that Proposition L does not include credit for tip income skews its benefits in favor of the already highest-compensated restaurant workers at the expense of lower-paid workers. In a twist of bureaucratic irony, Proposition L may actually hurt the very people it purports to help most: those workers struggling hardest with the high cost of living in San Francisco.
Permit me to explain, again using Incanto as an example. In the past year, we have had 24 hourly-paid employees at Incanto. The twelve lowest-compensated employees earned from $8.50 per hour and upward, without tips. The twelve highest-compensated employees all earned the California minimum wage of $6.75 per hour, plus tips. Under Proposition L, we will be required to increase the wages of every person earning less than $8.50 per hour. At Incanto, as at many of San Francisco's table service restaurants, this pay increase will therefore go almost exclusively to those employees who are already earning the highest wages. We don't have anything against these employees earning more money, but it is tragically unfair that those persons earning $9, $10 and $11 per hour will be left behind, while those earning two and three times that amount may receive a pay increase. Given what is at stake, this seems like an investment of precious resources made in the wrong place.
A Political Solution?
In July of this year, a group of restaurant industry representatives raised this issue of wage inequity to Proposition L's primary political backer, the aforementioned mayoral candidate Matt Gonzalez. They presented their case but came away from the meeting without any compromise on the issue of a tip credit. My colleague Patricia Unterman, co-owner of Hayes Street Grill, wrote in the San Francisco Examiner that she telephoned Matt Gonzalez three times to attempt to talk to him about this issue and that her calls were not returned. One week ago, I went to a Matt Gonzalez neighborhood campaign stop and asked him about this issue in person.
His response to the problem I described was that I could easily resolve this economic injustice by sharing tips among all my employees, not just among the dining room staff. Great idea, I told him, except that California law specifically forbids it. Matt's response was that he was not aware of any such law. Evidently, here in San Francisco one does not need to understand the body of law relating to the public policy you're sponsoring.
At his request, I sent Matt a copy of the applicable law. In return, Matt's campaign assistants sent me a copy of the 51-page economic study upon which they based their conclusion that raising the minimum wage in San Francisco without a tip credit would be a good idea. The study documents the plight of San Francisco's minimum-wage workers. But nowhere in the 51 pages is any mention made of the fact that thousands of these workers also receive, report, and pay taxes on tip income. That struck me as a significant oversight.
The Future
Proposition L was passed by voter ballot initiative last month by an overwhelming margin, 60% against 40%. The law will go into effect in early February. It is unlikely that anything will happen in the interim to change that.
Here is what this will mean to you, the dining public:
First, almost all restaurants are going to have to raise prices. We will all try to minimize this to the greatest extent possible, but there is virtually no fat left to cut. For most San Francisco restaurants, raising prices will be a matter of survival.
Second, restaurants will become increasingly cautious with staffing. Hours will be cut from schedules, positions will be eliminated from budgets. I know at least one group in the midst of opening a new restaurant next year that has already eliminated two jobs from its planned staff directly as a result of Proposition L. They have decided to make due with a smaller staff and risk the possibility that service will suffer.
Third, restaurants will have to get creative to address the wage inequity issue that Proposition L has exacerbated. Someday soon, instead of leaving the tip entirely to the diner's discretion, it might not be an uncommon sight to have a service charge line item appear on your dinner bill. This money would be used by the house to pay the higher payroll costs. This complication to our business model is not an attractive option to us, because it will also increase payroll taxes and workers' compensation insurance payments, not to mention raising acceptance issues with customers and staff. But our hand has been dealt and we must play it as best we can.
Fourth, depending on how the previous three items play out, when this is all over there is a very real likelihood that there will be fewer restaurants and less choice for San Francisco diners. Restaurants will survive, but the variety and vibrancy of the restaurant scene in our city may be further diminished.
Groucho's Wisdom
One of my beliefs that has been reinforced by this process is that our ballot initiative-driven system of policymaking is absolutely insane. It permits our elected officials to escape accountability in matters that they could have addressed themselves. The San Francisco Board of Supervisors could have raised San Francisco's minimum wage. But instead they passed the buck to San Francisco's voters, in part fuelled by the political aspirations of the President of the Board of Supervisors, Matt Gonzalez. Under this system, our politicians can take credit for popular ballot initiatives, yet disavow responsibility when things go wrong. It is ludicrous to expect that our general electorate could anticipate the economic subtleties of passing the nation's highest minimum wage law without a tip credit. The initiative was of course popular. Now we are left to deal with the consequences.
I mentioned that this is a battle being fought quietly. I have spoken to some restaurant owners who are still unaware that Proposition L passed and of its implications for their restaurants. Others are aware but are in denial. Politicians are afraid to discuss this issue publicly, for fear of being perceived as against a popular ballot initiative. For similar reasons, many restaurant owners (with a few notable exceptions, such as Patty Unterman) don't want to offend their customers or staff by speaking publicly about the issue. I have a different perspective. I think we are making a grave error and that we must speak the truth.
I briefed Incanto's staff this weekend, telling them how much this issue has been weighing on my mind. I told them I don't know what the future will bring, but that I pledge to do my best, as always, to balance their needs with the needs of our customers and of the business. Then I asked for their support as we head into another challenging transition, brought upon us by external forces. In typical form, Incanto's employees gave me a pat on the back and told me to do my best.
Food | Wine | Why | Dante | Letters | Information | People
Incanto Italian Restaurant, 1550 Church Street, Noe Valley, San Francisco 94131
415-641-4500 - Email: info@incanto.biz