04.05.201611 min read

What A $15 Minimum Wage Means for 3 Small Businesses in San Francisco

Rick Karp calls himself a “bleeding heart liberal.” He’s a member of Business for a Fair Minimum Wage, a national non-profit that supports hikes in the minimum wage, including $15 in California, New York, and District of Columbia, and a $12 federal minimum. At Cole Hardware, the San Francisco-based chain of five stores he took over from his father in 1978, Karp, 64, has long made a point of setting compensation for his lowest-paid hourly workers, including cashiers and stock clerks, above the required minimum. Among his staff of 124, he has 10 full-timers and three part-timers who make $13 an hour, 75 cents above the current $12.25 minimum in San Francisco and 45 cents above the $12.55 minimum in Oakland, where he has one store.

But now that California governor Jerry Brown has reached a deal with state lawmakers to adopt a $15 state minimum as of 2022, matching the minimum San Francisco is already set to enact by July 2018, Karp wonders if he can continue to pay above what the law requires. California raised its wage floor from $8 to $10 in January 2016. If the California legislature approves the deal as expected, the first state hike, to $10.50, would come January 1, 2017, for businesses with 26 or more employees.

“We’re going to make it work,” says Karp. “We’re going to continue to thrive.” But at the same time, he says, something will have to give. He’s thinking about shrinking his payroll by 10 percent, through attrition he hopes, and he’s realizing he may not be able to keep paying above the required minimum once it hits $15.

San Francisco was one of the first U.S. cities to pass a $15 minimum, through a ballot initiative in November 2014, when the city’s wage floor was $10.74. That measure raises the minimum in increments, culminating in $15 in July of 2018. In addition, under a 2006 law aimed at providing health care to everyone in the city, San Francisco businesses with 100 or more employees, like Karp’s, are required to pay at least $2.53 an hour toward each worker’s health care. Taken together, the health care and minimum wage laws mean Karp must pay $14.78 an hour this year, which will climb to at least $17.53 in July of 2018 (the health care payment is pegged to health costs across the state, which will surely rise).

Research into the effects of higher minimums is conflicting and inconclusive. One frequently cited 1993 study, co-authored by Alan B. Krueger, a Princeton economist, surveyed fast-food restaurants in New Jersey, which had increased its minimum wage above neighboring Pennsylvania, and found that New Jersey’s hike increased employment rather than depressing it. But Krueger recently published an op-ed saying he believes that, while the economy can absorb a $12 an hour federal minimum, a $15 minimum could have negative consequences (he did say that he thinks some high-wage cities and states could probably absorb it).

Meanwhile, Forbes contributor Tim Worstall is certain that a $15 minimum will devastate the California economy. Worstall latches onto two points in a new paper co-authored by UC Berkeley economist Michael Reich that concludes a $15 minimum wage will result in a modest job loss and an economic slowdown in the city of Los Angeles (the study predicts a modest job gain in L.A. County). A 2014 study for San Francisco’s Office of Economic Analysis found that a $15 minimum would benefit the local economy by boosting the spending power of low-wage workers but also acknowledged that it could result in 15,000 fewer jobs by 2019. Still, if San Francisco's economic expansion continues, the report predicted that growth would produce enough new jobs to make up for the loss.

With the minimum wage so much in the news—Hillary is for $12, Bernie for $15, Cruz and Trump for no hike in the current $7.25 federal minimum, and New York governor Mario Cuomo is pushing a $15 statewide minimum—we asked three San Francisco businesses to open their books and tell us how they’ve been coping with their city’s wage requirements.

At Cole Hardware, Karp says his 2015 revenue reached $15 million while wages and benefits accounted for 30 percent of his overhead. As San Francisco's minimum wage rises to $15, he plans to hike wages for his 86 full- and part-time workers who now earn between $13 and $18. In theory, that means he’ll have to absorb a 40 percent increase in wages over a four-year period for more than two-thirds of his staff.

Because he competes with Amazon’s low prices on almost every item he sells, Karp says he can’t simply raise prices. Already, he charges more than Amazon for most items, like a $21 blacksmith’s hammer that Amazon offers for $17.05, including shipping. To compete, Karp says, “I want my employees to provide the best customer service possible and in order for them to do that, I need to do whatever I can to make them as happy as possible.” That means offering health and dental insurance, nine paid days off a year plus vacation, and above-minimum wages.

But it’s going to be very tough to continue to be so generous, he says. Last year, profits were three to four percent of sales, he says. If he stays ahead of the $15 minimum, he could wind up erasing his profits, unless he has a significant revenue increase. One other option he’s considering is doing away with a newspaper the store publishes, which he sends through direct mail to 25,000 customers a month, at a cost of $240,000 a year. But doing so could cost him sales.

Even so, Karp says he still favors the $15 minimum: “The cost of living is so high here, it’s very hard to live on minimum wage in San Francisco.” He’s especially pleased that the statewide minimum is likely to match the city’s, requiring competitors like Amazon to pay their warehouse staffers as much as he pays his cashiers. “There needs to be a level playing field,” he says. “I think a federal minimum wage of $15 would be great though I don’t think our crazy Congress will do that.” The higher minimum can also have benefits for retailers like him, he believes. “When people make more,” he says, “they spend more.”

A pizza place can handle higher wages

Philip DeAndrade, 72, runs Goat Hill Pizza, which has three locations, 60 employees, and revenue of more than $3 million last year, according to DeAndrade. He has an even thinner profit margin than Karp’s, just 2.7 percent, which means he has little room to maneuver on profits of around $81,000. He pays himself $40,000 and lives on a houseboat near AT&T Park. “I personally do not view wealth as a marker of success in my life,” he says. “It is not my goal.”

That’s a good thing, given his rising wage costs. In addition to the increasing minimum, California is one of six states that require tipped employees to be paid the minimum wage. The San Francisco ordinance also requires DeAndrade to pay $1.68 an hour toward health care (that’s the rate for businesses with 20-99 employees). Roughly one third of DeAndrade’s staffers, some full- and some part-time, work for minimum wage. He says his customers don’t make a fuss when he raises prices on his pizzas. The Internet makes it easier. “You can raise the price in your menu online, and nobody notices,” he says. Because all city restaurants contend with the same wage requirements and other costs, like the fluctuating price of cheese, DeAndrade says he knows he can pass on the costs of higher wages, and more expensive ingredients, to his customers. He says he raises prices roughly once a year and his customers have yet to complain.

A bookstore’s novel strategy

A third business, Borderlands Books, on Valencia Street in the increasingly gentrified Mission District (Mark Zuckerberg reportedly bought a $10 million home there in 2012), announced early last year that it was shutting down because it couldn’t absorb the cost of the rising minimum wage. Since 2001, the store, which specializes in science fiction and was dubbed by a local paper as the “Best Place to Meet Kinky Space Cadets,” had fought off competition from Amazon and e-books. But early last year, the store’s owner, Alan Beatts, 48, a former firearms instructor, and his general manager, Jude Feldman, posted its closing message on the store’s blog. “Although all of us at Borderlands support the concept of a living wage in principal [sic] and we believe it’s possible that a new law will be good for San Francisco,” they wrote, “Borderlands Books as it exists is not a financially viable business if subject to that minimum wage.”

Conservatives including the website Breitbart, seized on the announcement, as a we-told-you-so to liberals who supported a higher minimum wage. A right-leaning think tank, the Employment Policies Institute, which gets funding from the restaurant industry, included Borderlands on a website devoted to businesses that have been pushed onto hard times because of higher wages, The Faces of Fifteen.

Beatts, who says he is no conservative, reacted by speaking out in favor of the minimum wage hike. “There are tens of thousands of people in this city that are going to benefit,” he told The New Yorker. “Businesses are going to pass the costs to consumers, and the product of that money that’s being spent is going to go to the lowest-paid people in this city. I think that’s a good thing.”

The math just didn’t work for Beatts’ store, where payroll was his biggest expense. In 2014, it accounted for 42 percent of his overhead, followed by the good deal he has on rent, which made up 26 percent. Beatts employed five people in the bookstore beside himself, and only one worked full-time. Four made minimum wage or slightly higher. He didn’t earn much more, at $28,000. “I ride a motorcycle and I have relatively simple desires and needs,” he says. In 2013, Borderlands’ profits were a mere $3,000. By the time the minimum wage hit $15, the bookstore would be losing $30,000 a year, he says, if his revenue did not also rise. Borderlands has an adjacent café with an additional nine employees, most of whom make minimum wage, and Beatts says customers will accept higher coffee prices, but the prices for books are printed on the covers, and he didn’t see hiking book prices as a way to stay in businesses.

In the wake of all the attention, Beatts held a meeting at the store that was open to the public, where a suggestion arose: The store should sell some sort of membership or sponsorship. Beatts figured that 300 sponsorships at $100 each would keep the store open for at least a year. Sponsors would get perks like reserved seating at author events, invitations to a quarterly bring-your-own-beer gathering with other sponsors, and the ability to rent the café or bookstore after-hours for just $125 an hour, a bargain for a San Francisco venue. Within 42 hours, 300 people had signed on and by year’s end, Borderlands had 844 sponsors, producing $84,400 in extra cash. This year, just under 600 people have signed on. Beatts even gave himself a raise, though he won’t say how much. He hopes the sponsorship program will pay enough that he can buy a building when his lease is up in five years.

This article was written by Susan Adams from Forbes and was legally licensed through the NewsCred publisher network.

 

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