Example of the Impact of Minimum Wages on Consumer Prices
I thought folks might be interested in a letter I just wrote to the US Forest Service. I have left some of it out, but these are the guts of it. As many of your know, we manage parks and campgrounds under concession contract for public entities. As such, we typically must get changes to customer fees approved in advance by the agency. This is a version of a letter we just wrote to a number of US Forest Service offices in California explaining the substantial increases to camping rates that must occur over the coming years to accommodate the new California minimum wage laws.
2017 Fee Proposal & Impact of California Minimum Wage Increases on Camping Rates
The purpose of this letter is to make you aware of the substantial effect that the recent increase in California minimum wages will have on use fees. I will get into details below, but in short the newly-legislated 50% increase in the state minimum wage is likely to increase our costs by about 22%, even ahead of inflation in other categories of expenses. Just to stay at parity and to avoid cuts in service, we (and other California concessionaires) are going to need substantial increases in fees over the next five years. Frankly, this does not make me very happy – our company will have to struggle with public resentment of the new fees without making an extra dollar in profit – but it is the reality we must face together. The only other alternative would be large cuts in service (e.g. bathroom cleaning frequency) which frankly I am not going to accept.
Background on the Minimum Wage Increase
California minimum wages have already risen over the last three years by 25% from $8 to $10 an hour. The new California law, which will apply to most concessionaires, demands the following timetable for minimum hourly wages (smaller companies with fewer employees than we have will have one extra year to comply):
2016: $10.00
2017: $10.50
2018: $11.00
2019: $12.00
2020: $13.00
2021: $14.00
2022: $15.00
Note that given the terms of other portions of labor law, these same sorts of percentage increases must trickle up to all managers and salaried employees in California as well.
Background on Concessionaire Cost Structures
Not surprisingly, as a labor-intensive service business, a substantial portion of concessionaire costs are directly tied to wage rates. The minimum wage increase will increase at least three categories of our costs:
- Wages
- Payroll taxes (which are calculated as a percentage of wages, so will go up by the same percentages as wages go up)
- Workers compensation insurance premiums (which like payroll taxes are calculated as a percentage of wages and go up by the same percentage wages go up)
Looking at our financials for our California permits (we have three large permits in the Inyo NF and one in the Cleveland NF) these three categories make up 44% of our total costs.
Preliminary Estimated Fee Impacts
Let’s look, then, and how much our costs may rise between now and 2022.
For the labor and labor-related charges discussed above, we know that costs will rise 50% between now and 2022. A 50% price increase on 44% of our costs raises our total cost structure by 22% (0.5 * 0.44).
But all of our other costs will also continue to rise during this period by at least the national rate of inflation. It is very possible that these costs will increase faster in the future due to this minimum wage increase – for example, our waste disposal costs will almost certainly go up as the labor costs of waste disposal companies rise. For a starting point, we will assume 3% general inflation in 2016 and 2017 and 4% in the years after that. This would yield a 24% increase in the other 56% of our costs for an impact on our total costs of 13.4% (0.24*0.56). Combining these two effects, we can expect a total cost increase to operate campgrounds in California by 2022 of 35.4%.
Note that though we bid based on trying to earn a profit margin around 9%, our actual profit margin in the USFS campgrounds we operate in California has been between 3% and 7% of revenues (5% in 2013, 7% in 2014, 3% in 2015). There is simply no room in that margin to absorb a 35.4% cost increase. We are going to have to therefore seek fee increases over the next 6 years in the 35% range, or between $6 and $8 on the $18-$23 camping rates that currently obtain. This is about a dollar or year, or two dollars every other year.
Competitor Analysis
We understand that the USFS wants to justify fee increases based on market conditions. One problem we will have is that even though we don’t open until April or May at seasonal locations, we need to get fee approval the previous September or October. We fully expect private operators will have to pursue fee increases of a similar magnitude; however, they may not announce their new higher rates in time for our very early fee-setting process. This makes local competitive analysis misleading.
Fortunately, in California we have another large public campground provider, California State Parks (CSP), that has many of the same public service and land management goals as has the US Forest Service. They therefore make a very good comparison. While rates vary by park, CSP is typically charging $35 a night for a no-hook-up campsite in parks that are very comparable in their natural settings to USFS campgrounds.
We currently charge no more than $23 for a no-hook-up site in the USFS in California (both in the Inyo and Cleveland NF). Even with a $6 fee increase, we would still be offering no-hookup campsites at 17% lower cost than does the State of California today (and presumably even lower in 6 years given that CSP is likely to continue to increase its camping fees).
[Rest of the letter on exact fee recommendations and other contract issues omitted]
LoneSnark:
As Economics teaches us, all goods are substitute-able. As camp-ground fees increase, people are less likely to camp at your park and will spend their entertainment dollars elsewhere, say scrapping the Winnebago and going to see more movies or buying international manufactured goods (video games/software) which are immune to minimum wage laws.
I developed a theory that our government leaders intention is to result in everyone living the 1950s lifestyle: gotta eat at home and spend your time watching TV. Everything else is purposefully being priced out of American's reach. Back in the 70's people used to open up dance and music clubs with a measly $5k. Today faced with crushing nuisance-regulation you need a million to get started. So everyone switched to food as a form of entertainment, adding to our waste-lines but only facing labor regulations...and now the labor markets are being crushed with the minimum wage and other Obama edicts. Much of these businesses will not survive the cost increase. Just as price increases in the club and dance markets largely killed them off outside of the larger cities, where they are ungodly expensive, you too may need to worry about such an outcome.
You are resisting reducing labor expenditure by cleaning bathrooms less frequently, but you may be killing the business this way. Some of your customers faced with higher prices will stop paying to use your park, which will force you to raise prices again to cover that additional lost revenue, which causes you to lose more customers, etc. etc. It is the case that some industries only exist up to a certain cost structure. .
August 15, 2016, 8:05 pmdisqus_DCPbdeGXic:
Coyote, while many people reading this blog are analytical and numbers-driven, not everyone at the USFS thinks this way. Even though everything you've written in it is true, the economic dollar and cents argument is likely going to rub people the wrong way. The people at the USFS have a different worldview and they could interpret this as wining and bickering. An alternative approach would emphasize persuasive messaging such as "we're only asking for a $1-2 increase, one or two bucks, not much" to appeal to emotions.
A better approach for your letter would have been to start off with an executive summary "cliff notes" section highlighting key takeaways / talking points:
1) In order to continue to deliver the same services we do today we forecast nightly use fees will need to increase "about a dollar or year, or two dollars every other year." By 2022 we estimate use fees will rise from $22 to $28.
August 15, 2016, 9:22 pm2) This increase is the result of cost pressures from wage increases that will result from the increase in California's minimum wage. The minimum wage is currently $10 and is set to rise every year until it reaches $15 in the year 2022.
3) 44% of our costs are tied to wages and we are unable to absorb these wage increases with our small profit margins.The only other alternative would be large cuts in service (e.g. bathroom cleaning frequency) which I am not going to accept.
4) We respectfully request that you honor our fee requests of $1-$2 per year over the next 5 years while taking into consideration the lag between when we place our requests (September-October) and the opening dates of our parks (April-May). Minimum wage increases take effect on January 1st and will not yet be reflected in market data when we make our requests in the fall.
5) While we do not like raising prices, we believe $1-$2 price increases are modest and affordable for our patrons. Even with these price increases our campgrounds will still be more affordable than the California State Park's.
Petri:
I worked for the government, all of them that worked with me believed all private profits as bad and unethical. When you explained that 40% of your costs are represented by labor, I can't help but believe they interpret this to mean you are making a 60% profit.
August 16, 2016, 5:14 amTimB:
I've already quit staying at campgrounds. Camping in a national forrest is free, at least until our politicians realize this. Don't tell them.
August 16, 2016, 8:12 amTim Broberg:
Interesting, if 50% of your costs are labor costs, and the cost of labor rises 44%, how much do your costs rise? I would have said 22%.
It never occurred to me that your vendors are also seeing the same rise in labor costs and are also raising their prices.
August 16, 2016, 8:43 am- The other TimB
Bruce Zeuli:
Here is how I would have discussed it. My reasons follow.
I am writing to you to provide an update on our proposed 2017 Camping Rates. As you know, our state legislature has finally taken action to improve the lives of hard working minimum wage earners. Over the next seven years we will be able to move our lowest paid employees from $10 to $15 per hour. The impact of this change cannot be overstated and our workers look forward to these increases.
After “crunching the numbers” we have come up with a simple way to include this long overdue pay raise into the camping rates. Increasing workers pay from $10 to $15 PER HOUR for every hour they work will add just $1.50 PER YEAR to camping rates for each of the next 7 years.
I think this is exactly the kind of win-win that our legislature hopes to see. Campers spend a little bit more each night to provide minimum wage workers with a great deal more each hour.
****As a point of comparison, California State Parks currently charges $35 for the same kind of site we offer for $23. We will continue to offer better value even as our workers earn substantially more.
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I was a partner in a San Francisco based business that provided services to municipal and state government. While we grumbled internally about all of the issues Coyote raises, we took a very different approach in communicating with customers.
First start with the premise that government is wise and good and that every action they take makes things better. Second assume that they want to partner with your company and once partnered will work vigorously to protect that partnership from all challengers (because it makes their life easier). Third, understand that they actually want their budget to grow every year, provided they can get the funding they need.
Lastly recognize that their success (and yours) depends on them out competing other departments and agencies to get the funding they need. They don’t have to please customers, they have to please bosses. Your job is to help them achieve that goal. Think of the makeup of your audience. You are speaking to your customer, their boss, their boss’s boss and a committee. Your customer knows something about the nitty-gritty of what you do and likely wants you to do it well. But as you move up the chain each level knows less and cares less about the specifics. At the top it’s just numbers and stories. Give your customer a good story that they can pass on up the line.
August 16, 2016, 10:03 amSimon Clarke:
"California minimum wages have already risen over the last three years by 25% from $8 to $10 an hour." – That's actually a 20% increase. Don't worry though – I doubt anyone working for Government will notice...
August 18, 2016, 2:44 amobloodyhell:
I thought you'd abandoned Cali?
August 18, 2016, 3:31 amobloodyhell:
LOL -- No, it's a 25% increase. The difference is 20%.
25% of $8 is $2 -- so the increase is 25%.
So: you have a government job, I take it? LOLZ.
August 18, 2016, 3:36 amMike Powers:
See, that's the thing I thought as well. The USFS is not going to see this as "oh, here is an honest assessment of how his costs will go up". They will see it as "whine whine whine, MUH PROFITS".
August 18, 2016, 11:58 am