Controlling labor costs in the new $15 an hour minimum wage world: kiosks, robots, and housekeeping opt-out rewards

From Mark Perry.

"We know from basic economics that capital and labor are substitutes in the production process, and the more expensive labor is, the more incentive there is for firms to substitute capital for workers. It should be no surprise then that restaurants across the country are suddenly more interested than ever before in investing in labor-saving technologies, self-ordering kiosks, automation, and robotics as they prepare to counteract the inevitable spike in labor costs from the $15 an hour minimum wage hysteria that is sweeping the country.

For example, Investor’s Business Daily reported recently that fast-food chain “Wendy’s said self-service ordering kiosks will be made available across its 6,000-plus restaurants in the second half of the year as minimum wage hikes and a tight labor market push up wages.”

Former McDonald’s CEO Ed Rensi had this to say on FOX Business News a few days ago about what he called the “$15 an hour minimum wage nonsense“:

I was at the National Restaurant Show yesterday and if you look at the robotic devices that are coming into the restaurant industry — it’s cheaper to buy a $35,000 robotic arm than it is to hire an employee who’s inefficient making $15 an hour bagging French fries — it’s nonsense and it’s very destructive and it’s inflationary and it’s going to cause a job loss across this country like you’re not going to believe.

Ed Rensi also wrote recently for Forbes about the “restaurant math” of a $15 an hour minimum wage:

For some McDonald’s locations, a $15 minimum wage wipes out their entire profit. Recouping those costs isn’t as simple as raising prices. If it were easy to add big price increases to a meal, it would have already been done without a wage hike to trigger it. In the real world, our industry customers are notoriously sensitive to price increases. Instead, franchisees can absorb the cost with a change that customers don’t mind: The substitution of a self-service computer kiosk for a a full-service employee.

But what about industries like hospitality? It’s pretty difficult for a hotel to automate services like housekeeping, so how can they control labor costs when they are forced by government fiat to pay workers a $15 an hour minimum wage? Actually, the minimum wage in the city of Los Angeles for hotel workers is even higher — it’s currently $15.37 an hour for hotels with 300 or more rooms and will apply to hotels with 150 or more rooms on July 1. So it shouldn’t be surprising that some hotels are starting to come up with creative ways to control their labor costs, like Marriott’s offer to credit guests with bonus points of 250 to 500 towards its Marriott Rewards Program for each day they agree to pass on housekeeping.  

Interestingly, Marriott is promoting its “Pass on Housekeeping” option as a way to help “conserve natural resources” and “save on millions of gallons of water” (see receipt in the photo above advertising the program via Steve Rider’s article below). But it’s also certainly an innovative way for Marriott to save on labor costs, especially in an era of $15.37 an hour labor costs in LA, and pending increases to $15 an hour in San Francisco, Seattle and New York state in 2018, and statewide in California by 2022. And $15 an hour minimum wage laws are being considered around the country in cites and states like Minneapolis, Cleveland, San Diego and New Jersey, to name just a few.

I first found out about the Marriott housekeeping opt-out option from this first-hand report and commentary from Steve Rider — “Marriott’s ‘Help Us Conserve Water’ Program Seems More Likely a Reaction to Minimum Wage Increases,” here’s a slice:

As a corporate consultant, I travel on business quite frequently. This week while checking in at a Marriott that I’ve stayed at several times, I was asked “Would you like to take advantage of our opt-out housekeeping program?” The desk clerk explained to me that now Marriott is offering the option for guests to opt out of housekeeping and to then receive 500 Marriott points per day. Giving points is a more effective incentive than giving a lower hotel rate. Most business travelers bill their hotel costs to their employer, or to the customer. But by giving points rather than a discount, it benefits the person making the hotel reservations — the guest — rather than the bill payer.
It’s an innovative attempt to control housekeeping costs and now with California leading the way with massive increases in the minimum wage, it seems likely that Marriott’s real motivation for this program is a low profile but highly effective way to combat spikes in labor costs.
Hotel cleaning staff is one of the more vulnerable fields to minimum wage laws, giving employers few options beyond raising prices or reducing services. Most housekeeping work cannot be automated or outsourced. Additionally, skill-sets among cleaning staff is not going to vary in large degrees. A fast food restaurant may be able to consolidate some of its headcount with highly skilled employees who can manage the register, speak three languages and still flip burgers, but it’s difficult to imagine a housekeeper being twice as valuable as their co-workers.
What should really surprise no one is that liberals’ aggressive minimum wage laws will hurt the very people it’s intended to help. Ironically and most certainly not by liberals’ design, it’s actually going to benefit white-collar business travelers like myself. Seeing this, one can understand Marriott’s decision to promote this as a “Save Water!” program instead of a potentially less popular title of, “Help us reduce our low-income workforce and earn free travel!”
Regardless of the intent of Marriott’s plan, the program will most certainly allow Marriott to control its labor costs more effectively. As more housekeeping staff gets laid off, or their hours slashed, the media will paint Marriott as a greedy corporation laying off its loyal workforce.
I suspect that this innovation will be adopted by other hotel chains. Indeed, Marriott itself might have adopted the idea from a competitor.  Good ideas have a tendency to be widely adopted.  And that’s not good news for unskilled hotel staff — or for low-skilled employees in every industry.

Bottom Line: Most industries that employ low-skilled and limited-experience minimum wage workers operate on razor-thin, single-digit profit margins, e.g. restaurants (7.5%), hotels (8%), discount retailers (2.6%), grocery stores (1.4%) and department stores (1.7%) for the most recent quarter. There just simply isn’t any magic pile of money or profits lying around that would allow businesses in those industries to absorb an annual increase in labor costs of $15,500 per full-time worker from an increase in the minimum wage from $7.25 to $15 an hour. In the end, it’s a matter of simple “business math” — and a $15 an hour minimum wage is some very, very bad math for business survival and job creation. Those businesses that are able to survive will only be able to do so by replacing workers with labor-saving technologies discussed above including self-ordering kiosks, automation and robotics, along with innovative labor-saving strategies like Marriott’s reward program for opting out of housekeeping. As former McDonald’s CEO Ed Rensi predicts, you should expect “job losses across this country like you’re not going to believe” as a result of the $15 an hour minimum wage."