Insights on Finance Trends and Strategies

Responding to Higher Labour Costs - May 22, 2018

By: Tony Valente May 22, 2018 2:59:03 PM

 


 Weekly Market Dispatch

 

Responding to Higher Labour Costs 

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Over the weekend there has been a deceleration of the China/US trade war with an agreement in principle that will reduce the bilateral imbalance. Meanwhile in Europe, progress has been made in forming a government in Italy between the Five Star Movement and the Northern League.  The M5S is a populist, anti-establishment, environmentalist, alter-globalist, and Eurosceptic party while the NL is regionalist political party that basically wants to separate from the rest of Italy – what could possibly go wrong?

Unfortunately, David Granner and I were both unavailable to write the newsletter for this week due to other corporate responsibilities. Thus, we have asked our esteemed colleague, Victor Hinojosa, to provide one of his recent articles that will be published in the CFA magazine. 

 

Responding to Minimum Wages Increase

How Franchisors can tackle higher labour cost

Since Ontario increased its minimum wage from $11.60/hour to $14/hour on January 1, franchises have been affected by the 29 per cent increase in labour costs and are scrambling to find cost-cutting measures to stay in the black amidst tighter margins. This includes laying off staff, in some cases even switching from full-service dining to counter service, increasing menu prices or applying a mandatory service fee for customers to foot the difference. In the United States, 20 states have also implemented minimum wage increases this year, most notably a dollar increase in Maine. For Canadian franchises, the buck does not stop there, and they can look forward to a further hike in Ontario up to $15/hour in 2019, while other provinces across Canada implement minimum wage increases in 2018. As this is one trend that isn’t going anywhere any time soon, franchises need long-term strategic solutions to tackle rising labour costs.

Price increases are not a long-term solution, and it isn’t within reach for the majority of franchises, if franchises want a sustainable foundation of healthy profits. As a Band-Aid strategy, price increases fail to address the issue that franchises are in a highly competitive landscape. Increasing prices work best for businesses in monopoly environments, where consumers have few options to spend. To put things into perspective, since 2014, Canadians have had 1,892 new QSR options in Canada (14,006 in the U.S.) to consider, making it a frictionless decision for many consumers to simply go to a competitor on the next block.

Canada has the second-largest franchise industry in the world, with 1,200 to 1,300 franchise companies operating close to 76,000 outlets. Competition is fierce, and franchises must look at every way possible to reduce costs. 

Avoid the "cost of doing business" mentality

The majority of franchisors understand the value of mitigating inefficiencies throughout the supply chain process in order to boost the bottom line. Streamlining the supply chain also benefits franchisors when it comes to maintaining a positive relationship with their franchisees. Wage increases can put strain on franchisees, who are taking on increased costs at their locations, so finding and reducing the hidden costs of doing business is pertinent in helping franchisors to stay innovative and engage with their franchisees. 

Franchisors often overlook foreign exchange as a natural cost of doing business. Implementing a dynamic foreign exchange strategy is an underutilized tool to simultaneously manage costs and protect franchisees. From wage increases to interest rate hikes, there are factors that are unequivocally beyond the control of franchisors, but with the right currency cost strategy, individual franchisees can save thousands of dollars, without dedicating extensive resources or time.

Digitizing the payment workflow

Unnecessary foreign exchange costs related to procurement costs can be eliminated through online portals. One common experience that franchisees find themselves in is the scenario of paying for equipment upfront to their franchisor. If the equipment is sourced overseas, the franchisee will pay in the foreign currency, such as USD or EUR. The franchisee will send a draft or wire to the franchisor, thereby incurring courier and wire fees. Franchisees lack, for the most part, a strong banking relationship that is sophisticated enough to handle foreign exchange payments, and franchisees will go in-branch to a financial institution and pay the retail rates for these payment transactions.

A customized payment portal eliminates extra costs by allowing direct payments to be made to the franchisor. Some payment portals can be integrated in their existing enterprise resource planning (ERP) or through an experienced partner knowledgeable in the franchise payment workflow. Not only can online portals save on costs, but the time reduced for payment processing directly impacts cost savings for franchisees, while allowing the franchisor transparency into the transaction to facilitate payment reconciliation. Traditionally, individual franchisees faced higher international fees than larger corporations that have leverage to negotiate competitive transaction fees. A digital solution levels the playing field for franchisees to mitigate these pain points in relation to excessive fees and prolonged processing times.

In addition, Canadian franchises should also consider their ability to leverage the purchasing power of the entire franchise network to reduce costs in their entire supply chain. They should work very closely with their purchasing co-operative to mandate that they implement a solution on this front.  No franchisee is going to be upset if they’re provided with the opportunity to save thousands of dollars that goes right to their bottom line to offset other costs (like the one below) on an annual basis that requires no effort on their end.

Rising labour costs are on the horizon for franchisors and eliminating the secret costs of foreign exchange payments is an underestimated strategic investment into the long-term health of the franchise organization

About the author

Victor Hinojosa is the Vice President, Digital Solutions & Partnerships of AscendantFX, and is working very closely with some of the world’s most recognizable franchise brand names. AscendantFX marries the world of technology and international payment delivery to provide award-winning, technology-based payment solutions for businesses. To learn more about AscendantFX, visit www.ascendantfx.com.

 

          Key Data Releases This Week 

         
      Forecast Previous
MONDAY, MAY 21
         
TUESDAY, MAY 22
05:00 GBP Inflation Report Hearing    
WEDNESDAY, MAY 23
04:00 AUD RBA Gov Lowe Speaks    
04.:30 GBP CPI y/y   2.5%  2.5%
10:30 USD Crude Oil Inventories  -2.5M  -1.4M
14:00 USD FOMC Meeting Minutes    
THURSDAY, MAY 24
04:00 GBP BOE Gov Carney Speaks    
04:30 GBP Retail Sales m/m 0.8%  -1.2%
07:30 EUR ECB Monetary Policy Meeting Accounts    
  GBP BOE Gov Carney Speaks    
FRIDAY, MAY 25
04:30 GBP Second Estimate GDP q/q 0.1% 0.1%
08:30 USD Average Hourly Earnings m/m  0.5%  0.1%
09:20 GBP BOE Gov Carney Speak    
  USD Fed Chair Powel Speaks    

 

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TONY VALENTE
Senior FX Dealer,
Global Treasury Solutions
                    

Topics: Trends, Analytics, Currency Market Trends

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