Will a Higher Minimum Wage Mean More Automation in Illinois?

A $15 minimum wage will force companies to raise their prices and chop labor in favor of automated machines, all putting mom and pop stores at a distinct disadvantage.

by Alexia Elejalde-Ruiz and Lauren Zumbach, Chicago Tribune / February 19, 2019
Shutterstock/Stokkete

(TNS) — If you’re the anti-social type, automation has made life a bit easier.

You can grab lunch, groceries or movie tickets without interacting with cashiers. Check into your hotel room without stopping at the front desk. Retrieve the goods you ordered via touch-screen kiosk or mobile app from a locker and avoid having to thank a soul.

Consumer preference is partly behind this latest wave of mechanization, but businesses also are pressed to streamline operations in the face of a tight job market and rising labor costs.

With Illinois poised to adopt a $15 minimum wage, nearly double the current rate in parts of the state, companies that have yet to automate tasks may jump on the bandwagon.

“They’re chipping away at manual tasks to reduce the number of hours employees have to work,” said Rob Wilson, managing director and partner in the Chicago office of L.E.K. Consulting, a strategy firm. “A lot of it is under way. … This (the minimum wage increase) would just accelerate it.”

Chicago is already on the front lines of counter service automation. In September, Amazon opened a cashierless store in Chicago, the company’s first outside of its hometown of Seattle. Quick-service Asian chain Wow Bao opened a fully automated restaurant in Chicago in late 2017.

Those extreme examples are unlikely to become widespread anytime soon, but consumers will likely see more restaurants and stores invest in technology like self-checkout kiosks and electronic shelf labels that can automatically update prices, Wilson said.

Companies that have been rolling out those technologies, including McDonald’s and Kroger Co., say that rather than replacing workers, the new systems free up employees to do tasks where they add more value. McDonald’s, for example, has created the role of “guest experience leader” to help customers navigate the kiosks and has other employees bringing food to tables.

But Michael Jacobson, president and CEO of the Illinois Hotel and Lodging Association, worries that Illinois’ $15 minimum wage might force businesses to automate when it’s not in the best interest of customers or employees. And some small businesses that can’t afford to invest in technological efficiencies worry they’ll be at a competitive disadvantage as wages rise and they are forced to increase prices.

“We don’t have the resources, the access to technology,” said Arthur Potash, second-generation owner of Potash Markets, which operates three grocery stores on Chicago’s Near North Side. In addition, he said, “we don’t have the relationship with our customer that encourages automation. People shop with us because of the people they deal with.”

A higher wage

Legislation to gradually increase Illinois’ minimum hourly wage to $15 by 2025, up from $8.25 currently, was approved Thursday by the state House and now heads to the desk of Gov. J.B. Pritzker, who is expected to sign it. Illinois will be the fifth state in the nation to adopt a $15 minimum wage, after California, New York, Massachusetts and, most recently, New Jersey.

While Chicago already has a $12 minimum wage that rises to $13 July 1, and some Cook County suburbs are close behind, the jump will be a shock to much of the rest of the state with a lower cost of living, Jacobson said. His organization, which represents more than 410 hotel properties in Illinois, supported raising the minimum wage to $15 in Chicago but sought $13 for the six collar counties and $11 for downstate.

The hike to $15 — with a first incremental step to $9.25 coming Jan. 1 — will force not only higher hotel room rates in towns already struggling to maintain tourist interest, like Bloomington and Carbondale, but also greater adoption of technologies that allow management to reduce labor hours, Jacobson said.

Hotels might offer guests bonus points to use mobile check-in and digital room keys via their smartphones, he said. Already some chains offer guests similar incentives if they forgo housekeeping for a day.

Even kitschy technologies, like robots that deliver toiletries and other requests to rooms, might transition from fun toys to necessities, he said.

“The more and more that labor costs increase, you’re going to see it become less trendy and more a reality,” Jacobson said.

Darin Dame, general manager of the Residence Inn Springfield, expects average room rates in town to increase from $86 currently to $125 per night by the time the minimum wage hike is fully rolled out, as hotels adjust to wage pressures not only from their own employees but that of their vendors. With both Indiana and Missouri less than two hours away, Dame worries tourists will spend the night there instead and make Springfield a day trip to see the Lincoln sights.

Greater use of mobile check-in or having robots vacuum floors may help alleviate some of the costs, but he fears the impact on an industry centered on hospitality.

“As of today in society people like that (human) interaction, and if we lose that, what is that going to do to their interest in coming to Illinois?” Dame said.

Getting wallets to open wider

Minimum wage laws are one of many factors pushing business toward automation, said David Portalatin, vice president and food industry advisor at NPD Group, a market research firm.

The difficulty of finding workers to perform low-wage jobs is also driving the trend, as well as the fact that consumers seem to like the convenience, he said.

Self-ordering systems improve order accuracy, retain customers’ order history and allow businesses to collect data that help them target promotions and develop menus, Portalatin said. Restaurant orders placed online or on mobile devices have increased 23 percent over the past five years while consumer traffic overall has been flat, so it’s a rare bright spot for growth, he said.

Machines also never forget to invite customers to add a dessert, a beverage, or another item to their order, which may be one reason people open their wallets wider when interacting with a machine. Average spend rises 20 percent, and frequency of visits rises 6 percent, when people use technology to place an order inside a quick-service restaurant, according to a study from Deloitte.

The automation Walmart is introducing is intended to give customers a range of convenient ways to shop, the company says. It is testing robots that scan store shelves to check for out-of-stock items or missing price information and systems that sort new inventory so workers spend less time unloading merchandise. Some stores have vending-machinelike “pickup towers” where customers can retrieve items ordered online.

“We are playing a long game and investing in technology and associates because we need to be that retailer who customers can rely on,” said Anne Hatfield, Walmart’s director of state and local communications for the Central U.S. “There are so many ways to invest, it’s not one versus the other.”

Some of those new shopping options have created new roles, like overseeing preparation of online orders customers opt to pick up at the store. “If we can help get automation to pick up the tedious stuff, associates can focus on things that benefit customers,” she said.

Chicken wing chain Wingstop is investing in self-ordering kiosks and lockers where customers pick up their orders because “they demand that of us in today’s fast paced lifestyle,” and streamlined workflow is a secondary benefit, spokesman Brian Bell said. Similarly, the restaurant chain replaced labor-intensive side dishes like potato salad and coleslaw with several varieties of loaded fries because of customer tastes, and a side perk is that they take less time to make, he said.

Not all automation efforts have gone smoothly. Shake Shack abandoned plans to expand cashierless and cash-free restaurants after customers at its pilot location in New York complained. The burger chain is now introducing kiosks alongside cashiers, and testing in markets with high labor costs like San Francisco.

A group of McDonald’s franchisees, who operate 90 percent of its 14,000 U.S. stores, complained of cash flow problems as the chain rolled out restaurant remodels that include self-service kiosks and systems for more delivery orders. The fast food giant extended the remodel deadline by two years, to 2022, in response.

But Charlie Buchanan, senior manager in human capital consulting practice at Deloitte, says automation can be a win-win-win for consumers, employees and the business. A big part of success is reassigning workers to capitalize on their skill sets, and he urges clients to ask employees what they’re interested in doing if mundane tasks are taken off their hands.

“What I think is exciting about this is that you’re really giving people a chance to dynamically upskill their talent in a way that frees them up to do something that creates a differentiated customer experience,” Buchanan said. Asked if a rising minimum wage might push more companies to automate, he said, “I hope so.”

Workers are still needed

Even with automation, most businesses still need human employees, they’re just putting them to work differently.

Amazon Go, which now has four Chicago locations, eliminated checkout lanes with a system that tracks shoppers with cameras and sensors as they take items off shelves, adding the purchases to virtual carts linked to their accounts. But the stores still employ greeters, stockers and food prep workers who make the pre-made sandwiches, salads and snacks the stores sell.

Wow Bao’s fully automated restaurant in the Gold Coast has a smiling concierge waiting by the door to greet customers, wipe down tables and explain how to order through touch-screen kiosks and pick up their food from a wall of cubbies. Other employees make the food, out of sight from the customers.

Jess Tucker didn’t know she was walking into an experiment in automation when she grabbed lunch at the Wow Bao in Chicago’s Gold Coast this week, and though she said it was “a little weird,” ordering her dumpling and bowl of noodle soup felt easy.

“I love speaking to a human,” said Tucker, 29. “But I used to work in food service and know what it’s like, and I don’t want to see someone not enjoying their day.”

She added: “It was nice not to have to tip.”

Worker advocates who have pushed for minimum wage hikes say the increases are not driving automation. Nor is automation a bogeyman that’s going to swallow all the service jobs, said Yannet Lathrop, researcher and policy analyst at the National Employment Law Project.

The Bureau of Labor Statistics projects tens of thousands of new jobs in food preparation and restaurant service, and even now there are more jobs than can be filled by the current labor force. While jobs may change to focus more on customer service than transactions, that could be a good thing, Lathrop said.

“Retail and fast food really do need workers to be present,” Lathrop said. “This gives an opportunity to rethink all these roles, to rethink the value of these low-wage workers and role they play in the profit-making of their employer.”

Small businesses worry

The whiz-bang examples of automation are unlikely to see widespread adoption for now, analysts say. Instead, most shops are investing in behind-the-scenes technology that trims costs or helps workers do their jobs more efficiently.

“The cost of putting robots in every store is incredibly high,” said Brendan Witcher, e-commerce analyst with Forrest Research. “They’re trying to figure out ways to reduce costs, not add more through automation.”

Despite companies’ assertions that minimum wage increases are not fueling automation, surveys suggest labor costs are a major business concern.

About 38 percent of food service operators considered rising labor costs a top barrier to growth, according to a 2017 survey conducted by L.E.K. Consulting. To help control labor costs, 41 percent said they were looking to reduce the number of people they employed full-time, and 32 percent said they tried to limit at least some employees to 30 hours a week or less.

“Where folks can automate, they will, and as the technology gets more efficient and the costs come down, they adopt it,” said Tanya Triche Dawood, vice president and general counsel at the Illinois Retail Merchants Association. “This is the future of work. The ultimate person who pays the price is people seeking entry level jobs.”

Some small Illinois businesses now facing a $15 minimum wage are worried about how they will make it work.

Brett Zehr, owner of the IGA grocery store in Mackinaw, Ill., said increasing the minimum wage to $15 per hour would add $150,000 to $200,000 annually to his costs by the time he includes payroll taxes and workman’s compensation for his 31 employees. His community of about 2,000 people doesn’t generate enough foot traffic to absorb the costs, and although only a handful of those employees earn the minimum wage — they’re high school students — others will also expect an increase as wages go up, he said.

“There are only two things I can do: Cut people and hours, or raise prices. And we’ve kind of got hours cut back as far as we can and still serve customers,” Zehr said. “I don’t think I’ll survive.”

Chris Johnson, CEO of Downers Grove-based Classic Cinemas, said he’s not opposed to an increase in the minimum wage and has already raised starting wages to $9.25 or $10 an hour at theaters that struggle to find enough workers. But $15 is a big jump, he said.

“In some outlying areas, that’s a big challenge, and could potentially make us shut down marginal locations,” he said.

Arthur Potash of Potash Markets has been adapting to Chicago’s rising minimum wage for the past three years by cutting costs across his budget — renegotiating garbage hauling rates, installing LED lights to reduce the electric bill, and not filling roles when employees leave. He estimates he’s cut 15 percent of labor hours through attrition.

He’s also raised prices, but can only do so much before shoppers go to the competition. Meanwhile, he can’t afford to give raises to employees he’d like to reward for good performance.

The company, which employs about 100 people, has benefited from events like the closure of a Treasure Island grocery nearby, and it remains profitable. But it is “huffing and puffing” to meet Chicago’s July 1 increase to $13 an hour, and an eventual rise to $15 seems even more daunting, Potash said.

“There’s a very thin line between making money and not making money,” he said, “and I think that gets lost.”

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