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Consumer and Community Impacts of Hazard Pay Mandates <br />Many stores incur losses in normal years <br />The 1- to 2 -percent net profit levels cited above reflect industry averages. There is considerable <br />variation around these averages among individual stores, with some doing better and some doing <br />worse. As one indication of this variation, the 2020 Independent Grocer Financial Survey found that, <br />while the nationwide average profit before tax for all stores was 1.1 percent of sales in 2019, about <br />35 percent of the respondents reported negative net profits during the year.? This national result is <br />consistent with feedback we received from California grocers, which reported that even in profitable <br />years, anywhere from one-sixth to one-third of their stores show negative earnings. While chain <br />operations can subsidize some store losses with earnings from other stores, a major mandated wage <br />increase would eliminate earnings for even the most profitable stores, making cross- subsidies within <br />supermarket chains much less feasible. As discussed below, the consequence would likely be a closure <br />of some unprofitable stores. <br />Mandated wage increases would push most stores into deficits <br />The grocery business is very labor intensive. Labor is the industry's second largest cost, trailing only <br />the wholesale cost of the food and other items they sell. According to a benchmark study by Baker - <br />Tilly, labor expenses account for 13.2 percent of gross sales of grocers nationally.$ The Independent <br />Grocer Survey, cited above, found that labor costs account for 15 percent of sales nationally and 18.4 <br />percent for independent grocers in the Western region of the U.S.9 <br />Respondents to our survey of California grocers reported that labor costs equate to 14 percent to 18 <br />percent of sales revenues. For purposes of this analysis, we are assuming that the wage base <br />potentially affected by the mandated hourly pay increase is about 16 percent of annual sales.lo <br />A mandatory $445 per hour increase, applied to an average $18.00 per hour wage base, would <br />increase labor costs by between 22 percent and 28 percent. This would, in turn, raise the share of <br />sales devoted to labor costs from the current average of 16 percent up to between 19 percent and <br />20.5 percent of annual sales. The up -to -4.5 percent increase would be double the 2020 profit <br />margin reported by the industry, and three times the historical margins in the grocery industry. <br />Potential Impacts on Consumers, Workers and Communities <br />In order to survive such an increase, grocers would need to raise prices to consumers and/or find <br />substantial offsetting cuts to their operating expenses. As an illustration of the potential magnitude of <br />each of these impacts, we considered two extremes: (1) all of the higher wage costs are passed <br />through to consumers in the form of higher retail prices; and (2) prices are not passed forward and all <br />the additional costs are offset through a reduction of jobs or hours worked. <br />Supra 3 <br />s White Paper, "Grocery Benchmarks Report", November 5, 2019, Baker Tilly Virchow Krause LLP. <br />9 Supra 3 <br />10 This recognizes that not all labor costs would be affected by the hazard pay proposal. Grocers report that both in-store and <br />warehouse staff would receive the increase, as would supervisors and managers, although some executive and <br />administrative staff may not. In addition, costs for health coverage would probably not be affected, at least not immediately, <br />but payroll taxes and some other benefit costs would be. <br />8 <br />