Jim White: Welcome. My name is Jim White, and I'm a member of the Restaurant Services Group at Katz, Sapper & Miller. We are a Top 100 accounting firm, and it is our pleasure to bring you this edition of Grow Your Restaurant: Recipes for Financial Success.

Today's guest is Patrick Tamm from the Indiana Restaurant Association. Thanks for joining us today, Patrick.

Patrick Tamm: Hey, Jim, thank you very much, and thank you to Katz, Sapper & Miller for doing this, and also your continued support of the Indiana Restaurant & Lodging Association. We appreciate that, and have a lot of good members that are long-time clients of yours as well.

Jim White: That's a good thing.

The focus of this podcast is around profitability and benchmarking and best practices. With the profitability, I wanted to kind of touch base with you on some of the major issues that you see now that you guys are dealing with the Restaurant Association that may be affecting profitability for restaurants.

Patrick Tamm: Profitability – in terms of things that we see from an association perspective that really are hammering some of our restaurants is always costs. You have some commodity costs in terms of beef, ground beef prices; your fruit costs are always going to be there. Energy costs, there's some concern on some rulings federally with regards to coal energy generation that could also impact us in the future that we're actually paying attention to right now, that's in the rulemaking process.

But it's always going to come down to food costs and employee costs. There is some issues with financing, which we can talk about I'm sure here in a minute. But really, those are the two big drivers for us.

However, the largest issue, and the one that causes the most confusion, is healthcare costs and what people are doing with regards to that. I generally usually lump that into employee costs.

Jim White: So with regards to that, what do you see operators doing as a way to combat the healthcare issue?

Patrick Tamm: The healthcare issue, a large number of it for them is how are they classifying employees. We also represent hotels, so hotels are in a completely different wicket, if you will, compared to restaurants. We represent restaurants that are large multi-unit franchisees, big, small, mom-and-pop where they have 20 employees at best, and then we have folks that have 1,000-plus employees or more.

So they're really trying to educate themselves still. They're going through that process of how do we classify, is this person going to be a full-time employee, how many hours are they going to work, what type of health insurance are we going to offer, are we going to put people on the exchange, can we retain people?

It's fascinating to me because some of our larger operators still are very concerned about what they're doing, and some of our smaller ones aren't as much because they feel like they're better prepared. It's fascinating mostly in the hotel world, because we have HR folks at every large full-service hotel. They won't necessarily be at some limited service hotels with 100 rooms, but a 500-room hotel will have an HR department. There's some pretty significant companies that really have struggled with how they classify folks, because we want to retain our good employees. They also want to be able to recruit good employees, whether that be a server, banquet server, waiter, waitress, somebody up at a hostess stand or somebody running the front desk, or someone being a controller for a restaurant as well.

Jim White: So those benefits are key.

Patrick Tamm: Benefits are always key to any industry, and how do we maintain that. We provide good wages for a lot of folks. I think a lot of times, people outside the industry don't quite understand that. We've been doing quite a bit of research in terms of from the restaurant side nationally and regionally, in terms of what is our perception of our employees of their career in the restaurant industry? Would they recommend that to friends and family?

Some of the fascinating things that come across there is absolutely, employees view that a career in the restaurant industry is valuable; it's been valuable to them. It's also an entry point. A lot of times we've seen, and studies now are backing it up as recent as last week, that people oftentimes start – a majority of America starts their job, their career, in a restaurant setting; one out of three Americans. And so then all of a sudden, those folks then may go somewhere else for a period of time, but we provide really an industry of opportunity. 8 out of 10 restaurants today are owned by someone who started out in an entry-level position in a restaurant.

Jim White: Is that in response to all the discussion around minimum wage?

Patrick Tamm: Minimum wage is always an issue. It's an issue state-by-state. As you know, Jim, in Indiana, we are tied to the federal minimum wage. Also, tip credit, we have a tip credit, but that tip credit is the federal tip credit. So from a state perspective, there's no ability to all of sudden make a quick change.

The other piece on that, that a lot of your listeners and clients are more than aware of, our members, are localities throughout the country. Seattle has one that's pretty front-and-center. San Diego is doing several currently as well that we as my peers and also the national associations are very much engaged on.

But we have no ability in Indiana today for a local unit of government, whether that be a county or a city or a town to adopt a different wage standard as well.

Jim White: Than what the federal standard is?

Patrick Tamm: Than what the federal standard is. We also, in our restaurants up on the northern border, know that Michigan just recently cut a deal, if you will, with regards to minimum wage and tip credit. There's a lot of different reasons for that. Brian DeBano is my counterpart that runs the Michigan Restaurant Association; the two of us talked pretty frequently prior to him agreeing to do that with a Governor that does not want an increase in minimum wage and a Legislature that does not want an increase in minimum wage. But in Michigan, you have very easy ballot access, and so they've made a calculated decision to take a proactive step.

Jim White: So what is – I'm just curious how they...

Patrick Tamm: They raised a little bit. I have so many facts and figures in terms of where people are and which state doesn't have a tip credit, I would be reluctant to quote you exactly where it is.

Jim White: But they have established a minimum wage that was higher than it was before?

Patrick Tamm: Correct. They've increased their minimum wage.

Jim White: At the state level.

Patrick Tamm: Correct, at the state level. Illinois, you have Chicago doing some different things. Ohio has done the same, Kentucky's looking at some things.

Jim White: What's going on at the federal level then?

Patrick Tamm: The federal level, actually that's a great question. I've had multiple conversations with our congressional delegation as well as our two U.S. senators. Frankly, our conversations with the overwhelming majority of our delegation is pretty positive. There has been some recent federal activity with regards to minimum wage that has been mostly procedural. You're going to see the drumbeat will be harder and harder as we get closer to the November midterm elections.

There’s a couple things, though, that are happening through executive order with regards to overtime regulations, where literally for an overtime qualification – and we have a lot of managers, key personnel that are salary in restaurants.

Jim White: Who work more than 40 hours a week?

Patrick Tamm: Who work more than 40 hours a week. You know, they fluctuate. And the same thing with hotels, they fluctuate, particularly in the food and beverage side of hotels. So they fluctuate as businesses there, and you know, a lot of times, for folks that are just starting out, mid-career and they're at $40,000, $45,000, $50,000 a year making good money, but at the same time, they want to get ahead, take that next step. They want to work more.

Well, now we're in a situation where we're going to have to start paying certain people if the classifications aren't handled right – and the HR departments are having fun with this – with regards to we're going to have to pay you overtime. In a traditional salary environment, that doesn't happen. And people struggle with well, all of a sudden, he's going to work 20 hours next week because well, frankly, I don't need him and he worked 80 last. You know, it kind of works its way out over a quarter or a year, and the employer has made that decision. It's something that employers do on a rather frequent basis.

That really concerns a lot of the leaders in the Restaurant Lodging Association because a large time, that's how they promote people, and they don't want that person to have to be clocking in and tracking hours.

Jim White: The promotion is to go to salary?

Patrick Tamm: The promotion is to go to salary and become managers. At some of our fine dining establishments, the Assistant GM really wants to become the GM real quick because he or she, if they were a server, and oftentimes were at that fine dining establishment, may, over certain times of the year, could be making more dollars as a server. In some cases, extremely so.

So that's where folks want to seek that career opportunity. They want that growth, so it's an interesting balance. You know, that person wants to go after it, really expand their career, try to throw in everywhere they can, and the restaurant owner wants to reward that as well, but at the same time, now we're sitting there struggling, you know, we don't want to pay overtime, so maybe we'll just keep you hourly and just kind of fudge around with your title and responsibilities.

Jim White: Do you have any sense on timing for the overtime or the minimum wage?

Patrick Tamm: That was announced by President Obama in the mid- to late spring of this year. I think there will be some action on that here this fall, and I think it will probably be October.

Jim White: Right before the election.

Patrick Tamm: Right before elections. The other piece that folks particularly in the franchise side of the world need to be aware of is that again, another agency, the National Labor Relations Board, did a joint employer ruling, which really makes that small franchisee, whether that be a Subway, a Great Clips, you know, there's all sorts of different types of franchises, but it will make that McDonald's franchisee McDonald's.

Jim White: So it turns them from a small employer to large employer?

Patrick Tamm: To a large employer. And in reality, they have one McDonald’s, three McDonald's, six McDonald's, obviously there's some franchisees that are quite large, but there's a lot of franchisees that are not, and you're really disrupting franchisee and franchisor franchise law with that when that was done. We are not alone in terms of opposing violently, if you will.

Jim White: So is that already done?

Patrick Tamm: That has been done at the National Labor Relations Board, but then there's a process and a procedure that they have to keep on following to fully enact. We are one of an army of hundreds of associations and businesses – thousands, probably – that are interested in that impact.

But what you're seeing, though, is in Seattle, they are promoting – they passed the minimum wage in SeaTac, which is near their airport. And then in Seattle, they are saying, well, we'll let the independents not have to pay that, but if you're a franchise, well, you're a big guy, so you can pay that. Well, there's a Subway franchisee sitting there going, I have one Subway; I'm behind the counter busting my butt so I can open up a second one, hopefully a third one, or whatever that enterprising individual wants to do, and I can't do that.

So, in Seattle, they don't care. It's a national push. You know, a large part of these issues – and restaurants are almost ground zero right now for unionization issues because we're in the service industry, and there's two groups in particular that are really looking to really penetrate on unionization issues for us.

Jim White: So, just to make sure I'm clear, you’ve got a Subway owner that has one Subway and he's got 15 employees, but because he's a member of the Subway franchise organization, he's going to be considered a large employer?

Patrick Tamm: And he would have to pay in Seattle, under their current proposal, he would have to pay the mandated increased Seattle minimum wage.

Jim White: Because that applies to large employers, not small ones?

Patrick Tamm: Large employers. He may have 15 employees, and 5 of them may be family members.

Jim White: But he's still considered a large employer?

Patrick Tamm: He's considered a large employer, which really just throws a wrench into reality.

Jim White: Does that affect the way it would impact him for the healthcare law as well?

Patrick Tamm: I don't believe so, because that's a federal law.

Jim White: So it’s really just focused on the minimum wage question.

Patrick Tamm: Now, the National Labor Relations Board, you can get crazy and promulgate rules and procedures there. I don't believe at this time they're moving towards that direction.

Jim White: So right now, that's all focused on the minimum wage issue.

Patrick Tamm: Correct, right.

Jim White: So the unionization, is that happening for the larger employers, the franchises, is that really who they're targeting then?

Patrick Tamm: They are. The other piece of that, though, is that the labor violations of that joint employer – a lot of folks, restaurants, hotels, hotels in particular, are impacted by federal contracting per diem rates and those types of things because they have people expensing things, having events, meetings, what have you. But that other piece is that if there's a labor violation with your franchisor or another franchisee somewhere, that labor violation would come back and haunt you as well, and particularly for a potential opportunity for business as well.

Jim White: The employers or the restaurant operators, what do you see them doing to prepare for potential higher minimum wages? What kind of changes have you seen take place?

Patrick Tamm: Really, for us, we spend a lot of time educating here in Indiana in terms of our general assembly members. Republicans do have some significant majorities both in the House and the Senate, and we honestly have Governor Pence as well, as a Republican. We do spend a lot of time talking and participating with – there's a group of us that get together; we call ourselves the Old Big Ten. We don't include Maryland and New Jersey, although that's good for Big Ten TV ratings. But we get together on a regular basis physically and talk about what's going on in our respective states, as most of us are bordering one another.

But then we also get together on a very frequent basis as well nationally. We're taking a lot of steps through the National Restaurant Association in terms of really talking about the reputation of restaurants, how we are an industry of opportunity and we do provide a lot of opportunity for folks wherever they are in their life. That may be a teenager that is learning work skills, life skills, that may go on and be a great employee at Katz, Sapper at some point, or go be a doctor, or they may build a great career in the hospitality industry. But those first job skills, we instill those. Maybe if somebody is going back to school, we can meet them with part-time work, which is valuable.

There are folks that, here in the next six to seven months, you’re going to hear a lot of people demonizing part-time work, and part-time work is a vital part of people's lives. As I shared with you earlier, two out of three of my kids today went to school for the first day. I have a pre-kindergarten daughter; my wife has a degree from Butler, she's chosen at this time not to work outside the home. She's done a variety of things, but she's reaching a time where maybe part-time work could be great. But there's also single moms, there's adults that are reentering the workforce for a variety of different reasons. There's retirees that are just like, I don't want to be sitting at home, I want to go do something. So part-time work is valuable. Part-time work really drives a large part of our industry, but it's also because we provide that flexibility.

There's times where I spend a lot of time on bus routes because they don't have certain times near some core hotel groups whether that being, you know, various parts of the state, because those are part-time folks that need that part-time work while they're doing different things in their life.

Jim White: And that's part of what the National Association...

Patrick Tamm: The National Association is, but then also really trying to have that image of what is a restaurant? Are we an industry of opportunity? Data after data after data point that I see now as they're launching is – we go to We Are Restaurants, when you go to their Twitter feed and so forth, it's constant factoids in terms of what the industry means to communities.

In Indiana, restaurants alone provide 10% of the state's employment, 10%. You throw in hotels, we're pushing about 15%. Technically, with an accountant, it's 14%. But that's where people have to realize that 14% of our employment is in the hospitality industry in the state of Indiana. In a large part of our neighboring states, it's about the same. If you go into Chicago, it's a little bit different, but it’s a vital part of our economy.

And that's where people have to realize – and we have to be proud of that in terms of we provide great jobs. We provide jobs where people can learn a lot of different skills. We provide jobs where they can go in different parts. We have folks that are running IT for restaurants, running marketing for restaurants.

Jim White: So it's not just a server or a cook.

Patrick Tamm: Right, it's not controllers that then have to answer all of your tough questions. But that's where there's a lot of different career paths. And if you want to talk about hotels, that's a completely – I mean, we have facility directors in hotels. These are huge, physical facilities, and they're not just fixing your air conditioning.

Jim White: And some of those hotels may even have construction teams.

Patrick Tamm: They have construction teams on call, or they may have three or four guys that manage those projects on a regular basis. Our continued capital investment in hotels for a 500-room, 400-room and up hotels, I mean, it's a constant drumbeat of millions of dollars every year. We have folks that call on us, and all they want to do is not necessarily talk to the general manager of the hotel, they really want to talk to that chief engineer, that facility director for those hotels as well.

In some cases, also restaurants. Restaurants are building. We spent some time having a partner lunch with regards to how folks have managed some construction processes and financing, like the owner of Bub's Burger's, which just expanded to their third location in Zionsville. Independent. Joe Vezzoso, with French Lick Resort, much different, but multiple hotels, a casino, golf courses, you name it, but they pumped in millions of dollars. And then, Dale McCarty with the Westin, they just completed a significant, I think another $30 million, but that was on top of another $7 million and a $9 million, year after year after year in downtown Indianapolis. Le Meridien, which is the old Canterbury, is doing a $9 million gut. Really a small boutique-type hotel. I think it's a great brand to have in core downtown Indianapolis. I mean, that's significant dollars.

Jim White: And somebody has to manage all that.

Patrick Tamm: Somebody has to manage it, and it's a constant struggle. Even if your architects are from out of town, they always have a local architect, and you can't do drywall from Texas. So we spin off a lot of opportunities.

Then you talk about tourism. Tourism for us is an important issue. Second and third benefactors from tourism are restaurants and hotels, respectively. Retail is actually one.

Our state does very well with the very little resources that the state Tourism Office does have. They've put out some really good content and advertising. I was just in the state of Missouri for – my in-laws are from there, and it was great seeing billboards for the state of Indiana.

Jim White: In Missouri.

Patrick Tamm: While listening to a Come Visit Indiana radio ad. I thought that was fantastic. Rather than me sitting in Indiana and hearing about Colorado, Michigan, Ohio, Illinois, Florida, Georgia, Tennessee. And we just don't – we need to change that discussion, you know, the shoreline up in the Dunes, up in northern Indiana, a lot of people don't even know it exists. But three million people visit that every year. The Grand Canyon has five million. So we're doing something.

Jim White: Right. The word is getting out.

Patrick Tamm: We have attractions, and we take the approach of the rising tide lifts all boats. The more people visit Indiana, it's better for the industry. I'm not going to pick one over another in terms of location or a locale. I do think there are regional attractions that we need to be honest with ourselves and realize, hey, in that region, these are the things that really kind of help grow.

And we've been very pleased with the Office of Tourism development. They just had a national meeting on agritourism, and people don't realize this, but we get a ton of it particularly here in Indiana. We also see with our Restaurant Weeks culinary tourism. It's real. We had our first ever Restaurant Week in Fort Wayne this year, and we were seeing people traveling to Fort Wayne and stay a couple nights to eat at restaurants.

Jim White: They eat at different places, yeah.

Patrick Tamm: And we've been seeing that in downtown Indianapolis for quite some time.

Jim White: Unfortunately, we've kind of come to the end of our scheduled time here, so I wanted to say thanks again, Patrick. It's been great for you to share your expertise today.

Patrick Tamm: Sure.

Jim White: With that, we'll close out this edition of Grow Your Restaurant: Recipes for Financial Success. If you are interested in exploring how to improve the financial performance of your restaurant operation, please contact me for a complimentary benchmark and best practice assessment. I can be reached at 317.468.5633 or at jwhite@ksmcpa.com.

This podcast is presented by the Restaurant Services Group of Katz, Sapper & Miller. For more information, visit our website at ksmcpa.com. My name is Jim White, and thanks for listening.