Dear Mr. President,
During your April 7, 1994 town hall telecast from Kansas City, you asked me to send you my calculations of the impact on our business of your health care proposal. I am happy to do so in this letter.
As a reminder, the Godfather's Pizza system has 525 restaurants with over 10,000 employees. Two-thirds of these restaurants are owned and operated by franchisees of our company, whose operating financials are almost identical to our corporate-owned operations of 141 restaurants. Therefore, in order to be as specific as possible in our calculations, I will focus on just our corporate-owned operations with 3,418 employees.
Under your proposed health care plan, the cost to cover all 3,418 employees would be nearly $2.2 million annually. This amount of $2.2 million is a $1.7 million increase in our insurance, which is approximately 3 ½ times our prior-year insurance premiums to cover an 80% employer portion for all participating full-time employees.
You mentioned during the telecast that restaurants with approximately 30% labor need only increase prices 2.5%. This price appears to be arrived at by taking 7.9% times 30%. Quite frankly, we cannot just look at a percent of a percent, but instead we must look at the actual dollars involved. A $1.7 million increase would directly decrease "bottom line" profit. In order to produce the same "bottom line" as we are generating today, a 16% to 20% in "top line" sales would be required due to variable costs such as labor, food costs, operating expenses, marketing and taxes. Thus, it is incorrect to assume we can just add $1.7 million to the "top line" and expect it to flow directly to the "bottom line."
As a system of small businesses, we are concerned about the impact of any price increase for the following reasons:
1. Large price increases will drive customers away. Over 50% of our customers use coupons with their pizza purchases because they are very price conscious. In fact, 25% of all restaurant customers use a coupon with their purchase. (Source: NPD/ CREST)
2. Since it is likely that many of our suppliers of ingredients and materials will also experience increases in costs due to a mandate, they will likely pass some or all of those costs on to us and, thus, it becomes an inflationary "snowball."
3. Although consumers are spending more of their food dollars eating out, it is due to competitive forces which tend to hold prices down. This is evidenced by the cost of eating out rising slower than the cost of eating at home (Source: Consumer Price Index, Bureau of Labor Statistics). I believe price increases "by all competitors" in our industry would change this trend.
To summarize, Godfather's Pizza Inc. employs a large percent (67%) of younger, inexperienced and minimum-educated workers with a very high turnover rate of over 100% annually. This is typical of all quick service restaurants, which account for 47% of all eating place sales. I wish we could cover this group of workers, but the incremental cost under your plan causes a significant negative impact on our "bottom line" which cannot easily be rectified. We would then be put in a position to eliminate jobs which would impact productivity and ultimately profitability, or to increase prices to the point of being at a competitive disadvantage.