LOS ANGELES — Up, up and away. That’s where California’s minimum wage is going and if there’s one certainty apparel manufacturers and retailers can count on, it will be higher costs.
Gov. Jerry Brown on Monday revealed what his office called a “landmark deal” to increase the state’s minimum wage to $15 an hour by 2022 in a bill that could be signed into law as early as this week. It would affect some 2.2 million minimum wage workers.
The plan puts California in the lead in the push by labor groups and some politicians, including President Obama, to boost the minimum wage nationwide – while retailers including Wal-Mart Stores Inc., Sears, Target and J.C. Penney Co. Inc. have instituted plans to boost the wages of their lower-paid workers. Brown’s statement comes only a few days after New York Gov. Andrew Cuomo made his own bid to raise the minimum wage in the state to $15 an hour by July 2021, but Cuomo has yet to formally introduce his plan.
“California is proving once again that it can get things done and help people get ahead,” Brown said. “This plan raises the minimum wage in a careful and responsible way and provides some flexibility if economic and budgetary conditions change.”
The increases would be phased in over time, beginning next year with an increase from $10 to $10.50 an hour.
A plan to increase the starting wage was originally slated to go before voters in November as a ballot initiative and Brown seemed optimistic during the day’s press conference that his bill would be passed in the legislature.
As for criticism that business concerns were not taken into account, the governor rejected the idea that industry did not have a say.
“There were a number of meetings, dozens if not more…and there were lots of phone calls and visits and so you come up with things,” he said. “The way a bill comes together is not some formalized process where each person who is concerned is in the room. It’s a moving target with a lot of conversations.”
Conversations had ramped up in recent months on the bill, though Bill Dombrowski, president and chief executive officer of the California Retailers Association, said he was never contacted by anyone from the Governor’s office.
“Fifteen dollars is a huge amount to absorb,” Dombrowski said. “You’re talking about raising our labor costs, which is the single highest expense item we have, by 50 percent over the next 6 years, which means everything has to be on the table for us to handle that. That is an unbelievably large expense to absorb. It is going to affect staffing. It’ll involve layoffs. It’ll involve increased automation. It’ll involve price increases because there’s no money just sitting around in a pot.”
California Fashion Association president Ilse Metchek talked about the ripple effect raising the minimum wage would have on other costs, such as workers’ compensation liability or exempt and non-exempt employee pay. She pointed to similar concerns raised when the city of Los Angeles passed its own hike last year.
“It will affect domestic manufacturing,” Metchek said. “It can’t not. It will affect it not just in the ways of the wage, per se.”
The proposed legislation is seen as a key one in unifying the state on its minimum wage policies as more and more cities have taken the matter into their own hands in more recent years. The end result has been a mixed bag of policies for companies doing business in the state.
The question of what all of this means for the apparel and retail industry is nothing new as business owners grappled with the implications of a wage hike last year. The city of Los Angeles and Los Angeles County both approved raising the minimum wage last year to $15 an hour over the course of five years. The first increase in the city, to $10.50 per hour, is slated to occur in July. The measures led to some manufacturers threatening to leave the city or county altogether while others guessed additional costs would be passed on to consumers via higher prices.
Los Angeles Mayor Eric Garcetti, for his part, tried to soothe business concerns by offering business tax cuts that are expected to result in about $90 million in savings.
A statewide measure would, no doubt, be hardest on small business, pointed out Melinda Liming, chief operating officer of Vacaville, Calif.-based retailer Apricot Lane.
“When a store has to pay everyone at least $15 (an hour), then it makes it difficult for them to then go after the best employees as we always strive to have [them] on the floor, as they will garner even higher wages,” Liming said. “With many other costs being higher in California, it then becomes even harder to get the types of employees we look for.”
The surge in online start-up brands and retailers over the past few years could also have implications on that segment of the industry or, more generally, the supply chain, according to a report released earlier this month from CBRE Research. For every $1 per hour increase in wages, companies’ labor costs will rise by about $1 million annually for businesses with a warehouse workforce of about 500, according to the report. The impact begs the question of whether the increases will be absorbed by passing the costs onto consumers in the way of shipping costs or if some companies would consider moving a distribution center elsewhere.
“By 2021, when the minimum wage in Los Angeles (and perhaps the entire state) reaches $15 per hour, the warehouse and distribution industry will be faced with millions of dollars in additional labor costs, which will force some hard decisions,” the report said.
Eunice Cho, who started her online brand Aella as to the go-to place for workwear basics, expects to be sheltered from any potential rising costs in the supply chain. Aella, she pointed out, fulfills orders in-house and not through minimum wage staff. Additionally, Aella, Cho said, is focused on hiring experienced workers and working with factories that pay its workers more than minimum wage.
That’s “exactly why we focus so much on quality and storytelling, rather than just the price as our main selling point,” she said. “And we keep our channels limited in order to control dilution. Manufacturing costs are always variable, especially for a growing company. But exclusivity is a very important tool for fighting margin erosion, so even though it is challenging to sustain growth while keeping your channels limited, that is exactly what we have been doing. We think in the long run this will help us build a more resilient brand.”
Other companies, such as Cho’s parents’ textile business Nextrade Inc. in South Gate, Calif. have been nimble in preparing for the wage increases locally.
“All business owners have to be planning for this increase and Nextrade…has been addressing this cost hike by gradually revising the market we serve,” Cho said. “For example, Nextrade has always distributed novelty and branded yarns, such as Invista’s Lycra and Supplex, but our textile business has serviced mainly price-focused customers. We are now refining our textile business to be more aligned with our specialty yarn business: making high-quality and more performance-oriented products that serve a more discerning customer who is less price sensitive.”