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Consumer and Community Impacts of Hazard Pay Mandates Introduction The Long Beach City Council has passed an ordinance that mandates grocers to provide a $4.00 per hour pay increase - "hazard pay" - to grocery workers. The mandate expires in 120 days. Two members of the Los Angeles City have introduced a similar measure for a $5.00 per hour increase for companies that employ more than 300 workers nationwide. Grocery workers in California currently earn about $18.00 per hour.' Therefore, the Los Angeles proposal would increase average hourly pay to $23.00 per hour, an increase of 28 percent. Several other cities in California have discussed $5.00/hour proposals similar to Los Angeles. This report focuses on the impact of hazard pay mandates on grocery store profitability and on the sustainability of an industry with traditionally low profit margins. It also assesses the potential impact of the proposed wage increases on consumers, especially lower -income consumers (a cohort already hit hard by the COVID lockdowns and business closures). Background — Grocery is a Low -Margin, High -Labor Cost Business The grocery business is a high -volume, low -margin industry. According to an annual database of public companies maintained by Professor Damodaran of New York University (NYU),z net profit margins as a percent of sales in the grocery industry are among the lowest of any major sector of the economy. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) averaged 4.6 percent of sales in 2019, and the net profit margin (which accounts for other unavoidable expenses such as rent and depreciation) was just 1.4 percent during the year. This compares to the non- financial, economy -wide average of 16.6 percent for EBITDA and 6.4 percent for the net profit margin. The NYU estimate for public companies in the grocery industry is similar to the 1.1 percent margin reported by the Independent Grocers Association for the same year.3 COVID-19 temporarily boosted profits In the beginning of the COVID-19 pandemic, sales and profit margins spiked as people stocked up on household items and shifted spending from eating establishments to food at home. According to data compiled by NYU, net profit margins in the grocery industry increased to 2.2 percent in early to mid 2020 4 Although representing a substantial year-to-year increase in profits, the 2.2 percent margin remains quite small relative to most other industries. This implies that even with the historically high rates of profits in 2020, there is little financial room to absorb a major wage increase. ' $18.00 per hour is consistent with the responses we received to our informal survey. It is also consistent with published contract agreements we reviewed. See, for example, the "Retail Food, Meat Bakery, Candy and General Merchandise Agreement, March 4, 2019 - March 6, 2022 between. UFCW Union Locals 135, 324, 770,1167,1428,1442 & 8 - GS and Ralphs Grocery Company." In this contract, hourly pay rates starting March 2, 2021 for food clerks range from $14.40 per hour (for first 1,000 hours) up to $22.00 per hour (for workers with more than 9,800 hours), The department head is paid $23.00 per hour. Meat cutter pay rates range from $14.20 (for the first six months) to $23.28 per hour (for those with more than 2 years on the job). The department manager is paid $24.78 per hour. https://ufcw770.org/wp-content/uploads/2020/08/Ralphs- Contract-2020.pdf 2 Source: Professor Aswath Damodaran, Stern School of Business, New York University. http://pages.stern.nyu.edu/—adamodar/ ' Source: "2020 Independent Grocer Financial Survey." Sponsored by the National Grocer's Association and FMS Solutions Holding, LLC 4 Supra 2. 6