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Mellow Walk’s Andrew Violi with employee Maria Candia. Mr. Violi says Ontario's higher wages will add about another $250,000 in expenses in 2018.The Globe and Mail

Faced with rising minimum wage costs, many small-business owners across Ontario are crunching numbers and making the difficult decision to raise their prices.

The provincial Liberal government is increasing the minimum wage to $14 an hour as of Jan. 1 and then to $15 by Jan. 1, 2019 – an increase of about 23 per cent and 32 per cent, respectively, from just over two months ago. The rate increased to $11.60 from $11.40 in October.

"It is meaningful, the way it affects us," says Andrew Violi, president of Mellow Walk Footwear, a Toronto-based manufacturer of footwear sold to retailers such as Mark's and Mister Safety Shoes.

Minimum wage hikes can spur business owners to rethink how they run their companies

Mr. Violi says the higher wages will add about another $250,000 in expenses in 2018, and the company may have to eliminate up to five of its 60 positions as a result. He says some of the additional expenses will still need to be passed on to its customers through higher prices.

He expects to charge his retail partners an average of $2.50 more per pair of shoes or boots. For consumers, that could translate into an increase of about $5 for a product that costs between about $120 to $180. Mr. Violi has written to his customers and followed up with a phone call, citing the minimum-wage increase as the reason for the price increase. Meantime, the company expects to hear about price increases from some of its Ontario based suppliers by the end of the year, which is expected to put even more pressure on margins.

Raising prices is a risky move for companies such as Mellow Walk that compete with suppliers in other countries, such as China, where labour costs are cheaper. "It is a worry that we could price ourselves out of the market," says Mr. Violi. "We are trying to pass along the minimum increase that we need to."

It's not just small businesses that will be affected. Large retailers such as Metro Inc. and Loblaw Cos. Ltd. have said they expect higher costs as a result of Ontario's minimum wage increase. Ontario's move is being closely watched by businesses in Alberta and B.C., which are also poised to increase minimum wages to $15 an hour in the years ahead. (Alberta's NDP government announced its plans in 2015 to increase its minimum wage to $15 from $10.20 over four years. The new B.C. NDP government has set up a commission to study how and when it will roll out its increase).

"We are on some new ground here," says Dan Kelly, president and CEO of the Canadian Federation of Independent Business. "We've seen minimum wage increases for years ... but not this rapid of an increase over a shorter period of time." The Ontario government ​changed legislation passed in 2014 to tie minimum wage increases to​ ​​the provinces's Consumer Price Index, which is​ a measure of inflation.​

For many businesses, raising prices will be a risk. "You take a deep breath when you do it, not knowing if your consumer is going to stick with you," says Mr. Kelly. "I think there will be a lot of businesses that will try first, but are going to find that will lead to a reduction in the demand for their product and services. That will take an even further toll on wages and hours."

Erin McLean, whose family operates the McLean and Buckhorn Berry Farms near Lakefield, Ont., is figuring out how much they may have to raise prices for their fruits and vegetables when the season starts up again in the spring and summer. The farm, which employs up to 50 people in the peak summer months, sells their produce on the farm, at farmers' markets and to grocery stores. Ms. McLean says it might be difficult to get grocery stores to pay more, given competition in the produce aisle from other parts of the world such as California and Mexico.

Even at the farm and farmer's markets, she says prices aren't likely to increase at the same level as the minimum wage. "We don't want to raise them too much," she says. "We don't want to alienate or frustrate or make it inaccessible to consumers, but the reality is we'll have to raise our prices at least somewhat in order to pay our staff costs. … If our labour costs go up, that money has to come from somewhere."

Ms. McLean says about a third of their costs are for labour and she's anticipating to pay more next year for input costs, such as seeds and packaging, due in part to higher wages that will be paid across the province.

"It's a hard place to be in. We want people to make a fair wage," Ms. McLean says. "We don't want to have to raise prices, but don't want to go out of business either. If we can't pay our bills, we can't be in business."

There is no right time for small businesses to raise prices, says Steve Pulver, director of entrepreneurial studies at York University's Schulich School of Business. He recommends businesses phase them in slowly, be transparent about why they're higher and keep politics out of it. "If someone asks, you just say 'we've held our prices for this long, wages went up and we had to raise our prices,'" he says. "Do it as slowly as you can afford to."

Doug Stephens, the founder of consultancy Retail Prophet, says businesses could also view it as an opportunity to boost their customer service, by giving them more for their extra money.

"Instead of hemming and hawing over when and how to break the news to consumers, what retailers ought to be doing is sitting down and figuring out how to use this as a watershed moment to design better and more enjoyable customer experiences that are actually worth more to their consumers," Mr. Stephens says, adding that many retail experiences are "mediocre at best."

He says the mediocrity is "the real, underlying problem that afflicts 90 per cent of retailers, putting them in constant jeopardy. Create a dramatically better customer experience and the wage hike will be an afterthought."

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