The Restaurant Industry: Consequences of a $15 Minimum Wage
Restaurant Finance Monitor Published: 2019.04.04
By late 2024, the $15 minimum wage will be fait accompli in major metropolitan
areas in the United States, with CPI inflators expanding wage increases into the
future. Habit Restaurant’s Russ Bendel told an audience at a January conference
in Orlando that “it’s only a matter of time before what’s happening in New York
and California will spread to the rest of the country.”
Once blessed with an abundant pool of teenage and young adult workers willing
to accept lower wages in return for experience and flexibility, restaurants are now
feeling the pain of state and local wage mandates and a tight labor pool. The
gloomy combo is squeezing margins and changing the very nature of hospitality.
There are consequences of wages rising beyond the level of what businesses are
capable of paying, however, the restaurant industry is fairly resilient and capable
of making adjustments, albeit slowly.
Here are 10 things investors and operators should think about as the $15 minimum
wage is implemented nationwide across the country in the next few years:
1. Fewer Restaurants. The industry is due for a reset. There are too many
marginally profitable restaurants kept alive by low interest rates and financial
engineering. The rationalization of locations has already begun and the dominoes
will fall in the next recession. Casual-dining’s expenses are rising faster than recent
sales gains and fast casual isn’t the slam-dunk as predicted years ago. The unit
economics of new construction is underwhelming and public restaurant companies
are no longer rewarded for unit growth. Money is harder to come by for emerging
brands. All of this means the restaurant count in the United States will decline over
the next few years. Take that to the bank. Needless to say, restaurant companies
with strong balance sheets, real estate ownership and manageable debt will
benefit.
2. The Chick-fil-A Model. Who says you have to be open seven days per week when
Chick-fil-A generates huge volumes in six and the franchisee store operators spend Sunday
with their families? Casual dining generates the majority of their sales on Friday and
Saturday nights, and many QSR businesses gain at breakfast and lunch only.
Smart operators will narrow their open window to maximize productivity.
3. Delivery-Only Locations. Who cares if a pizza is delivered by the store on 10th
Street, or the one on 20th Street, as long as it’s hot and tastes good? And would
you care if it were delivered from a production plant located in a light industrial
corridor in the middle of the city that took the place of 10 locations? Okay, maybe
not a Domino’s or Pizza Hut with many franchisees in a single market, but some
enterprising pizza, chicken or burger operator might consolidate their stores into a
few highly efficient warehouses, or perhaps a ghost kitchen, such as the ones
Kitchen United is building. Outback and Chick-fil-A are already testing takeout and
delivery-only locations. Locations become less important if mobile ordering and
delivery triggers a more convenient meal occurrence.
4. Delivery Costs. Restaurant owners complain about paying large delivery fees
to third-party providers and rightly so. Operators can’t make money at that level.
True, but competition is starting to drive those costs down.
5. Smart Equipment. The machines won’t take all of the restaurant jobs but they’ll
eliminate a number of them. Blame it on the customers. Foodservice consultant
Larry Reinstein says that when a restaurant provides easy, efficient kiosks and
mobile ordering it becomes a value add to consumers. Shake Shack CFO Tara
Comonte told a recent ICR Conference audience in Orlando that guests are now
driving their move to kiosks. Kiosks were hated in grocery stores when they were
first introduced, but customers now flock to self-checkout. Taco Bell has kiosks in
over 1,000 stores, McDonald’s even more. Pay two people $15 an hour to take
orders at the counter or pay one person $18 an hour to watch two order kiosks,
expedite and keep the customers happy. No brainer. Results Thru Strategy’s Fred
LeFranc sees cobots, or collaborative robots, working side by side with restaurant
workers to improve productivity. As long as wages continue to rise and employees
are hard to find, restaurant operators will load up on technology to become more
efficient.
6. Tip Credit. Tip credit is a wage equalizer that sit-down operators rely on in 43 states.
If Congressional Democrats and Bernie Sanders get their way in eliminating tip credit,
sit down restaurants will be decimated.
7. Consolidation. When you add the mandated costs of higher wages, don’t be
surprised when more restaurant businesses consolidate to attack costs. You are
going to see a consolidation of the restaurant industry in the next five years like
you’ve never seen before. Look for more mega- franchisees like Flynn Restaurant
Group and PE-backed firms such as Inspire Brands to emerge.
8. Franchisee Unrest. The smart money moved to a 100% franchised model and
no surprise: Franchisors are insulated from labor costs and benefit when
franchisees raise prices to cover them. This is not a favorable quid pro quo for
franchisees. There will be more franchisee unrest, the likes we’re seeing at Jack
in the Box and McDonald’s. If a franchisee’s bottom line remains under pressure
and they’re receiving fewer and fewer services from a brand intent on cutting G&A
for big shareholders, there can be no positive relationship. A franchise system can’t
survive long term if the franchisor takes a greater share of the store bottom line
than the franchisee.
9. Turnover. The $15 minimum wage isn’t lowering turnover. In fact, it’s a sign of
how tight the labor market actually is right now that hourly employees can still pick
up their tent and move down the street at the blink of an eye. Restaurants have to
get a handle on turnover in a $15 minimum wage environment. ShiftOne’s Ashish
Gambhir says turnover costs a single restaurant anywhere from $2,100 to $5,800
when a single team member quits. There has to be another model for restaurants,
perhaps more full-time employees, which might be more cost effective in the long
run.
10. Discounting. Watching QSR and casual dining television commercials, you’d
think the restaurant business is dog eat dog with deals, deals and more deals to
get customers in the door. It is. However, there are many successful restaurant
companies that focus on hospitality and eschew discounting. One thing is clear: In
a rising wage environment, you have to be able to pass these costs on to your
customers and you can’t do that very well by discounting. Executing at the
restaurant level with highly trained employees is the best strategy to win customers
and deal with increasing labor costs.
Paul G. W. Fetscher CCIM CRX CLS Great American Brokerage Inc. (516) 889-7200 Paul@RestaurantExpert.com
www.RestaurantExpert.com