The restaurant industry has its fair share of perennial challenges: fickle consumer tastes. Fluctuating costs of commodities. Mounting pressure to create digital ordering platforms and provide convenient delivery options. But of all the trials facing restaurant operators in 2017, few are quite as potent as wage inflation.
Running a successful restaurant concept is a labor-intense operation, and margins in the space are already pretty thin. The pressure on bottom lines has only increased in recent quarters: Minimum wage hikes took effect in more than a dozen states and municipalities throughout 2016, and another round of increases in 19 states was implemented in the first week of January. At the ICR Conference in Orlando, Florida this week — an annual gathering of the top food and retail companies in the country — executives from Shake Shack, Chipotle,
For Texas Roadhouse, one of the biggest effects of higher minimum wage is a reduced benefit from lower beef costs. President Scott Colosi said Wednesday that labor inflation was the highest in 2016 as it has been in “many, many years.”
But, he noted, there have been positive aspects to the hikes. Colosi said that he and the Texas Roadhouse executive team have fielded inquiries from store managers about new labor laws and regulations, and this has, in turn, led to conversations about employees’ quality of life — like getting weekends off and “things that traditionally aren’t necessarily the norm” in the restaurant business.
“Our turnover is low by industry standards, but we want it to be really low, unchartered territory low,” he said. And offering employees a better quality of life and higher wages helps Texas Roadhouse’s “moat of competitive advantages,” he said.
Higher minimum wages aren’t exactly the biggest headache for Chipotle — that would be recovering from the food safety scandal, of course — but that doesn’t mean the company’s bottom line hasn’t seen an effect from recent legislation.
“If you go back to 2013 and look at our average hourly rate, which back then was in the $9.50 range, we’re projecting that based on a continuation of inflation that average hourly rate will be in the $11.50 range. That’s more than 20% inflation over that time frame. We’ve only increased prices by 5- to 6%. We’ve eaten a lot of inflation,” Jack Hartung, Chipotle’s CFO, told a packed room Tuesday afternoon.
This, he says, has translated to a 2- to 3% dilution to the company’s margins. But he also knows that the burrito chain is not in a position to pass some of the wage costs along to customers.
“I’m not telling you we’re going to go out and raise prices. That’d be a foolish thing to do when we’re trying to rebuild customer visits,” he acknowledged. Hartung allowed for the possibility that eventually, Chipotle could start testing small price increases in markets where wages have grown the most, but the operative word is eventually. “There is going to be a margin dilution impact that’s going to exist until we are able to decide that we are able to pass some of these higher costs along to our customers,” he said.
For burger darling Shake Shack, which has 17 locations in New York (a state that’s been particularly aggressive in raising wages), the hikes have hit and will continue to hit store-level (or “Shack-level”) operating profit, which has historically been in the neighborhood of 28%.
“Shack-level operating profit will be 26.5% to 27.5% in 2017,” Jeff Uttz, the company’s outgoing CFO, said Tuesday. “That’s because of labor. We felt it in every market we operate in. It will be a big challenge for restaurant companies for the next two, three, four years.”
Unlike Chipotle, Shake Shack has chosen to pass some of the labor inflation to menu prices; last week, some menu items increased in price by as much as 36 cents. The company has long believed in paying its employees beyond that which minimum wage requires, and CEO Randy Garutti said Tuesday that the company chose to pass along higher wages even though the federal minimum wage was not increased.
Del Taco, a quick-service concept with a high concentration of stores in the west and southwest, is in a similar position: nearly 400 of its locations are in California, a state that has hiked wages every year since 2013. Additional increases in wages paid in Arizona, Los Angeles city and parts of Los Angeles county will result, in aggregate, in a 5% increase in the company’s “labor and related costs” line item for 2017, but CEO Paul Murphy, is not taking umbrage.
“We take a holistic approach to it. I think you have to have a strong orientation to taking care of your people and valuing them,” he told FORBES in an interview.
Murphy is also looking ahead to a silver lining: what higher wages could mean for Del Taco's top line.
“I think what you’re going to see with rising minimum wage is over time, a little bit more disposable income,” he said. “Over time, it could potentially be a catalyst.”
