THE UNMASKING OF THE NORMALLY TRANSPARENT RESTAURANT INDUSTRY

There will be more business done in 2021 than in 2020, as pandemic related restrictions ease. There will be some similar challenges, such as maintaining financial liquidity, ongoing negotiation with landlords for sites old and new, allocating limited labor between dine-in and off-premise demands, and others. In addition, in the midst of this state of flux, there is an emerging enormous uncertainty relative to the availability of labor. It has never been this difficult to properly staff a retail facility. The reasons for this crisis can be debated, but a crisis it is.

I was traveling in South Carolina last week, and dined at several well known full service chains. Two of them had restricted dining room seating, which we were told was the result of an inability to find servers. The third chain seated us, but the service was very slow and we were told it was due to the shortage of kitchen staff. The McDonald’s had a “help wanted” sign in the window, the dining room was closed, and each of the double drive thru lanes had about ten cars waiting. We’ve read about a number of chains that have chosen not to open their dining rooms for the time being, because the incremental sales in the dining rooms do not justify the extra labor. They are keeping it simple with just the drive thru lanes in operation.

This is not the first that you have heard relative the labor shortage, including the report of a McDonald’s in Tampa that offered $50 last week to anyone who would come in for an interview.

However, we suggest that the worst is yet to come in terms of industry “disclosure”, and even the awareness of the longer term problem. What we call the unmasking will not really take place for six months to a year, because the very strong YTY sales comparisons, reduction of losses and/or a return to profitability provides relief of sort. YTY operational results, however, will be distorted, including changes in terms of dine-in and off-premise contributions to sales and profits. Management will be hard pressed to predict what normalization will look like, and it will be at least equally hard for analysts. It is elementary that comparisons between 2021 and 2020 sales and margins are of little use. 2019 is the “base year”, for better or worse, and 2021 results vs. 2019 provide a better indication of how far back a company has come.

Just as it will be close to a year from now that operations will have normalized, it will be a while before the labor situation normalizes, hopefully for the better.

THE CAUSE OF THE LABOR SHORTAGE

In terms of what to expect, we have to give some consideration to the cause of the labor shortage. Last year, as the pandemic storm was most intense, it is clear that some workers were legitimately concerned with the possibility of infection. Unemployment benefits and stimulus checks no doubt made the decision to stay home that much easier.  At the moment, however, with 100 million Americans fully vaccinated, and restrictions easing, restaurant operators we have spoken to feel that some workers are using the Covid as an excuse, saying they “have been exposed” and are therefore quarantining themselves.

It has been suggested that people don’t seem to want to work in restaurants as much as they used to. The hospitality industry involves long hours, often at inconvenient times, and the compensation is not necessarily higher than elsewhere. Other jobs may be considered more “stable” and have fewer health risks in today’s environment.  We’ve read that candidates are just “taking their time”, sorting through the possibilities, trying to locate the right opportunity. We discount none of the just stated factors, and the reduction of immigration under the Trump administration may be playing a role as well.

Taking the above rationale into consideration, we believe that the most recent intensification of the labor crisis, at a time when the pandemic is easing and people seem anxious to get back to their previous routines, coincides almost precisely with the extension of unemployment benefits and the most recent stimulus checks. Studies have been done that show that workers receiving unemployment checks get very active looking for new work during the two weeks just before their benefits run out. In essence: “If you pay people to stay home, they will stay home.” The Federal Reserve Bank of Kansas City, with insight into manufacturing firms across Denver, Oklahoma City, and Omaha, said recently: “Stimulus and increased unemployment money are wrecking the labor pool. Lower level employees are quitting to make just as much not working”. Anecdotally, here in NYC, a restaurant owner told me last night that he can’t find kitchen help. A family with four or five children has received thousands of stimulus dollars, so the financial pressure is removed for the time being.

There is overall hope, as suggested below, but the outlook for relief on the labor front is not promising. The Biden administration is bent on providing financial “support” to US citizens in many forms. Economists debate the future course of the US economy. Some bullish observers believe that the economic rebound in 2021 is just a beginning.  Other strategists suggest that the “high” coming out of the pandemic will run its course over the next six months or so. They expect the economic recovery will be short lived and the debt burden, the underutilized manufacturing capacity, and aging demographics will undercut longer term economic growth. We believe that either way, the labor situation in particular will be troubled. A strong economy will provide a lot of alternatives for potential restaurant workers. A weak economy will require further government stimulus, which we fully expect as 2022 is a very important congressional election year. In short: “Help continues to be on the way !!” Our expectation, therefore, is that the labor crisis will not abate any time soon.

WHAT TO DO?

Even for the companies with the best employee “culture”, it is very difficult to deliver the bodies to the right positions at meal periods. The premier fast casual operator, who “wrote the book” in terms of employee culture, is Starbucks and a staffing shortage closed the Starbucks near my office twice in the last couple of weeks. An individual store operator can roll in the family at peak hours and the price is right, but a multi-unit corporate operator doesn’t have that luxury.

It is easy to suggest that a restaurant company develop a corporate culture that will maximum staff loyalty, in turn generating customer satisfaction and positive operating results. However, you either have it or you don’t at this point, and it is likely too late if you don’t. In addition to tripling down on your employee culture, you should consider a pay level that provides “golden handcuffs” to a well trained, reliable employee. Compare that retention rate to the cost to find, hire, train and retain a new employee to replace the experienced associate who has moved on. As the unmasking takes place over the next year, the gap between the haves and have nots will widen and become more apparent.

Simplification of operations can be a big help, and many companies are doing this. Menus should be streamlined, and service styles (i.e. drive-thru, pickup, dine-in, delivery) analyzed and adjusted to maximize sales and profitability. Unit expansion should be as close to home as possible, whether company or franchised. Labor and other services can be moved around the system far more efficiently within a limited geography. A franchised store must be monitored as well as a corporate unit, and the franchisor’s resources can be more easily applied.

CONCLUSION

People have to eat, so good operators are going to figure a way to satisfy customers. It may or may not look exactly like it does today but necessity is the mother of invention. I wasn’t the first to say that 😊 An important new feature of the restaurant industry is that a great number of competitors’ locations will have closed, making it a little easier on the survivors.

On my same trip last week to South Carolina, I had breakfast at a franchised location of a fifty unit chain, all in the southeast, that closes at 2pm. I will write more about this chain sometime soon, but it wasn’t “sexy”. Perhaps 2,500 square feet, functional décor, a basic menu. All they had was a very friendly staff, a clean store, attentive service, well prepared food at a fair price. They are doing comfortably over $1M per store with relatively low cost of  goods, comping positively by 10% over 2019, system units growing by 15% per year.

It can be done.

Roger Lipton