Tag Archives: Restaurant Labor

REPRINTED FROM THE RESTAURANT FINANCE MONITOR – FOLLOW THE MONEY, with ROGER LIPTON

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FOLLOW THE MONEY – with ROGER LIPTON – REPRINTED FROM PRESTIGIOUS RESTAURANT FINANCE MONITOR

The Labor Crisis – and some intended consequences – The unprecedented labor crisis in the restaurant industry, more broadly within hospitality and retailing, is no secret. Since something like 20 million Americans are employed within these industries, the implications for our overall economy are significant.

The restaurant industry is now forced to pay anywhere from $12 to $16/hr. for starting crew members, and, even at that wage, it remains difficult to find candidates. Some companies are offering referral bonuses to existing employees, $50 to just show up at an interview and many other enticements. On a recent trip to South Carolina, I saw signs to this effect at almost every restaurant on the commercial strip. The most striking offer was at McDonald’s, willing to pay $28,000 as a starting wage to a trainee promising a management position within 90 days. The candidate might become a shift manager, rather than a general manager, but it seems a sign of clear desperation that a store owner will be required to hand over the keys to their $3M restaurant, for even a shift, after only 90 days of training.

The cause of the crisis unfortunately, as with most policy debates these days, comes down to a political divide. The left suggests that it is the fear of interacting with the public while Covid-19 is not yet eliminated, even $15/hr is barely a living wage, and some candidates still have to stay home with children that are not yet back in school. Conservatives suggest that enhanced unemployment benefits amount to more than a recruit would earn while working and “if you pay people to stay home, they will stay home”.

The enhanced unemployment benefits are slated to remain until September 6th, and it seems unlikely that the Biden administration will modify that. However, South Carolina and Montana announced their plan to withdraw from the Federal Program at the end of July and the US Chamber of Commerce announced its support of stopping the extra $300/week.

The Result – including some unintended consequences

  • Crew wages are taking a major step higher, and what goes up will not, in this case, come down.
  • Store level managers and other field supervisors will also need wage increases over time.
  • Staffing will remain a challenge, at least until September, because only half the country is Red, and Blue states will likely not change course.
  • Store level service will likely suffer and/or training costs will increase materially for raw recruits.
  • Menu Prices will move higher. It may be called a “Covid surcharge”, as in NYC recently, but customers will pay more, and, with inflation in the news, they will understand why.
  • Store level and corporate margins will be under pressure (vs. ’19), since menu prices can only be raised with great caution. The other “prime cost”, namely Cost of Goods Sold is also currently trending higher, affected by higher beef, chicken, etc.

 

BITCOIN (and its potentially fatal flaw) –  Bitcoin, and its recently highly publicized baby brother, Dogecoin, continue in the news. There were originally two major stated attractions of Bitcoin as the ultimate currency. It was (1) non-traceable by governmental authorities and (2) there could never by more than 21M coins issued. The first reason is now obsolete since its use is being “discouraged”, in a variety of ways, by many countries. Cryptocurrencies, after all, compete with the unbacked currencies issued by your friendly government. The US government says Bitcoin is taxable property and your 1040 tax return asks: “at any time during 2020, did you receive, sell, exchange, or otherwise acquire any financial interest in any virtual currency?” The second justification does not hold up because Bitcoin, the most prominent crypto currency, is steadily losing its dominance and there are nine thousand competitors. A year ago, the value of Bitcoin “mined” amounted to something like 75% of all cryptocurrencies, and an even higher percentage of transactions. Today, though the value of the Bitcoins issued amounts to a trillion dollars, the myriad competitors include Etherium (worth $458B), Etherium II ($458B), Binance Coin ($101B), Dogecoin ($64B), and Tether ($56B), together comprising an additional $1 trillion. It seems to us that it is just a question of time before Bitcoin gets diluted into relative oblivion.

Shake Shack – (receives our Financial Transaction of the Year Award) – The restaurant stocks are mostly at their highs, anticipating a full fundamental recovery from the pandemic driven challenges. Shake Shack (SHAK), one of the most admired fast casual chains, has continuously traded at a very high valuation since its IPO at $21.00 per share in 2015. Well run though it is, SHAK has been especially battered by Covid-19, since their locations are in urban locations, at destination malls and resorts, have had no drive-thrus, and their product doesn’t travel particularly well. SHAK declined from about $100/share in late ‘19 to a low of $30 in early ’20, then (after returning $10M of PPP funds) raised $136M from the sale of stock at about $40/share. It should be noted that their highest earnings were $0.72/share in 2019, so even the $30 low was 42x peak earnings and it will obviously be a while before that level is achieved again. The stock sale, at $40 was opportune but THE AWARD applies to the latest financing. In March, 2021, still reporting operating losses but with the stock at about $130, SHAK issued $250M of Convertible Senior Notes, due 2028, convertible at $170/share (236x peak historic earnings), with a ZERO PERCENT INTEREST rate. A score for SHAK, to be sure, now sitting on over $400M of cash and no (interest bearing) debt. Not so admirable for the institutional buyers who have now written a new book called “Reaching For Zero Percent Yield”.

Roger Lipton

 

THE LABOR CRISIS IS ALL OVER THE NEWS: HOW WILL IT PLAY OUT? AND SOME UNINTENDED CONSEQUENCES

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THE LABOR CRISIS IS ALL OVER THE NEWS: HOW WILL IT PLAY OUT? AND SOME UNINTENDED CONSEQUENCES

We wrote a month ago about the labor crisis within the restaurant industry.  Today, the business press, in writing and on TV, has more than discovered the situation, with a continuous din. Our discussion below is intended to provide more insight as to how it plays out. Since something like 20 million Americans are employed within the hospitality industry, encompassing restaurants, retail and hospitality, the implications for our overall economy are significant.

The restaurant industry is now forced to pay anywhere from $12 to $16/hr. for starting crew members and, even at that wage, it remains difficult to find candidates to interview. Some companies are offering referral bonuses to existing employees, $50 to just show up at an interview and many other enticements. On a recent trip to South Carolina, I saw signs to this effect in the windows of almost every restaurant on the commercial strip. The most striking offer was at McDonald’s, a willingness to pay $28,000 as a starting wage to a trainee who would be a manager within 90 days. We don’t know what the “qualifications” would be to get that job, and the prospect might be slated to be a “shift” manager, rather than general manager. However, no matter how well “qualified” that person would be, is seems a sign of clear desperation that a store owner is now required to hand over the keys to a $3M restaurant, for even a shift, after only 90 days of training. Parenthetically, almost all the management teams of publicly held companies have recently reflected the labor “challenge”, though the longer term margin ramifications haven’t been explored.

The debate about the cause of the crisis unfortunately, as most policy discussions do these days, comes down to a political divide. The left suggests that it is the fear of interacting with the public while Covid-19 is not yet eliminated, even $15/hr is barely a living wage, some potential recruits still have to stay home with children that are not yet back in school, and recruits are just looking for the right opportunity. Conservatives suggest that extended and enhanced unemployment benefits amount to more than a full time employee would earn while working and “if you pay people to stay home, they will stay home”.

The enhanced unemployment benefits are slated to remain until September 6th, and it seems unlikely that the Biden administration will modify that. However, South Carolina and Montana announced last week their plan to withdraw from the Federal Program at the end of July, at least a few other states will likely follow,  and the US Chamber of Commerce announced its support of stopping the extra $300/week.

THE RESULT –some obvious, some not so obvious – including some unintended consequences.

  • Crew wages are taking a major step higher, and what goes up will not, in this case, come down.
  • Store level managers and other field supervisors will also receive wage increases over time.
  • Staffing will remain a challenge, at least until September, because only half the country is Red, and Blue states will mostly keep the unemployment programs in place.
  • Store level service will likely suffer and/or training costs will increase materially for raw recruits.
  • Menu Prices will move higher, and customers, with inflation news rampant, will understand.
  • Store level and corporate margins will be hard pressed to move higher (than in ’19), since manu prices can only be raised with great caution. The other “prime cost”, namely Cost of Goods Sold, is likely to trend higher, affected by higher beef, chicken, etc.

Roger Lipton

THE UNMASKING OF THE NORMALLY TRANSPARENT RESTAURANT INDUSTRY

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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

THE RESTAURANT INDUSTRY – THE LATEST RE: PRICE/VALUE, DELIVERY, & LABOR!!

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THE RESTAURANT INDUSTRY – THE LATEST RE: PRICE/VALUE, DELIVERY, & LABOR !!

PRICE/VALUE

Every time we have a quarter pounder with cheese, greatly improved after the change to fresh beef, we appreciate the value (for the price) that McDonald’s provides. Whether it’s just the sandwich (plus any drink, including coffee, for $1) or a combo meal, it is pretty tough on the competition, QSR, fast casual, or full service. The latest wrinkle: the second sandwich (of anything on the menu) only costs $1.00.  I paid a total of just under $10.00, including NY tax, for two quarter pounders with cheese and two cups of coffee. The franchisees don’t love it because the profit margin squeeze can offset the traffic increase, but, no pun intended, “that’s life in the fast lane”. The effect of what we’ll call this extreme value proposition, goes beyond just the QSR burger purveyors. If I’ve got a family of four to feed, I can do it at McDonald’s for about $20.00, including tax, with no tip, with predictably reliable service. I may or may not get all that at the various QSR choices for the same price. If I want to go all the way upscale, I can have a good meal, and a dining “experience” at Olive Garden or BJ’s, but that will cost me closer to $50.00 at a minimum with tax and tip, and that $30.00 or more  incremental expense is meaningful to me. My family has to eat every day, and the expense adds up. So…..the competitive situation for operators is not getting any easier.

DELIVERY

We hear that hardly any of the major restaurant chains are currently aggressively advertising delivery options. Aside from the pizza chains who have always provided delivery, McDonald’s, Chipotle, and Wingstop seem to be the most prominent chains that are currently pushing delivery. McDonald’s has the operating scale and the marketing dollars to do about anything they set their mind to. They can also afford to adjust their direction if that’s what the situation calls for.  Wingstop, with most of their sales consumed outside their four walls and selling a product that travels especially well, is appropriately extending every effort to build an in-house fulfillment system, at the same time learning from their use of third party delivery agents. Chipotle, with their second “make line” has become uniquely well situated to build their mobile app, pickup, and delivery capability. It seems like many restaurant companies, after living through the effect on profit margins, may be stepping back to let the dust settle. While some public companies have talked about a large portion of delivery sales being incremental, we’ve expressed our doubts. It seems pretty obvious to us that if a family consumes a meal delivered from a particular restaurant tonight, they are very unlikely to dine at that restaurant in the next few days, certainly not tomorrow night. It seems to us that most multi-unit operators, franchised or not, would probably be well served to do what they can to provide delivery in house. It’s something of a different business, to be sure, but The Brand must be protected, hopefully with the profit margin and return on investment maintained.

LABOR

The crisis continues. It is not getting any easier to hire qualified help, and the price of that help continues upward. In addition to increased fringe benefits, companies are providing increasing flexible hourly schedules. We heard today that “next day pay” is being provided by one creative company, whereby half of what you earned will be paid tomorrow, in cash we suppose. If this proves to be a meaningful appeal to hourly workers, it would indicate to us how little discretionary cash people have in “the strongest economy of all time”. Call it anecdotal, but it doesn’t seem to us that the labor expense line, as a percentage of sales, is coming down any time soon.

Roger Lipton

GENE LEE, CEO of DARDEN (DRI): “IT’S A WAR FOR TALENT – HERE’S A “TIP”

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Gene Lee, CEO of Darden: “It’s a War for Talent” – HERE’s A TIP !!

We wrote last week about Gene Lee’s tutorial, within Darden’s quarterly conference call, regarding successful management of casual dining restaurants, including his comments relative to the “War for Talent”.

We attended the heavily attended MUFSO (Multi-Unit Food Service) Conference in Dallas earlier this week, and found the CEO Panel (from Del Taco, Longhorn Steakhouse, Red Robin, Smoothie King and Arby’s/Buffalo Wild Wings/Sonic) most interesting.

Most of the discussion was pertinent, but, honestly, predictable. In our four decades following the restaurant industry, attending hundreds of conferences and listening to what must be thousands of conference calls, that shouldn’t be too surprising. However, Todd Burrow’s, President of the very well run Longhorn Steakhouse (within Darden Restaurants) provided an interesting viewpoint relative to the hiring of store level talent. He didn’t say whether he was referring to “crew” or “management”, but the following thoughts would no doubt apply to both categories.

Todd wants to make the first day of employment at Longhorn “the best day of their life”. Higher management meets and greets the new arrival, and provides an enthusiastic orientation in terms of how pleased Longhorn is to have them, the great opportunities that lie ahead, etc.etc. No doubt there are specific training aspects to the first day, as well as paperwork to be done, but Todd stressed the emotional commitment of the company to the new recruit, really “selling it”. There wasn’t a great deal more detail provided, but you get the message, and I have not heard it put this way before. Naturally, this will only carry the company and the new employee so far, but at least the relationship starts with some “romance”. As they say “you only get one chance to make a first impression”.

I honestly don’t remember whether Todd discussed the “last day” of employment. As an ex-operator (a long time ago), I would like to insert a few thoughts in that regard, which could be almost as important in terms of the corporate culture.

Later in the day after the presentation, I ran into a human resource consultant that concentrates on building the corporate culture that all restaurants aspire to, and I asked him why the last day is important, and what he would include. He responded that, among other things, he would do an exit interview, obviously to determine the pluses and minuses in the mind of the departing employee. There were a few other less important suggestions but what wasn’t cited, and what I would like to add, is the following:

Treat the departing employee with as much respect and encouragement for his or her future, as you can possibly muster, perhaps even a bit more than you feel is deserved. The reason is: your remaining employees are paying attention. If your attitude toward the departing associate is “he was never that important”, “we will do fine without him (or her)”, “we’ll find someone better”, etc.etc., those remaining will get the impression that they are just a “disposable” commodity in your mind, to be used temporarily in your own interest. They will obviously be less committed to their future with your company and inclined to move along at the first opportunity to someplace that will (at least potentially) appreciate them more. Secondarily, if the employee did at least a reasonable job for you, they could come back at some point, and perhaps make an even better contribution in the future. So your departing message, under most circumstances, and it takes very little time or effort to do this is: “You did a fine job, gave it your best effort, we are a better company because of you, we wish you the best, if there is anything we can do to help you in the future don’t hesitate to ask, if things don’t work out in the new place we are still here, etc.etc.”

Costs you nothing. It’s the right thing to do. Will send an important message to remaining associates, and will pay big dividends over time.

Roger Lipton Continue reading GENE LEE, CEO of DARDEN (DRI): “IT’S A WAR FOR TALENT – HERE’S A “TIP” →