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However, a recent report from Piper Jaffray restaurant analyst Nicole Regan Miller suggests the effect on restaurant earnings among brands operating in wage-increase states is manageable.

“On a broad level, we recognize additional labor costs as an added stress to restaurant operators,” wrote Nicole Miller Regan, Piper Jaffray’s senior research analyst, “but ultimately believe potential impacts should be manageable through a combination of menu price and/or operational efficiencies.

The Piper Jaffray analysts looked at brands it covered that had above-average exposure to wage increases in the states of California, Connecticut, New Jersey, Rhode Island and New York. Those brands included Huntington Beach, Calif.-based, B.J.s Restaurants Inc.; Seattle-based Starbucks Corp.; Calabasas Hills, Calif.-based Cheesecake Factory Inc.; and Denver-based Chipotle Mexican Grill Inc.



“Potential earnings impacts in 2014 will largely be based on a company’s particular exposure to various states, the expected increase in minimum wages in those states, and that concept’s ability to offset said labor increases through menu price and/or operational efficiencies,” Miller wrote.

She said highly franchised concepts like Atlanta-based Popeyes Louisiana Kitchen Inc., Miami-based Burger King and Canton, Mass.-based Dunkin Brands Group Inc. “provide for the highest levels of insulation from potential earnings impacts.”

Concepts with more than 20 percent of company-owned units in the five states face the most exposure there, according to Piper Jaffray. Those concepts include BJ’s, Starbucks, The Cheesecake Factory, Chipotle, Winter Park, Fla.-based Ruth’s Hospitality Group Inc., and St. Louis-based Panera Bread Co.

B.J.’s, Regan wrote, “is expected to have the highest wage rate given its 44 percent exposure to California, which in addition to already having higher-than-average wage rates is also expected to experience a 12.5 percent increase in state minimum wages in 2014.”

Despite the added pressure, the Piper Jaffray team expects restaurant brands to offset the added costs.

“We believe menu prices and operational efficiencies are able to offset this pressure,” Regan said.

Piper Jaffray’s analysts said that over the past 15 years, industry menu price increases have averaged about 2.9 percent a year. With the current minimum wage increases in the five states, the report said, “Our analysis suggests an approximate average of 50 basis points of price would offset unfavorable impacts.”

Contact Ron Ruggless at ronald.ruggless@penton.com.
Follow him on Twitter: @RonRuggless