With local minimum wage rates rising in major markets around the country, and competition for workers increasing, the increased cost of labor is a key concern for the second half of the year and beyond.
In the most recent round of earnings reports by public restaurant companies, many said they expected pressure on margins as a result of rising labor costs.
“Wage pressures and the war for talent continue to make labor our single biggest source of inflation,” said Mike Bufano, chief financial officer of Panera Bread Co.
Hear what executives at 10 public restaurant companies had to say about how they will approach the labor issue, according to Seeking Alpha transcripts of recent earnings calls.
McDonald's: 'We need to grow sales'
In July, McDonald’s Corp. raised hourly wages at company-owned U.S. restaurants to $1 more than local minimum wage rates.
McDonald’s chief financial officer Kevin Ozan said: “We expect the total impact from these incremental labor costs to be approximately 200 basis points on U.S. company-operated margins for the full year, further pressuring margins for the second half of 2015. To help offset cost pressures throughout our P and L and remain in line with food inflation, we took a price increase at the end of May. Our U.S. second-quarter pricing year-over-year was up over 2 percent, which remains below food-away-from-home inflation of around 3 percent.”
'Labor costs are under pressure right now'
- McDonald's CFO Kevin Ozan
“Certainly, labor costs are under pressure right now. In several states, as you know, minimum wage has increased. For us, margin is essentially our top-line gain. So we need to grow sales. Certainly, we need to grow comp sales in order to grow our margins. And the specific labor moves that we have taken are what we believe we should be doing as a business to make sure that we attract, recruit and retain the best employees we can for our business,” Ozan said of the bigger picture.
“And so we are doing that as long as, in our mind, the playing field is level across the industry. We believe we can compete competitively in the long run. And so our hope is that any of the regulations, or a law (that) comes through, deal with all of the industries similarly. And then we will all have to deal with the same concerns.”
Chipotle: 'Keep our menu accessible'
Chipotle Mexican Grill Inc. chief financial officer Jack Hartung said hourly labor rates increased 4.2 percent during the quarter, a faster pace than the fast-casual operator has seen in years.
In San Francisco, where the minimum wage increased to $12 per hour, the cost of doing business climbed 30 percent, while menu prices increased less than competitors in the area, he said.
As a result, Chipotle raised menu prices in San Francisco by 10 percent, and by 7 percent at the 74 restaurants in the surrounding Bay Area. Similar increases will be considered elsewhere, Hartung said.
“We'll take a similar approach when the overall costs of doing business in a market are escalating on a case-by-case basis, whether these higher costs are driven by legislative changes or by market forces. As an example, although the minimum wage in Maryland recently increased to over $10 an hour, our overall cost of doing business is reasonable there. And so we do not plan to increase our pricing in those restaurants,” he said.
“Our objective will always be to keep our menu accessible to our customers while being able to recruit the best people we can with competitive wages in each market and also while considering the overall cost of doing business and competitive prices in the area.”
Domino's: 'Profits are better than they have ever been'
J. Patrick Doyle, Domino’s Pizza Inc. president and CEO, said the company will continue to use technology to drive sales and steal market share.
“We are generating record profit out of our stores. And so our ability to run our stores well and efficiently, I think, is helping us to not only manage those increases, but to prosper despite those increases. And so I think the bottom line is, frankly … profits are better than they have ever been. So whatever pressures are out there on cost, we've been able to more than handle, and the profit levels are at terrific levels right now,” Doyle said.
'I think that puts more pressure on weaker players and people who aren't as efficient'
- Dominos Pizza Inc. president and CEO J. Patrick Doyle
“So it's certainly something that we watch and we keep an eye on, and there is certainly indication that there is more activity coming on that front. I think that puts more pressure on weaker players and people who aren't as efficient, and maybe don't have the same structure that we have to drive success in what has been a little bit tougher labor environment and will probably continue to be.”
Buffalo Wild Wings: 'Focus on delivering a great guest experience'
Sally Smith, president and CEO of Buffalo Wild Wings Inc., predicted that the company’s labor costs will rise this year over last, in part because it has added “guest experience captains” to some units. Technology, like hand-held devices for ordering, will help.
“In the near term, we're working on labor efficiencies, but keeping our primary focus on delivering a great guest experience. We've reduced captains' hours at certain lower-sales-volume restaurants and are focused on minimizing team member turnover and overtime costs. We are also focused on better managing labor at acquired restaurants to achieve standard operating levels more quickly,” Smith said.
“Server handheld tests have proven to help our team members be more efficient in entering orders and taking payment, improving speed of service and guest satisfaction.”
Wendy's: 'There will have to be other consequences'
Todd Penegor, The Wendy’s Co. chief financial officer and senior vice president, sees wage pressure on two fronts: minimum wage increases and the war on talent.
“So we've made some adjustments to that starting wage in certain markets. The impact hasn't been material at the moment, but we continue to look at initiatives on how we do work to offset any impact to future wage inflation through technology initiatives, whether that's customer self-order kiosks, whether that's automating more in the back of the house in the restaurant, and you'll see a lot more coming on that front later this year from us,” Penegor said.
'Some of these increases will clearly end up hurting the people that they are intended to help'
- The Wendy’s Co. president and CEO Emil Brolick
But Emil Brolick, Wendy’s president and CEO, said franchisees in markets like New York, where the minimum wage is scheduled to increase dramatically, will likely be forced to reduce hours and overall staff.
“There are some people out there who naively say that these wages can simply be passed along in terms of price increases,” Brolick said. “I don’t think that the average franchisee believes that, and there will have to be other consequences, which is why we have pointed out that, unfortunately, we believe that some of these increases will clearly end up hurting the people that they are intended to help.”
Texas Roadhouse: 'We'll look at all the angles'
Texas Roadhouse Inc. is predicting wage rate inflation above the 1.5 percent to 2 percent range officials expected at the beginning of the year. As a result, the company is looking to raise menu prices and allow operators to do off-cycle pricing in markets where minimum wage increases are more dramatic.
“Where you've got, let's say, Alaska or California, maybe in New York, where you've got mid-year pretty big wage rate changes, we might do something in those states. And we might do it in multiple parts; we might do it in one whole swing. It varies,” Texas Roadhouse president and chief financial officer Scott M. Colosi said.
“In the past, we've taken multiple price increases throughout a year if the cost structure changed in a certain way. But if it's something where we think the prices of some item, like beef, are coming back down throughout the year, and if we're floating a lot of product, we might not take a price increase sooner, if you will, to offset that. We'll be patient and let that play through.
“And so, that means maybe our guys are losing a little bit in Q2, (but) maybe they're winning a little bit more in Q3 and Q4. So we'll look at all the angles on that stuff.”
Shake Shack: 'We have always taken care of our team'
Jeffrey Uttz, Shake Shack Inc. chief financial officer, said the company reduced its labor expenses during the second quarter largely due to a return to crinkle-cut fries. But wage inflation is expected to continue to pressure margins as the operator works to stay proactive on wages.
'Minimum wage is pressuring the overall restaurant industry, and we don't see this pressure easing any time soon'
- Jeffrey Uttz, Shake Shack Inc. chief financial officer
“We have always taken care of our team and offered competitive compensation packages,” Uttz said. “In July, we took a proactive approach to rising minimum wages in a competitive labor environment and chose to raise the starting wage at our four Shacks in the Washington, D.C., market to $12 per hour. Minimum wage is pressuring the overall restaurant industry, and we don't see this pressure easing any time soon.
“As we look at the minimum wages, we are going to stay proactive with our compensation practices, recruiting and with the development of our team. Taking care of our team members first will always drive our decision making. And as a result, we expect deleveraging on the labor line over the long term.”
El Pollo Loco: 'Look for cost savings'
El Pollo Loco Holdings Inc. officials said minimum wage hikes in California will likely have an impact, particularly in January 2016, when the wage rate will increase from $9 to $10 per hour.
“We are working here to mitigate the impact of that through a number of initiatives. First of all, really going through all the other costs in the organization, really scrub and look for cost savings to mitigate that impact. We will also look through and see what things we can do to drive efficiencies in the back half. … We will hopefully drive efficiencies,” El Pollo Loco chief financial officer Laurance Roberts said.
'We are working here to mitigate the impact of that through a number of initiatives'
- El Pollo Loco chief financial officer Laurance Roberts
“Then let's take a look at what we are, and then we will see where we need to take additional pricing. And we will be much more sophisticated about how we take that pricing, very focused on where minimum wage (is) impacting our margins.”
Habit Restaurants: 'Still pressure on wages'
Habit Restaurants Inc. chief financial officer Ira Fils said the company is still absorbing minimum wage increases from last year, and other regulatory mandates are contributing to higher costs.
Habit officials said they are reluctant to raise menu prices. But because of the brand’s value proposition, it will be in a better position to do so than others, if necessary.
'We’re going to continue to see some pressure in labor in the back of the year'
- Habit Restaurants Inc. chief financial officer Ira Fils
“There is still pressure on wages over and above minimum wage,” Fils said. “We’ve opened a fair amount of stores in the (San Francisco) Bay Area this year, and, just structurally, the Bay Area runs a higher average wage than the rest of the system.
“In addition to that, if you think about the balance of the year, we are going to be
becoming compliant with affordable healthcare in August of this year, which should add, we said earlier, about 30 basis points in cost. It’s probably going to be a little higher than that — it’s going to be 40 to 50 basis points, as we’re kind of ramping up our open enrollment now. And we have a little bit of pressure in regards to California sick leave, where we are required to give three sick days to everyone in California. Now, so all that being said, we’re going to continue to see some pressure in labor in the back of the year.”
Noodles & Company: 'Do not back away from important investments'
Noodles & Company chief financial officer David Boennighausen said the largest external cause of margin pressure came from labor.
“We continue to see pressure on this line item industry wide, and we expect that's going to remain for the foreseeable future, on top of that has been the increased cost to implement the Affordable Care Act,” Boennighausen said.
He added later: “While outside pressure remains on this line, we also believe it is important that we do not back away from important investments that we are making in staffing our restaurant. These include increased staffing during certain peak times, as well as the investment in catering and marketing activities inside our restaurants.
“In the second quarter, labor cost increased 100 basis points versus prior year, and we anticipate similar pressure during the balance of 2015.”
Contact Lisa Jennings at [email protected]
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