Rising employment is increasing competition for workers and driving up wage rates, leading to rising labor costs at Buffalo Wild Wings Inc., the company said on its earnings call this week.
“Wage rates are going up,” CEO Sally Smith said. “It’s on a city-by-city, state-by-state basis. Other people are seeing that as well.”
Labor costs as a percentage of sales increased 90 basis points to 32.2 percent in the company’s second quarter, which ended June 28. That was higher than expected, and was a big factor why the company’s earnings for the period fell 9.3 percent, according to the company.
Wages weren’t the only factor in those higher costs. Buffalo Wild Wings last year added Guest Experience Captains to its company-owned restaurants to improve service, and those captains increased labor costs.
Yet rising wages have been an issue in the restaurant business, which has been dealing with higher minimum wages in many states as well as competition for labor.
Restaurants have been among the biggest job creators in the country in recent months, amid increased sales and improving confidence on the part of many operators.
One out of every ten jobs the economy created in June, for instance, was at a restaurant, according to federal statistics. And restaurant employment was up 3.7 percent in the first half of the year, higher than the 2.2 percent employment growth for the economy as a whole.
“High employment nationwide is driving up wage rates,” Smith said. “Our average rate of pay is increasing.”
Chicken costs also caused problems for the chain. Buffalo Wild Wings paid $1.79 per pound for traditional wings in the second quarter, up 26 percent from last year, when the chain paid $1.42. Traditional wings, an unusually volatile commodity, represent 21 percent of the chain’s sales.
Overall, higher food and labor costs led to a 1.5 percentage point decline in Buffalo Wild Wings’ restaurant level cash flow in the quarter, to 18.8 percent from 20.3 percent in the same period last year.
The higher costs didn’t phase investors. The chain’s stock surged 13 percent in morning trading on Wednesday. By comparison, the NRN Restaurant Index was up just 1 percent. The broader markets, at least based on the S&P 500 Index, were up a half a percent.
Raymond James Analyst Brian Vaccaro said in a note Wednesday morning that higher same-store sales, including same-store sales growth of 4.8 percent at company stores so far in the third quarter, trumped cost worries.
Still, in response to these higher costs, Buffalo Wild Wings is raising its menu prices the rest of the year. The company is starting out by raising prices for alcohol, and for its special price days like Wing Tuesday and Boneless Thursday. In November, the company is implementing a national menu price increase. By the fourth quarter, the company expects its overall menu price to increase 4.2 percent.
Those menu price hikes will vary by region and locality and will be dependent upon the local area’s costs.
“We’re confident in our ability to take menu pricing at company stores,” CFO Mary Twinem said. “Franchisees will be taking increases this fall with us.”
Updates on technology, mobile
Buffalo Wild Wings is also increasing its efforts to add technology to its restaurants in part to improve labor efficiency.
The company has been testing out handheld devices to enable servers to take orders and payments. Those tests, Smith said, have so far improved efficiency in order taking and payment, and the chain will add those handhelds to another 30 locations in the next few months. It will then assess the handheld devices at those locations before expanding it further.
The company is also considering options for taking payments at tablets and mobile devices.
About 90 percent of the chain’s 1,100 locations, including all of its company-owned units, have tablets. The company has tested enabling those tablets with ordering so customers can order their meals from those tablets.
Yet, Smith said, the company believes that customers won’t really adopt that service unless they can pay for their food, too. As such, the company is pulling back on that test until it can pair tablet ordering with payment. The company is ready to start testing order and pay in tablets, executives said.
They’re also planning to be ready to start testing mobile order and pay over a smartphone by the end of the year, executives said.
Contact Jonathan Maze at [email protected].
Follow him on Twitter at @jonathanmaze
