The restaurant industry is expanding as an improving economy convinces consumers to loosen their wallets. And with commodity costs finally coming down, the industry is enjoying rising profits.
But expansion comes with a downside: Higher labor costs.
Labor-related issues represent the three biggest challenges operators face in 2016, according to Nation’s Restaurant News’ annual Operator Survey.
The biggest challenge, by far: Finding quality employees.
Nearly half of operators in our survey said finding talent is their top challenge. Twenty-seven percent of operators named minimum wage increases as a top challenge, while 10 percent said healthcare costs are a problem.
These issues come at a time when the industry is facing a host of other challenges that are all expected to drive up the labor line, including government rules that could increase costs and demographic changes that are affecting the size of the labor pool.
“It’s the workforce perfect storm,” said Joni Thomas Doolin, founder and CEO of restaurant analytics firm TDn2K. “It’s a very challenging environment.”
Demand for employees comes as the industry remains on a hiring binge. In February, restaurants added 40,000 workers, or about 16 percent of all workers added during the month, according to federal data. Over the past year, the industry has added 360,000 workers.
Hiring is expected to persist this year. Franchised restaurants added another 20,000 jobs in March, according to the latest National Franchise Report from human resources firm ADP. Thirty-eight percent of leisure and hospitality employers expect to increase hiring this year, according to an annual report from the employment firm Manpower.
According to a recent TDn2K survey, 74 percent of operators said they are either “very concerned” or “extremely concerned” about recruitment.
The challenge has companies taking more aggressive steps to lure talent. A year ago,McDonald’s Corp. decided to raise the pay for its hourly workers at company-owned locations.
Mike Andres, president of McDonald’s USA, told investors recently that higher pay has reduced turnover and improved restaurant staffing.
“We’re pleased with it,” Andres said. “It was a significant investment, obviously, but we’re pleased with the decision. It’s working well for us.”
This year, growing fast-casual chain Shake Shack Inc. increased the starting pay for its workers to $12 an hour, and warned Wall Street analysts that it would increase its labor costs by 1 percent to 1.5 percent. But Shake Shack CEO Randy Garutti also said it will help the company build a stronger workforce.
“We believe paying the team well will drive more sales,” Garutti told analysts during a conference call. “It will help us attract and retain people and help leaders advance their careers.”
The demand for quality managers is particularly acute, and has restaurant companies increasing pay and benefits to lure experienced talent.
“If the client company calls me and wants to pay a manager $40,000 and they’ve got to work two years before they can get the first week’s vacation and provide limited benefits, I won’t sign the client,” said Patrice Rice, founder of recruiting firm Patrice & Associates. “I can’t fill the job. No way. There are too many people offering better things.”
But it’s not just about pay. “You can never get someone to leave Chick-fil-A because they’re closed Sundays,” Rice said.
“The days of 60- to 70-hour workweeks are over,” she added. “Some dinosaurs still expect that. But managers are looking for quality of life and career opportunities.”
Some companies are offering managers benefits like periodic weekends off, pet insurance and even identity theft insurance. Rice said that one of her multi-concept clients gave managers gift cards every month so their families could enjoy a night out at one of their restaurants.
“It’s not a lot of money to the company, but it means a lot to the candidate,” Rice said.
Operators also need to find ways to convince managers to stay by giving them something to work toward. Many managers want opportunities for advancement, perhaps to a district manager position, Rice said.
“If you have a general manager with no place left to go because your son is the district manager, they’re going to leave you and go to a different opportunity,” she said.
But companies can also convince managers to stay by enabling them to share in the success of their restaurant.
“Have a bonus structure so they know they can increase income,” Rice said. “Or have a bonus structure based on health department inspections or customer comment card results where you increase customer satisfaction by ‘x’ percentage.
“The worst thing is for someone increase sales at the restaurant and still make the same money.”
Some of the problems restaurant companies have in attracting labor are due to demographic trends. One of the biggest is the decline in working teenagers. In the 1980s, the participation rate among teenagers ranged from 50 percent to 70 percent, depending on the time of year.
That figure has been dropping ever since, but peak participation plunged by about 10 percent during the recession and hasn’t recovered. Workforce participation among teenagers is now 30 percent to 40 percent. That has reduced a major source of workers for restaurants.
“Have we lost that whole group of employees?” TDn2K’s Doolin said. “You now have people who went from age 16 to 26, and they’ve never worked in a restaurant.”
Part of the issue is that during the recession, many adults took minimum wage jobs after losing employment as companies cut millions of employees. Teens lost job opportunities and simply never returned to the workforce.
And adults have kept those jobs. More than half of workers paid at or below minimum wage were 25 years or older in 2014, according to federal data.
Because more minimum wage workers are supporting families, pressure has mounted to raise those wages. Several states, including numerous so-called conservative “red” states, have increased their minimum wages. Several polls of voters suggest strong support nationwide for an increase in the federal minimum wage, which is currently $7.25 an hour.
Congress, currently dominated by Republican lawmakers, is unlikely to back an increase in the federal minimum wage to $10 anytime soon. But there is increasing pressure to raise local and state minimum wages to $15 an hour.
Workers, backed by union and labor activists, have been protesting for years at restaurant locations around the country demanding higher pay and the right to form unions.
They have been getting some traction more recently. New York State is raising the minimum wage for quick-service restaurant workers to $15. California lawmakers recently announced a deal to raise the state’s minimum wage to $15.
Several companies expect higher wage rates to increase labor costs. Ruth’s Hospitality Group Inc., Texas Roadhouse Inc., Cosi Inc. and Zoe’s Kitchen Inc. all mentioned higher wages on their most recent earnings calls.
Dolf Berle, president and chief operating officer of the casual dining chain Dave & Buster’s, said rising wages are forcing the company to work harder on managing labor.
“We face upward pressure with regard to labor costs,” Berle said during the chain’s fourth-quarter earnings call. He noted that the company will recertify management teams on labor management practices to ensure that they use labor forecasting and scheduling tools.
Andy Puzder, CEO of CKE Restaurants Inc., parent of Hardee’s and Carl’s Jr., said the higher minimum wage rates are making it more difficult for operators to provide entry-level jobs.
Puzder said government mandates are a major problem for the industry.
“The problem now is the government,” he said. “Minimum wage increases, Obamacare, legislation pending in some cities where hourly workers have to work so many hours. At some point you just can’t survive.”
Rising minimum wages are expected to impact restaurant prices. Stephen Anderson, analyst with Maxim Group, estimates that restaurant companies will have to raise prices by 60 to 140 basis points over the next five to six years to cover higher minimum wages.
As it is, the increase in the minimum wage to $10 in California this year is expected to costDel Taco $7.2 million, given the 550-unit chain’s strong presence in the state. But Del Taco CEO Paul Murphy was circumspect about the impact of additional increases to the state’s pay.
“We just try to stay focused on our brand and the consumer,” Murphy said. “Regulator issues can keep you up at night. But it’s a level playing field out there. I’m confident in our brand that we can deal with the situation. We dealt with the move from $8 to $9 and from $9 to $10 very effectively I’m confident in our ability to deal with this over the next six to seven years.”
“We live in California,” he added. “That the minimum wage was going up was just not a shock to us, to be honest with you.”
But it’s not just the minimum wage. Other efforts are threatening to push labor costs higher. The Obama administration plans to increase the threshold of workers who could be considered exempt from overtime pay to about $50,000 a year — an increase that would likely cost restaurants millions in additional pay.
That plus the unionization push, as well as a drive by the National Labor Relations Board to classify franchisors as joint employers, could also pressure labor in the coming years.
The best solution for any company, according to experts, is to get ahead of the curve before the government forces change. In the current environment, that might help restaurants recruit workers.
“They’re going to deal with this reality for the next five to seven years,” Doolin said. “They’re not going to stuff that genie back in the bottle. There are companies that have been ahead of this stuff, who will continue to be ahead of it. And there are companies that are unprepared or in denial or still regard their workforce as a cost center. They’re in trouble.”