It May Take More Than Price Hikes To Fight Rising Restaurant Labor Costs

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If restaurant chains can’t price-hike their way out of rising labor costs, then they’ve got to find other ways to maintain profit margins—which, for many, will mean technology upgrades and more staff efficiency.

“We’ll never take enough price to offset the kind of labor headwinds that we’ve got right now and that we foresee for a period of time to come,” Shake Shack (SHAK) Chief Financial Officer Tara Comonte said Tuesday at a Barclays conference.

The New York–based burger chain cited “increased labor and related expenses” as the chief reason for a 1.4% decrease in operating margins when it reported third-quarter financial results last month.

Minimum-wage increases and turnover drove an 0.4% labor cost increase across the industry in Q2, according to BDO.

Some companies have already detailed their expectations for next year; Texas Roadhouse (TXRH), for example, said in October it sees a mid-single-digit increase in “labor dollars per store week,” well ahead of its projected 1% commodity cost inflation.

Shake Shack hasn’t given projections for 2019, though management said Tuesday to “expect continued pressure.” New York, a key market for the company, is boosting its minimum wage for larger employers to $15 from $13 next year.

That, Comonte said, puts a premium on local managers and process improvements that let staff focus on “hospitality and running great Shacks” rather than administrative work. (A transcript of her talk was available on FactSet.)

Technology is broadly seen as a source of cost leverage by restaurants—for example, by offering online ordering and payment that lets staff move to other tasks.

Starbucks (SBUX) has long been seen as an innovator in that area, while Chipotle Mexican Grill (CMG) has made it a priority as its new management team has revamped the company. At the former company, management has targeted cutting “in-store administrative tasks” in half as it aims to give staff more time to work with customers.

Nonfood retailers are thinking along the same lines, as we noted in an August story about Urban Outfitters (URBN).

At Shake Shack, the company has expanded its use of kiosks—one New York City restaurant is completely cashless—as it tests ways to use staff members who might have taken orders and money to do things that streamline other parts of the process.

(That doesn’t mean prices won’t rise. Comonte said Tuesday that when Shake Shack raises prices, it targets a number between 1.5% to 2% higher across the country, taking into account markets where the brand may be less recognized and consumers may not allow them as much flexibility.)

“There is a lot going on in the business to try and tackle it,” Comonte said.

By David Marino-Nachison
December 5, 2018
Source: Barrons.com