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Restaurants paid much higher labor costs in 3Q

A BDO report says sales weakness and higher wages put a crimp in chains’ profits.

Falling sales and rising wages took a bite out of restaurant company profitability in the third quarter and will likely continue until sales move noticeably higher.

That’s the conclusion of the most recent benchmarking report from the consulting firm BDO, which found that labor costs as a percent of sales increased 0.7% among publicly traded chains through the third quarter.

On average, restaurants have spent 30.8% of their revenues on labor, up from 30.1% in the same period a year ago, according to the report.

At least some of that was due to declining same-store sales. Overall, same-store sales declined 0.4% through the third quarter, according to BDO.

As such, restaurants employed the same number of people, and yet they served fewer customers, hurting the labor sales percentage.

“You still need the people, even as same-store sales decrease,” said Adam Berebitsky, co-leader of BDO’s restaurant practice. “You still need the fixed labor costs to be able to run the restaurant. If suddenly my sales go down by 3% to 5%, that doesn’t mean I can get rid of one manager.”

But wages are going up, too. The unemployment rate is 4.1%, meaning that most people who want a job have one. That has diminished the labor pool available for restaurants in many markets.

And restaurants have been hiring at a breakneck pace in recent years. The industry added 18,900 jobs in November.

Hospitality wages have increased 3.8% over the past 12 months, nearly double the rate of national wage growth.

“Unemployment being low, that means you’re having to pay a little more to get people into the industry,” Berebitsky said. “It’s hard to find people.”

Minimum wages have increased in many states and cities, with places like New York and California as well as markets such as Minneapolis having passed plans that will eventually take their minimums to $15.

But wages have already crept up well into the teens in many places as operators struggle to find workers.  

“There’s talk about the minimum wage being raised in some places up to $15 an hour, but when you look and see what some restaurants have to pay to get people, they’re already having to pay $12, $13 or $14 an hour,” Berebitsky said. “It’s not too far off.”

With commodity costs largely in check, food and paper costs rose just 0.2%. And overall prime costs, including food, paper and labor, increased 0.8% to 59.9% of sales, according to BDO.

Higher labor costs were a problem across the industry in the quarter, affecting all segments. Fast-casual chains had the biggest issue, with labor costs increasing 0.9% to 28.8% of sales while total prime costs increased 1% to 59.5%.

But fast-casual chains also had the biggest sales problem: Same-store sales for that segment have fallen 2.2%, including Chipotle Mexican Grill, which is working to recover from a brutal sales decline in 2016.

And it’s not like other segments didn’t have problems, too. Quick-service chains, which have had the best sales performance this year, still saw labor costs as a percent of sales increase 0.7% to 29.4%.

Total labor costs are a particular problem at casual-dining chains, where prime costs now amount to 61.4% of sales and labor costs are 33.2% of sales. Same-store sales for that sector are down 0.9%, continuing a long, 11-year decline for midscale, full-service concepts.

The best way for labor costs to improve would be for same-store sales to turn around. While sales have improved in the past two months, they remain relatively weak—and traffic remains a major industry issue.

“If same-store sales continue to decline, you’re going to see these labor percentages continue to [worsen],” Berebitsky said.

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