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OPINIONFinancing

Companies are getting more aggressive on labor

Technology and bigger bonuses have become more common as costs continue to increase, says RB’s The Bottom Line.
Photograph by Jonathan Maze

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Restaurant chains’ labor problems have pushed the industry toward a level of innovation recently that is not only changing the way companies pay workers but also in how they interact with customers.

Just last month, for instance, Chipotle Mexican Grill said it would start offering quarterly bonuses to crew members based on their restaurants’ performance metrics.

And McDonald’s revealed its own tests of technology inside its restaurants, including voice-activated drive-thrus, that could ease the labor burden inside the locations.

Those efforts follow news of Cooper’s Hawk using BMWs as an incentive for its general managers to develop and promote good employees, and sweetgreen offering five months of parental leave. There are undoubtedly many more such stories of restaurant chains getting more creative in dealing with the labor shortage.

Restaurants’ labor problem isn’t getting any better. In the first quarter, chains’ average labor costs as a percent of sales rose 0.5% to 32%, according to the quarterly benchmarking update from the consulting firm BDO.

And that’s before the minimum wage increased in 22 jurisdictions this week.

“Market saturation and competition due to low unemployment is causing our restaurants to be a lot more creative in how they're staffing, and to retain rather than have turnover,” said Adam Berebitsky, a tax partner and leader of BDO’s restaurant practice.

The restaurant industry has been adding jobs at a higher-than-average pace for years now—it added 300,000 workers over the past year, including 16,900 jobs in May. As such, the industry’s labor inflation is considerably higher than it is for the broader economy as just about any restaurant operator will tell you.

The challenge has likely hurt sales at some restaurants and has even led to growing reports of locations closing for an evening or more because of staffing shortfalls.

While labor is a significant challenge industrywide, it has been a particular problem at fast-food chains where starting wages well above minimum wage—and approaching the $15-per-hour dream of labor activists—have become more common.

According to BDO, labor costs as a percent of sales rose 90 basis points at fast-food restaurants, which now pay 32.4% of their revenues toward workers. That was a bigger increase than any sector BDO examined.

Chipotle Mexican Grill likely has an easier time than many others in finding workers, but its immense unit-level growth and rising sales means it has an insatiable demand for employees. Its bonus program could provide as much as a month’s worth of extra salary for part-time workers and is clearly designed to keep those workers from leaving.

McDonald’s test of drive-thru technology and other operations changes is worth watching. While the company said that its more-automated french fry machines and ordering technology are being tested to free workers to provide more service, the strategies could also help locations operate better when understaffed.

Over the long term, such efforts are vital to protect the industry from future labor shortages. Restaurants spend more on labor than any other type of business that serves food to consumers, including grocers and convenience stores. While they will never come close to eliminating that gap, making it even somewhat narrower could go a long way.

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