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OPINIONFinancing

Here’s how much labor costs rose last quarter

Despite higher prices, labor continued to pressure margins, according to an industry scorecard, says RB’s The Bottom Line.
Photograph: Shutterstock

The Bottom Line

Taylor Gourmet had barely closed its doors when another chain in the Washington, D.C., area, Cava, decided to hold a job fair that was at least in part aimed at hiring Taylor Gourmet workers who had lost their jobs.

Such is the way of the industry right now. Finding good labor is as hard as it’s been, driving up wages and, therefore, labor costs.

“Labor competition doesn’t seem to be going away,” Adam Berebitsky, who leads the restaurant practice at consulting firm BDO, said in an interview. “The discussion on the $15 minimum wage has gone by the wayside. It’s very difficult to hire good people for less than that these days in most markets.”

“If you’re not at $15 an hour, whether your minimum wage is going up or not, you’re slowly going toward that.”

According to BDO’s latest benchmarking report, labor costs as a percentage of sales rose 0.4% in the second quarter, despite a 1.1% increase in same-store sales during the period. That’s a substantial increase in labor costs, and probably prompted Darden CEO Gene Lee to declare that there is a “war on talent” in the industry.

On average, restaurants’ labor costs were 31.3% of sales in the quarter.

The biggest increase came at pizza chains, where labor costs rose 290 basis points. The companies on average had a 0.3% decline in same-store sales.

Labor costs rose 50 basis points at casual-dining chains, to 33.8% of revenue. Fast-food restaurants’ labor costs also rose 50 basis points, to 30.6% of sales.

Fast-casual concepts managed to keep their costs lower, thanks in part to stronger sales. Same-store sales averaged 1.6% at fast-casual chains, and their labor costs rose 0.2% as a percent of total revenue.

Still, the labor costs overall pushed total prime costs 30 basis points higher, to 60.4% of revenue.

While that might not seem like a lot, it doesn’t take into account other costs, such as rent, that are clearly going higher. With those costs on the rise, and lease rates continuing to skyrocket, that could be pushing more restaurant chains into bankruptcy.

The aforementioned Taylor Gourmet filed for Chapter 7 bankruptcy protection this week and, though it’s not yet sure exactly what the factors were in its downfall, high lease costs in the Washington, D.C., area were likely a major contributor.

Because it’s so hard to find good workers, restaurant companies have little choice but to pay higher wages.

The other option is to not fill positions, and the restaurant industry has a higher rate of unfilled jobs than any other industry in the economy, heading into a holiday season in which retailers are expected to hire a huge number of workers.

My colleague Peter Romeo has already noted that restaurants can expect to pay their workers even higher rates to maintain their competitiveness for the workforce this holiday season.

We discussed these issues recently on an episode of RB's podcast, "A Deeper Dive."

“I have seen it in my market, Cleveland,” Berebitsky said. “A lot of new restaurants are opening up here. But you will go into a restaurant and there’s a wait. But when you walk in there’s open tables. They don’t have the personnel to service you.”

All of this is putting restaurateurs in a tough spot. The higher labor costs are pushing companies to keep raising prices despite weak traffic because they still have bills to pay.

If they keep raising prices and pushing high-dollar items, however, customers might keep limiting their number of visits. Or, if they sense service is diminished because of staffing, they might take their business elsewhere. And that also hurts traffic.

But nobody ever said this business was easy.  

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