Competition for workers isn’t just hurting restaurants’ profits. It’s hurting their sales.
Speaking at the J.P. Morgan Gaming, Lodging, Restaurant & Leisure Management Access Forum in Las Vegas last week, McDonald’s CFO Kevin Ozan said there is a correlation between restaurants’ staffing and their same-store sales.
“We know there’s a direct correlation between the restaurants that are able to staff to guide and results, comp sales, sales results, etc.,” Ozan said, according to a transcript of the presentation from financial data site Sentieo. By “staff to guide,” Ozan simply means that the restaurants are following staffing guidelines.
“So the more that we can make sure that the restaurants are able to staff to the guidelines, that helps sales for sure.”
The problem, he said, is that staffing to guidelines isn’t always feasible.
Nationwide, the unemployment rate is 4%, which is essentially full employment. But that rate ranges from 2.4% in states such as Iowa and New Hampshire to 6.5% in Alaska. Only five states have unemployment rates of 5% or more.
And it’s arguable that the pool of potential restaurant employees is even smaller, given the industry’s breakneck hiring pace in recent years along with competition for that labor from companies such as Lyft, Uber and delivery providers.
Restaurants have added an average of 21,000 jobs a month for the past two years and have added more than 500,000 employees overall during that period.
“With record low unemployment, with increasing labor costs, labor is probably our—not probably—is our biggest challenge right now,” Ozan said.
The problem for the industry is that it’s largely full of locations. Restaurants have built locations faster than the rate consumers have increased their dining occasions—forcing a growing number of restaurants to battle for a largely stagnant dining market.
When some restaurants don’t do their job as well, consumers shift spending toward chains that do.
Because poor staffing hurts service, that pushes more consumers to go elsewhere.
Restaurants have been raising wages to attract workers. Many restaurant locations advertise for workers, and often those come with hourly wages well above local minimums. That doesn’t always work.
Restaurants have also been pushing more benefits, such as education programs. Several chains offer tuition assistance programs, and Chick-fil-A has found that such efforts boost overall retention because workers want to keep that benefit.
We’ve long wondered whether labor challenges are holding sales back. And we now wonder whether the lack of labor is posing a particular challenge for fast-food restaurants. As Ozan noted, McDonald’s restaurants tend to be more complex and require a greater supply of labor than many other restaurants.
Perhaps not surprisingly, McDonald’s traffic declined 2.2% last year—though the company has blamed speed problems and breakfast competition for that decline.
Yet its rivals haven’t done a whole lot better, suggesting perhaps that something is inflicting the sector more broadly.
Regardless, the comments from Ozan crystalize the impact the difficult labor market is having on operators right now. It’s not just a profit problem.