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Rising labor expenses cost restaurants $250M in 2017

Higher wages continued to be a problem late last year, even at chains with rising sales, says RB's The Bottom Line.

The Bottom Line

Higher wages and benefits expenses cost restaurants a lot of profit last year.

According to one estimate from Dean Haskell, a consultant with National Retail Concept Partners, higher wages and other labor costs could have cost publicly traded chains as much as $250 million in 2017.

That’s the increase in labor cost as a percentage of revenue, meaning that companies are paying higher wages and benefits for workers and managers, even after accounting for changes in sales.

Among chains that have reported their late-year earnings, Haskell wrote, the typical chain saw a $4.2 million decrease in earnings before interest, taxes, depreciation and amortization (EBITDA) in the period.

The biggest increase came at Texas Roadhouse, which saw a 135-basis-point increase in labor as a percent of revenue in the fourth quarter, hurting EBITDA by $7.3 million and decreasing earnings per share by 8 cents.

Olive Garden owner Darden Restaurants, The Cheesecake Factory, BJ’s Restaurants and Ark Restaurant Group all saw increases in labor that hurt the chains’ EBITDA by anywhere from $400,000 to $6 million.

Even chains with strong sales couldn’t avoid paying higher overall labor costs.

Both Darden and Texas Roadhouse have performed strongly recently. Texas Roadhouse same-store sales increased 5.8% in the quarter ended Dec. 26. Darden’s same-store sales rose 3.1% in the quarter ended Nov. 26.

In general, higher same-store sales typically help labor cost percentages, because companies use the same amount of labor to serve more customers. And while wages are definitely increasing, both for lower-tier workers and store managers, the higher sales should offset that.

Among quick-service chains, Haskell said that McDonald’s reported a $40.5 million negative change in labor costs at its worldwide company stores in the fourth quarter.

Chipotle, which had saved $65.6 million in labor in the first three quarters thanks to the chain’s sales recovery, turned negative in the last three months of the year as those sales fell.

Wages have been increasing, thanks to higher minimum wages and intense competition for workers.

The industry has added 250,000 jobs over the past 12 months. Wages for leisure and hospitality workers rose 3.9% year over year in January, far higher than the 2.9% increase for all workers over that same time period.

Intense competition has yielded higher wages.

But, Haskell said, “If you actively manage your labor scheduling relative to your sales level, you can mitigate some of those costs.”

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