Is the tight labor market hurting restaurant sales?

With unemployment low, poorer service could be keeping some customers away, says RB’s The Bottom Line.
Photograph by Jonathan Maze

The Bottom Line

The second quarter has proven to be a difficult one from a traffic perspective for many chains. Burger concepts like McDonald’s and Red Robin, as we wrote about yesterday, have seen declines in traffic.

But other chains have, too, including Starbucks, Dunkin’ Donuts and Chipotle Mexican Grill.

There are plenty of explanations for the traffic challenges, many of which we have covered ad nauseum: Consumers are eating at home more often than they once did; the industry is oversupplied with restaurants; independents are gaining share and consumers have options outside of restaurants like c-stores.

Here’s another one, however: Labor.

We typically view labor through a cost lens. As unemployment has fallen, and the restaurant industry has continued to add workers at a breakneck pace, that has intensified competition for workers.

As such, restaurants have had to increase how much they’re paying employees. That has driven up costs and hurt profitability.

But it might be hurting sales in two ways.

First, the rise in labor costs is forcing price increases, which can hurt traffic. Chipotle, for instance, increased prices 5% last year and into this year, which hurt traffic. Steak ‘n Shake shifted away from discounts, which (probably) led to a 6.4% decrease in traffic. If consumers even perceive a price increase, some of them will go to your restaurant less often.

But there’s another way that I believe it could be hurting traffic: By hurting service.

The industry clearly has a labor supply problem, or else we wouldn’t be seeing such high labor rates. Shake Shack, for instance, will open a restaurant in Nashville at $13 an hour—the state’s minimum wage is $7.25.

Low labor supply means that restaurants will more often make do with fewer employees per shift, which will hurt service.

Or, it can force locations to employ people they wouldn’t otherwise employ. Or perhaps they reduce some training to offset the higher wage rates.

But consumers might not know this if they end up waiting too long at the fast-food drive-thru or they end up getting less-than-stellar service at a casual dining concept.

The U.S. has an incredible number of restaurants. Consumers have more choices for their dining than they’ve ever had.

Service is one area where consumers might pick a restaurant or a restaurant chain. And if they don’t like the service at one concept, they might be more likely to pick another one. Or they just eat at home.

To be sure, it’s difficult to prove this out. A lot of things could keep a restaurant chain from gaining customers, and there are plenty of potential explanations for the difficult traffic environment in recent years despite a growing economy.

But every operator knows that service and operations strength matters. Getting labor right, and perhaps finding a more efficient solution to reduce labor challenges in the future, is important. Traffic may depend on it.

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