Operations

Restaurant chains paint rosier picture of labor and staffing

Midway through 3Q earnings, it appears wage inflation remains a challenge, but restaurants are fully staffed, turnover is low and efforts to optimize efficiency are paying off.
Chipotle hiring
Chipotle officials said the chain is in the best labor position it has been in for a while. |Photo: Shutterstock.

Midway through the round of third-quarter earnings, one theme is clear:

The labor picture is vastly improved for restaurants.

After years of struggling to find workers, public companies are now saying their restaurants are fully staffed and optimized for efficiency.

Labor inflation from higher wages remains a challenge, one that will be exacerbated by legislation in California that will bring the minimum wage for fast-food chains to $20 per hour in April.

Still, many companies touted ongoing efforts to offset those wage costs with better team deployment, automation and tweaks to operations designed for efficiency.

Most said they have lowered their turnover and improved retention at all levels, which is resulting in sales-boosting improvements to throughput.

It took time for the restaurant industry to recover from the labor cataclysm of the pandemic, but the industry has come close to pre-pandemic employment levels—despite a slight downtick last month, when restaurants and bars lost about 7,500 jobs, according to the U.S. Bureau of Labor Statistics.

But chains like Shake Shack, Chipotle, The Cheesecake Factory and others described a significantly improved staffing backdrop that is the best it has been in years.

Here’s a look at how companies are talking about the labor picture during the latest third quarter.

Shake Shack

“We’ve achieved some of the best turnover and retention numbers we’ve seen and we’re generating more than twice the team member applicant flow, compared to last year,” said Shake Shack CEO Randy Garutti. “Not only are our team members staying longer, competitive wages are also attracting more candidates, which is contributing to better operational execution and profitability in our Shacks.”

Labor costs were 28.8% of sales, which was down about 60 basis points from last year.

The chain is rolling out kiosks, which has helped reduce labor costs, and Shake Shack is working on developing new staffing models specific to certain kinds of restaurants, to boost efficiencies, especially during peak hours.

Shake Shack is seeing marked improvement in people available for shifts, for example. New scheduling and management capabilities have allowed the company to be more efficient with labor usage.

“We are proud of the progress here, but it’s also important to note that we have delivered this improvement despite the many headwinds that add to our overall labor costs, including the larger degree of team members needed to support our dining rooms with the return of in-Shack traffic and our commitment to improving the guest experience, as well as the significant wage investments we’ve made in our team members,” said CFO Katie Fogertey.

And it will only get better from here, she said.

As the chain grows with new formats, from larger drive-thru units to tiny food court operations, along with various channels, like the kiosks, “it’s the right time to refine and evolve our labor model, as well as broader staffing and deployment standards,” she said.

The company is planning to roll out a new staffing system in 2024, following tests later this year. Fogertey said it will give Shake Shack restaurant operators new tools to best optimize staffing for their unique needs.

Chipotle

Chipotle CEO Brian Niccol said staffing levels and turnover are “back to or better than pre-pandemic levels.”

Niccol told CNBC that Chipotle is “in the best labor position we’ve been in in a while, and what we’re focused on right now is how to best execute the operating model.”

The fast-casual chain has been fine-tuning its throughput for years, and part of that effort is a focus on putting “aces in places” to better optimize labor efficiency.

“Aces in places is a critical piece of the puzzle,” he said.

During the third quarter, the company said those efforts have helped the chain push through an additional four to five entrees during peak 15-minute periods, for example, which has helped boost same-store sales.

Wage inflation remains a challenge—third-quarter labor costs were 24.9%, a slight decrease from the prior year—and the chain said the impending wage increase in California is expected to add 2.5% to 3% to the labor line.

But the effort to properly deploy team members, as well as tests of automation designed to take on some disliked tasks, could help offset some of those labor costs, Niccol said.

Portillo’s

Labor costs at Portillo’s decreased slightly in the third quarter to 25.5% of sales, compared with 25.9% a year ago, but that was largely because of increased revenue. Wages were up around 2% during the quarter.  The company is projecting labor inflation in the mid-single digits for the year.

Year to date, labor inflation was up 4.8%, and that is largely because of wage increases, said Michael Osanloo. The upside of that, however, is that the chain is “much better staffed than we were last year.”

Portillo’s is also working on efficiencies. New restaurants in Texas are using a kitchen design that cuts wasted movement, for example.

“The labor efficiencies that we’ve got by putting people in the right position and reducing conveyance has been a big help,” said Osanloo. “Otherwise, labor would have been out of control.”

Potbelly

The Chicago-based sandwich chain reported labor costs of 28.9% for the quarter, a 200-basis point improvement over the prior year that was partially attributed to better labor optimization.

Turnover rates have been lower for the chain than the fast-casual space more broadly, which has brought stability and retention, said CEO Bob Wright.

“It’s becoming a major point of differentiation behind the scenes,” he said.

Potbelly has been rolling out a digitization of restaurant makelines, called the Potbelly Digital Kitchen, which has also helped boost efficiency. About 65 of the chain’s 361 company-owned restaurants have the new system so far.

Wright said those units not only have better accuracy and “ready-on-time” scores, the PDK restaurants have extracted an hour a day of labor, which has helped bring down costs.

In addition, all Potbelly restaurants now also allow tipping, which has added about $3 per hour in tips on average to worker wages, Wright said.

Denny’s

Denny’s has also been working on using both technology and kitchen optimization to boost efficiency.

The company said labor inflation improved sequentially, moderating from 4% in the second quarter to 3% in Q3. The company is expecting labor inflation of about 4% for the year.

Denny’s CEO Kelli Valade is expecting the legislation in California to force an increase in menu prices. Although full-service concepts like Denny’s are not required to pay the $20 per hour minimum wage for fast-food workers scheduled to begin April 1, they stand to lose potential hires to the quick-service segment unless they offer a competitive wage.

Denny’s CFO Robert Verostek projected, based on “back-of-the-envelope math,” that corporate stores in California will need to raise prices by about 3% to cover the impact of the legislation.

Still, Valade said Denny’s turnover rates have improved, and she credited employee benefits like the GAIN career development program launched in August, which gives workers access to classes to finish their GED, or learn life skills like personal finance.

“We have an excellent employee proposition all across the country,” she said. “You’ll hear us talk more about it because we do feel like there are things that we can absolutely do to offset that labor and help with the business model at a time where it’s really critical,” said Valade.

El Pollo Loco

Costa Mesa, Calif.-based El Pollo Loco is expecting a big hit to the labor line next year as the minimum wage for fast-food workers moves to $20 in April.

The grilled chicken chain is planning to roll out the use of kiosks systemwide, which will help reduce labor costs. The chain said last week it is expanding its test of kiosks to about 20 company-owned restaurants.

Labor and related expenses held steady during the third quarter at about 32.2% of sales year over year. The chicken chain had wage inflation of about 3% during the quarter, and the company expects that number to be about 4% for the year. But it was offset by increases in menu prices and improved labor management.

In addition to the kiosks, the chain is also rolling out new salsa processing equipment that is easier to use and easier to clean, which is expected to boost efficiency.

Other equipment shifts, like an automated dishwasher, will also be tested with the goal of bringing down costs, the company said.

The Cheesecake Factory

The Cheesecake Factory said its wage inflation is now trending below pre-pandemic levels, and, like commodity inflation, returning to normal.

The casual dining chain said labor costs were down about 110 basis points during the quarter, which it credited in part to improved staffing levels. The company is projecting labor inflation in the mid-single-digits for the year.

“Our enviable staffing position continues to improve,” said David Gordon, according to a transcript by Sentieo. “Our industry-leading retention rates are now running above pre-pandemic levels. Furthermore, our already high staff engagement scores improved significantly from a year ago.”

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