Labor Costs Are The New Operator Worry

The announcement last week of a plan to raise the minimum wage for chain restaurant workers in New York to $15 over the next six years is the latest thrust in an ongoing campaign to raise the minimum wage for low-wage workers in the U.S. economy. But the various minimum-wage initiatives throughout the country during the past three years are not the only labor-cost development that has operators concerned about the impact of labor costs on their current business models. The improved U.S. economy and upbeat foodservice sales and traffic environment also are beginning to reach the stage in which the gap between the demand for workers is closing with the available labor pool.

The U.S. Bureau of Labor Statistics monthly jobs report released Sept. 3 showed another 28,000 net new jobs in eating and drinking places were created in August. According to the BLS and the National Restaurant Association, the industry has created 1.8 million jobs since the end of the recession

An analysis of BLS “Job Openings and Labor Turnover” data by the NRA shows that average monthly job openings in the restaurants and accommodations sector—the BLS data includes lodging jobs—rose to a post-recession high in the first half of 2015. It currently is running nearly 70,000 jobs ahead of this time in 2014. At the same time, the pace of hiring in the sector is also on the rise, hitting marks not seen since 2007. It’s the gap that’s the issue: The difference between monthly hires and job openings in the restaurants and accommodation sector is the smallest it’s been since the JOLTS data was launched in 2000.

And in simple terms, that means operators now are competing with one another for a smaller available pool of potential workers as well as competing with other industries for those potential employees. The bottom line is natural upward pressure on labor costs in addition to the minimum wage initiatives by government.

This may explain why restaurant operators surveyed for NRA’s monthly Restaurant Performance Index have become increasing less optimistic about “business conditions during the next six months” even as their current sales and traffic are booming. Food and labor are always the two largest cost inputs for operators. Food prices are down, but labor costs are rising.

The potential impact of this labor-cost pressure on margins and cash flow is a negative for capital spending. And this explains one of the major reasons FER forecasts that the growth rate of E&S sales will begin to slow over the next year. FER currently forecasts that nominal dollar growth of 4.8% in 2015 will slow to 4.6% next year.