Some thoughts on labor
There isn’t much that can be said about labor that hasn’t already dominated headlines. But here is one interesting shift: According to Black Box, the pandemic and staffing shortage have not only affected the number of available employees, but have also disrupted teenage employment in restaurants.
In limited service, 17 percent of hourly, non-management employees were 18-years-old or younger in 2019. That’s grown to 24 percent. The age group that witnessed the biggest reduction in its share of limited-service employees was 25–34 years old. For full service, the teenage percentage lifted from 4.6 to 7.2 percent over two years,
How this plays out is difficult to predict as school schedules, college admissions, and other routines bounce back. One thing that is bankable, though—that minimum wage debate has lost some luster. “Operators have had to increase what they’re paying for many reasons, including the presence of federal stimulus payments, and more competitors increasing wages, too,” Butkus said.” And the pandemic has changed the way people think about work, and how they prioritize things in their lives; some are not coming back to the industry. It’s a shift in mentality.”
Bank of America research shows nearly 2 million workers left the U.S. labor market due to skills mismatch, retirement, and COVID deaths. As of April, more than 4.6 million former workers remained on the sidelines for myriad reasons, everything from personal safety fears to childcare concerns. Federal unemployment programs might have ended but the effect lingers. During that stretch, an untold pool of workers found other careers, decided simply to reevaluate current ones, or completely reset their wage expectations.
“The shortage we have now has created a bidding war in many markets, especially for store managers and assistant managers,” Valerie Sanger, Bank of America senior relationship manager, said in the report.
BofA Global Research economists don’t expect higher labor costs to retreat short-term. That’s just hard to imagine with a record-high rate of job openings accompanied by a record-high quit rate.
“How long does this last?” the company said. “We should see some movement back into the labor market more naturally, and you should see perhaps some cooling of demand once we get past this pent-up demand for restaurants. And then we should see some moderation in wages. But we’re certainly not there yet. It’s going to take a lot more time until we get to equilibrium in the labor market.”
Counter tactics like tablets in the hands of servers (from Chili’s to Red Robin), kiosks, QR codes, and robotics, are going to continue to gain relevance. As will programs like retention bonuses, education assistance, pet insurance, and other perks that speak to a generation that has different demands. Even from 19 months ago.
Investor confidence
Matthews, of BofA Securities, said investors took notice of restaurants’ resiliency as much as customers did. The sheer number of IPOs (eight) of late proves that, O’Hara adds. Bank of America, for one, led Dutch Bros’ public offering in September.
Valuations have trended higher for publicly traded restaurant companies throughout 2021, particularly quick service. Ted Lynch, the managing director for Bank of America, credits that to the sector’s ability to “get more transactions out of a box, with less labor.”
“The past couple of years have really highlighted the quality and reliability of the top [quick-service restaurant] brands,” he said in the report.
Call it “annuity quality.”
“They generate predictable dollars,” Lynch added. “Having something like that that doesn’t go through ups and downs or is subject to seasonality—many investors find that’s worth paying more for.”
This line of thinking goes back to the first point. Closing dining rooms was a mixed blessing of sorts for many quick-serves. It reduced labor costs and saved the wear-and-tear on dining rooms, Lynch noted. Given the small dine-in sales figure to begin with, sending guests to curbside or drive-thrus often provided a financial boon.
“As we’ve come through COVID-19, it’s forced operators to wring out unnecessary expenses,” he said. “For a strategic buyer, that means a lot of the hard work is already done; he can take over a clean operation. Opportunistic buyers often expect an even higher return on their investment, but because this industry is so reliable, with such good earnings quality, they are willing to live with a lower level of returns when they are assessing their models when considering an acquisition.”
To put it plainly, there could be plenty of M&A activity when the calendar turns.
So where does the industry go next? Bank of America’s SVP of Global Commercial Banking Rich Watson said the past couple of years forced operators to “evaluate and strip down their business models to figure out what’s working and what’s not.”
“Over the next six to 12 months, things will continue to change and the restaurant industry we saw in 2018 or 2019 won’t be the industry we see going forward,” he said in the report.
A lot of new restaurants are going to be built—and remodeled—in the coming years. And these aren’t going to turn back the clock. Double drive-thru lanes. Pickup widows. Access points dedicated to digital orders. Points of pickup just for third-party drivers, whether attached to restaurants, in them, or on the outside. Ghost kitchens won’t just be for low-grade real estate anymore. They are already popping up in major urban metros.
These are all commitments that will change the makeup of quick service. “Everyone has learned that they can run a more profitable four-walled business without the dining room—that they don’t need 60 to 80 seats,” Watson said.
The industry was overbuilt before COVID, inching its way toward a course correction that retail brands know all too well. The shakeout started pre-pandemic as you saw with a rash of bankruptcies. What COVID inspired, however, was a favorable arena for what Butkus calls “billion-dollar chains,” which have the capital to selectively expand and make acquisitions, and invest in tech and innovations needed to thrive today. In turn, consolidation is in store (just look at FAT Brands and Restaurant Brands International’s recent deals).
“A lot of franchises are looking to become multi-brand franchise groups, providing a path for growth and a way to transform their companies,” O’Hara said.
“I feel more confident and better about the restaurant industry than ever before,” Matthews added. “It may seem crazy that I’m saying that. But ultimately, we know the consumer demand is there, and the restaurant industry has proven even more resilient than expected. If we also create better jobs for the workers, we will have a win-win-win—a more sustainable industry, where people are happy to work. And happy workers produce better food and a better experience for customers.”
