How would a $15 per hour minimum wage affect the restaurant industry? Well, the answer depends on who you ask. This week we explore several different theories while taking a look at a variety of other economic indicators and foodservice-related developments.
The effects of last Thursday's fast food related labor stoppage, demonstrations, union organizing drive or whatever they may have been still remains vague but the New York Times took a look at the rallying point, namely, the $15 an hour minimum wage. The organizers of the protests, including the Service Employees International Union treat the wage increase as no big deal. The union president stated that they have never seen a raise drive a company out of business.
A professor from the University of California, Berkley, was quoted as saying that the $15 an hour wage would result in a 10 percent increase in prices which some restaurants would not even pass on entirely. Further, the professor believes the wage increase will be partly offset by lower turnover and higher productivity. He theorizes franchisers might swallow some of the wage increase by accepting lower franchise fees and that the economy will benefit since fewer employees will need to rely on government assistance. The university was the source of the study stating that foodservice workers cost the government $7 billion a year in food stamps and other support.
A University of Massachusetts professor thinks the effect on menu prices would be greater, nearer to 20 percent. The U-Mass professor theorizes that a modestly higher minimum wage doesn't hurt employment but acknowledges that a $15 an hour minimum wage could hurt employment as companies look to automate certain roles or tasks, thus limiting the number of jobs.
A third professor, this one from the University of California—Irvine, notes many studies have been done on a 50 cent or dollar an hour increase but a more than 60 percent increase is uncharted territory. He went on to say that there could be a 5 percent reduction in employment, adding "Anyone who thinks sensibly about this should be concerned that $15 would have a big impact on employment."
As far as the activities on Thursday went, a scan of numerous news sources fails to find any instances of major interruption of restaurant service. A spokesperson for the National Restaurant Association discussing previous demonstrations claims that the majority of participants were "activists and paid demonstrators" and that "relatively few restaurant workers" were involved.
Economic News This Week
- Gross Domestic Product increased to 3.6 percent in the second estimate for the third quarter, making it the fastest growth rate this year. Unfortunately, the driver of this increase was a build up in business inventories which economists believe companies will have to work down thus impeding fourth quarter economic growth. Moreover, consumer spending, the main engine of the U.S. economy, rose just 1.4 percent for the third quarter, which represents a 1.5 percent decline from the previous estimate.
- ADP reports November job creation was strong. The payroll processing company estimated the U.S. gained 215,000 new jobs last month with 102,000 of the new hires coming from firms with less than 50 employees.
- The U.S. Bureau of Labor Statistics also reported more new jobs were added in November. The Bureau said that non-farm payrolls grew by a total of 203,000; including 196,000 jobs in the private sector. The unemployment rate dropped to 7 percent from October's 7.3 percent, its lowest level in 5 years. Short-term unemployment declined as did the total number of unemployed. The number of part-time employees who would prefer to be working full time also fell.
- Long-term joblessness is a major cause for worry according to a recent article in the New York Times. From 1948 until 2009 the long-term unemployment rate — measuring those out of work for more than 15 weeks — was never higher than the short-term rate. But now the long-term rate (3.8 percent) is higher than the short-term rate (3.5 percent). The number of long-term unemployed remained constant in November despite the improving jobs picture reported above.
- The employment to population ratio was up 0.3 percent to 58.6 percent in November, according to the U.S. Bureau of Labor Statistics. The Gallup Organization's Payroll to Population Ratio of 43.7 percent is identical to what it was in November of 2012. (The government counts anyone more than 16 years old working at least one hour a week. Gallup counts those 18 and over working at least 30 hours a week.) This statistic has been troubling since it has been showing a downtrend.
- October new home sales jumped 25.4 percent compared to September and were running at an annualized rate of 444,000, the highest rate in 4 months.
- November car and light truck sales exceeded forecasts for most manufacturers, with Chrysler and General Motors reporting double sales growth, making it the best November for auto sales in six years. Now the not so good news: some heavy discounting drove this volume.
- The Institute for Supply Management's Non-Manufacturing (Service) Index retreated in November to 53.9 from 55.4 in October, indicating a slowing in the growth of service industries. The Institute said that 11 of the 18 industries they study were growing. Production, new orders, and employment were all down but remained in the positive range.
- Personal spending increased 0.3 percent in October while personal income declined 0.1 percent.
- The Reuters/University of Michigan Consumer Index took an unexpected jump up in November to 82.5 from 75.1 in October, with substantial increases in both the current economic situation and the economic outlook. The Gallup Organization's Economic Confidence Index for November rose to minus 25, which was a major improvement over October's minus 35 but below the other months in 2013.
Foodservice News This Week
- Foodservice employment rose in November. The U.S. Bureau of Labor Statistics reported that foodservice operators employed 17,900 more people last month on a seasonally adjusted basis, raising total employment to 10,399,000. Out of the 196,000 increase in private sector employment the foodservice industry accounted for 9 percent of the new jobs.
- Applebee's announced the rollout of tableside tablet computers. The chain said that after five years of field research and customer trials it expects to have tablets at every table and bar position in every Applebee's by the end of 2014, allowing guests to add to their orders, play games and pay their bills without assistance from the wait staff. Applebee's parent company is also considering adopting the system for sister company IHOP.
- Sysco and US Foods to Merge. Sysco will pay $3.5 billion — $3 billion in common stock and $500 million in cash — for privately held US Foods. Sysco's CEO will be in charge of the combined companies. Technomic estimates that Sysco has an 18 percent market share in the U.S., with US Foods second with a 9 percent share. Performance Food Group is third with a 5 percent share, according to Technomic. Sysco's CEO said that the companies may have to divest some businesses due to anti-trust concerns. The deal should close in the third quarter of 2014.
- McDonald's November domestic comparable store sales fell. McD's reported U.S. same-store sales dropped 0.8 percent while revenues in the U.S. increased 0.1 percent. System-wide, comparable store sales were up 0.5 percent driven by a 1.9 percent increase in Europe.
- The United Nations' Food & Agricultural Organization's Food Index has remained relatively constant over the last few months and down from November of last year while remaining near historically high levels.
- Food away from home prices in the U.S. are running 2 percent to 3 percent higher this year and are projected to go up by 2.5 percent to 3.5 percent in 2014 according the latest data from the U.S. Department of Agriculture. Food away from home prices increased 2.3 percent in 2011 and 2.8 percent in 2012.
- California Pizza Kitchen's founders, Larry Flax and Rick Rosenfield, will launch a fast-casual pizza chain. The partners' firm will look to acquire and develop real estate for their own portfolio as well as landlords nationwide on maximizing the value of their properties.
- Growth Chains: Burger King plans to open 200 restaurants in Spain in the next 5 years. Burger King also will re-enter the French market with 250 restaurants planned. Taco Bell expects to add 2,000 units in the United States in the next 10 years. Krispy Kreme has signed a franchise development agreement to open 10 units in Houston in the next 5 years. Starbucks plans to have 100 stores in Peru by 2015. Bob Evans has completed 166 remodels thru October and expects to have their remodeling program completed by the end of 2014. The Corner Bakery Café signed development agreements with 3 franchisees for 5 cafes in Idaho and Washington, 3 in Baltimore and 10 in Westchester and Suffolk counties N.Y. Casey's General Stores has been successful with a pizza program in their C-stores and now has now opened a "pizza only" location in Iowa with 5 more planned in the Des Moines area. Quaker Steak & Lube has signed development agreements for 2 restaurants in Nebraska and one in Iowa.
- Comparable Store Sales Reports: Bob Evans (Down 1.9 percent), Good Times Burgers (up 14.1 percent), and McDonald's (down 0.8 percent).
For the latest same-store sales results at a wide variety of chains, click here.