A Surprising Ruling May Change Chain Operations, Impact of California's Minimum Wage Bump and Much More

This Week In Foodservice reports on a ruling that could result in major changes for franchised restaurants, gives an overview of the NRA’s June performance index, looks at the success of Taco Bell’s breakfast advertising, sees the impact of the minimum wage increase in California, and a whole lot more including more than half a dozen major chains comparable store sales reports

In a stunning ruling, the general counsel of the National Labor Relations Board (NLRB) said that it would treat McDonald’s as a “joint employer” of workers at the chain’s franchised units. The NLRB’s counsel stated that he found merit in some of the claims filed against McDonald’s corporate by workers who said that parent company was liable for activities at all its restaurants because McDonald’s requires franchisees to strictly follow rules on food, cleanliness and employment practices, and also owns many of the restaurants. The ruling was hailed by unions and some labor attorneys because it could make it easier to organize restaurant workers.

McDonald’s and other franchisers insist they don’t employ the people at franchised restaurants since they don’t hire, fire, or set wages and hours for them. The ruling seems to upset what has been generally accepted business assumptions for many years. The standard to this point has been “direct control.”

Of course, if the ruling stands it will impact not just McDonalds but every franchised operation, including C-stores and temporary employment agencies.

The next step will be a hearing before an administrative law judge. Whatever the finding it can be appealed to the full National Labor Relations Board. From there it could go to the federal courts and even end up at the U.S. Supreme Court.

Economic News This Week

  • Gross domestic product increased 4 percent in the second quarter, according to the Department of Commerce’s first estimate. Led by an increase in household spending and business activity the first estimate was significantly over the consensus estimate of 2.9 percent. However, the increase in business inventories, which increases GDP, can become a negative if the products are not sold.
  • The ADP National Employment Report showed 218,000 new jobs were added in July. APP said that medium-size businesses (those with 50 to 499 employees) accounted for 92,000 of the new positions.
  • The economy added 209,000 new jobs in July according to the Bureau of Labor Statistics. The private sector added 198,000 with various government agencies adding 11,000. The unemployment rate rose to 6.2 percent. While results were below forecasts and some observers found the July report was at least slightly disappointing, the rise in unemployment was essentially due to more people looking for work, which can be taken as a positive step.
  • Initial jobless claims rose 23,000 to 302,000 in the week ending July 27. However, the increase was off a low and revised number of claims of 279,000 the previous week. The less-volatile 4-week moving average fell by 3,500 to 297,250, which is lowest the average has been since April 15, 2006.
  • Gallup’s US Payroll To Population Employment Rate was 45.1 percent in July, virtually identical to the 45 percent June reading. This marks one of the highest rates the study has achieved since the research started in 2010. Gallup measures the percentage of adult population 18 and over who are employed at least 30 hours a week or more. The Department of Labor’s payroll to population ratio (which is calculated differently than Gallup’s) rose to 62.9 from 62.8 but is down from 63.4 from a year ago.
  • Personal spending increased 0.4 percent in June. The Bureau of Economic Analysis also reported that personal income rose 0.4 percent.  When adjusted for inflation “real” personal spending and “real” personal income both rose 0.2 percent for the month.
  • U.S. car and light truck sales enjoyed a strong July with volume up 1 percent over June and up 9.1 percent over July 2013. All but two major auto producers experienced sales increases for the month and vehicle sales are running well over 16 million a year on an annualized basis.
  • The Institute For Supply Management Manufacturing Index rose 1.8 points to 57.1 in July, marking the 14th straight month manufacturing activity has risen in the U.S. This is the highest the index has been since April 2011. New orders, production and employment all increased.
  • The Chicago Purchasing Manager’s Index declined by 10 points in July to 52.6. In May the barometer had hit a 7-month high of 65.5. A decline of this magnitude has not been seen since October 2008, and left the Chicago area just barely (over 50) in positive area. Purchasing managers interpreted the fall as “a lull rather than the start of a new downward trend.”
  • Consumer confidence increased for the third consecutive month in July rising to 90.9 from 85.2 in  June. The Conference Board noted that the Index is the highest it has been since October 2007 when it was 95.2. The Present Situation Index edged up to 88.3 from 86.3 in June while the Expectations Index rose to 92.7 from June’s reading of 86.4.
  • Consumer sentiment, as measured by Reuters/University of Michigan, fell to 81.8 in July down from June’s 82.5. Interestingly, the current economic conditions reading rose to 97.4 in the final July reading vs. 96.6 in June while the survey’s gauge of consumer expectations fell for the third straight month to 71.8 compared to 73.5 in June.
  • Gallup’s U.S. Economic Confidence Index finally moved significantly but unfortunately it was in the wrong direction. After remaining almost maddeningly in a narrow range for most of this year, the Index declined 6 points in the week ending July 27 dropping to minus 21. This is the lowest the Index has been since December 2013. It will be interesting to see if this is a one-week fluke or a long-range trend.

Foodservice News This Week

  • The National Restaurant Association’s Restaurant Performance Index retreated in June in what the Association called a “moderate decline.” The Index dropped to 101.3 after hitting 102.1 in May. The Current Situation Index fell 1.1 percent while the Expectations Index lost 0.5 percent. Most striking was a slide in customer traffic with 39 percent of operators reporting an increase but 41 percent reporting a decline vs. June 2013. However, operators continued to invest, with 53 percent saying they had made a capital expenditure in the last 3 months and 59 percent saying they planned on spending for equipment, expansion or remodeling in the next 6 months.
  • Taco Bell’s breakfast commercials are scoring well according to Ace Metrix, an advertising measuring service. The Mexican chains ads are “more likable” than McDonald’s breakfast commercials even though some ad executives see Taco Bell’s direct attack on McDonald’s as risky. But, the question remains if the ads are driving a decent volume of breakfast sales at Taco Bell. YUM executives have announced the breakfast program is a success but some industry observers are not convinced.
  • California’s minimum wage increase from $8 to $9 an hour has restaurants reacting in different ways with some raising prices cautiously while at least one operator put a note on the door that the state mandated wage increase of 12.5 percent required a 12.5 percent menu price increase. Overall, restaurants are concerned but seem to be coping.
  • The foodservice industry continued to hire in July with 18,600 new hires added to foodservice payrolls. The industry accounted for 9.3 percent of the new jobs in the private sector.
  • Red Lobster’s new strategy. The chain’s new owners have not wasted time in revising their marketing approach. They have announced that the operation will cut back on many of their low cost deals in an attempt to position themselves as a higher-grade alternative to restaurants that rely on promotions. The company will adopt a “barbell pricing strategy” with low priced value items on one end along with premium priced menu items on the other. Red Lobster also plans to cut back on non-seafood offerings with beef and chicken making up no more than 10 percent to 15 percent of the menu.
  • Wendy’s Russian stores will close. The 8 locations in Russia were supposed to be the first of 180 restaurants that Wendy’s Russian partner had agreed to build.
  • The Manitowoc Company reported their foodservice equipment sales increased 4.4 percent in the company’s fiscal quarter ending June 30 vs. the corresponding quarter last year.
  • Corporate stirrings: Jamba Juice announced an “expansive” franchise recruiting campaign in Atlanta, Baltimore, District of Columbia, Dallas, Miami, Manhattan, Northern New Jersey, and Raleigh/Durham. Wendy’s International has sold 39 Wendy’s stores — 32 in California and 7 in Hawaii — to Cotti Foods.
  • C-Store operator says key to taco sales is the equipment. Called Mr. Tortilla, Larry Gerosa, from Fredricksburg, Texas, said that his tortilla press and grill machines were set up in the front of his two former stores where customers could see them and were thus assured the tacos were fresh.
  • Growth Chains: Dunkin’ Donuts has signed a multi-store development agreement for 7 stores in Duluth, Minn. Russo’s Restaurants plans on opening 10 to 12 restaurants in Texas. Jamba Juice is aiming to add 500 domestic stores in the next 5 years. Carl’s Jr. plans on raising the number of their restaurants in Texas to 300 by the end of the decade. The Corner Bakery Café will open 8 locations in Brooklyn with the first set to open next year. The Einstein Noah Restaurant Group will open 75 to 85 new units this year. Fazoli’s has opened 3 restaurants in travel centers this year with 8 more to open by the end of 2014.
  • Comparable Store Sales Reports: Bravo Brio Restaurants (total down 5.1 percent, Bravo down 6.0 percent and Brio down 4.5 percent), Burger King (up 0.4 percent), Good Times Burgers (up 13.7 percent), Jamba Juice (system up 2.2 percent, company owned up 2.5 percent, and franchised up 2 percent), Kona Grill (up 3.2 percent), Mitchell’s Fish Market (down 0.7 percent), Ruth’s Chris Steakhouse (up 2.8 percent), and Texas Roadhouse (company-owned 2.9 percent and franchised up 3.5 percent.)

For details and same-store sales for other chains, please click here for the Green Sheet.

Foodservice Industry Equipment Supplier Financial Data: This week has the latest quarterly financial data for Cintas and the Manitowoc Company. For details and latest financials on other suppliers, please click here.

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