Minimum Wage Debate Heats Up, US Foods/Sysco Merger Hits a Bump, and More

This week we report on the minimum wage battle and the government’s speed bump on the path for the US Foods/Sysco merger and a whole lot more.

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The already contentious minimum wage battle heated up with a study by the Congressional Budget Office (CBO) that said an increase to $10.10 an hour in the federal minimum wage would move 900,000 workers above the poverty line but could cost the economy 500,000 jobs. An increase in the federal minimum wage to $9 an hour would lift 300,000 above the poverty line but might cost the U.S. 100,000 jobs.

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The reaction to the report was predictable. Those opposed to the minimum wage increase focused on the loss of jobs and ignored the benefits of lifting people out of poverty. The people supporting the increase pointed to improving the income of hundreds of thousands of workers but said the CBO was wrong about the job loss.

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The Wall Street Journal provided a brief history of the federal minimum wage, which was first established in 1938 and has been raised 30 times since then. The minimum wage was last increased in 2009 in a three-step progression. Factoring in inflation, the minimum wage peaked in 1968. The Journal said that close to 20 states have set their own minimum wage higher than the federal law. (Merrill Lynch says that 38 states and the District of Columbia have a minimum wage higher than the federal current minimum of $7.25 an hour.)

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In addition to the basic minimum wage, there is a proposal to raise the tipped employee minimum wage to $7.07 an hour from the current $2.13. The tipped employee minimum wage has not been changed since 1991. Joseph Buckley, Merrill Lynch’s restaurant stocks analyst, says this major increase could possibly have a “significant impact on full service restaurants’ cost structure and potentially exacerbate the secular trend away from casual dining.”

Economists and other experts don’t seem to have consensus (Do they ever?) about what exactly to do with the minimum wage but it appears a moderate increase would not have a terribly negative effect on employers. Every time an increase is proposed, various companies and other organizations predict dire consequences. But after the increase goes into effect the operators adjust, people keep eating out, and life goes on.

As for the controversial Congressional Budget Office report, perhaps the plusses and minuses just go to prove the most basic law of economics — there no such thing as a free lunch.

Economic News This Week

  • First-time jobless claims fell to 336,000, a decline of 3,000, for the week ending Feb. 15, 2014, according to the U.S. Bureau of Labor Statistics. The less volatile 4-week moving average for claims rose to 338,500, an increase of 1,750. Initial jobless claims seem to have settled into a narrow range, below the weekly 350,000 they were in last year.
  • Housing starts dropped 16.4 percent in December to an annualized rate of 880,000. The U.S. Department of Commerce attributed most of the decline to bad weather. The Department also reported that the number of building permits issued fell by 5.4 percent to an annualized rate of 937,000. The drop was caused by declining multifamily housing permits. Single family home permits increased 1.3 percent.
  • Existing home sales fell 5.1 percent in January to an annualized rate of 4.62 million,the slowest growth rate since July 2012. The National Association of Realtors attributes the decline to the bad weather and a limited inventory of homes on the market.
  • Builder confidence declined sharply this month. The National Association of Home Builders/Wells Fargo Index fell 10 points to 46. The association blames inclement weather along with shortages of both lots and labor.
  • Bank lending is up, according the New York Federal Reserve. It appears that consumers are finally willing to take on more debt and banks are willing to lend. The NY Fed also issued a report that said banks are loosening the purse strings for small business loans.
  • Producer prices climbed 0.2 percent in January, led by increases in heating fuels. Wholesale food prices were up 1.0 percent, the biggest increase since May. So called core prices — without food and energy — also rose 0.2 percent. It’s important to note the Department of Labor has changed its methodology for computing the Producer Price Index. Under the old system, the PPI would have risen 0.5 percent and core prices would have been up 0.6 percent.
  • The Consumer Price Index rose 0.1 percent in January led by household energy costs, which rose 0.6 percent. The CPI Report said food away from home price increased 0.1 percent and are up 2.0 percent in the last 12 months.
  • Manufacturing may be picking up, according to the flash Markit manufacturing purchasing managers’ Index. (This survey should not be confused with the Institute for Supply Management’s Index.) The index rose to 56.7, up from 53.7 in January, and any reading in excess of 50 shows expansion.
  • The New York Federal Reserve’s ManufacturingSurvey fell to 4.48 in February from January’s 20-month high of 12.51. Any reading that totals more than zero shows manufacturing is expanding in the New York region.
  • The Philadelphia Federal Reserve’s Manufacturing Survey fell to 6.3 in February, down from 9.4 in January. The survey shows continual expansion but at a slower rate.
  • The Conference Board’s Index of Leading Economic Indicators rose 0.3 percent in January. A Conference Board spokesman said while indicators fluctuate on a month to month basis, “underlying economic conditions should continue to improve.”
  • U.S. Economic Confidence held steady in the week ending Feb. 16, 2014, according to a poll by The Gallup Organization. The Index was minus 17, showing no substantial change over the minus 18 reading from the previous week.

Foodservice News This Week

  • Last week this space commented that the miserable winter in many parts of the U.S. has taken the blame for slow sales when other factors may also have been at work. Similar sentiments were expressed in an Advertising Age article this week that stated “…weather makes a convenient excuse.” The article then quoted Harry Schumacher, editor and publisher of Beer Business Daily who explained a 7.4 percent drop in beer sales in bars and restaurants for the 4 weeks ending Jan. 26, 2014, by stating “From New York down to Atlanta and down to the Florida panhandle, nobody has gone out to dinner in a month…” Of course, that might be a slight exaggeration because if no one had gone out to dinner sales would have been zero.
  • The Federal Trade Commission has issued a second request for additional information regarding the proposed US Foods/Sysco merger. Both broadline distributors acknowledged the possibility of anti-trust questions when the merger was announced.
  • Airport food has gone first class, according to the Wall Street Journal. Capitalizing on affluent travelers, airports now offer gourmet food and continue to replace restaurant chains with local operations run by top notch chefs. As one chef put it, they operate restaurants inside of an airport, not airport restaurants.
  • Zaxby’s is the “most craveable” fast-casual restaurant, says Technomic’s consumer brand performance study. This is the second consecutive year Zaxby’s has ranked first in their category.
  • Panera targets cities for expansion. The chain’s CFO stated Panera has little operating experience in urban areas and that operations there are “more difficult.” High rents and capital costs are partially offset by “extraordinarily high” volumes.
  • Growth Chains: Cups Frozen Yogurt signed 3 area development agreements for 26 franchise units in California. Fuddrucker’s has signed a 10 unit partnership in Chili. UncleMadio’s Pizza Joint plans on opening 35 new restaurants this year. Another Broken Egg Café, which has doubled its number of locations in the last two years, will open five new restaurants in the first quarter of 2014. Hooter’s has signed a development agreement for three restaurants in Thailand in the next three years. London-based Wasabi will open its first U.S. location in Times Square. Cowboy Chicken has signed a franchise agreement for five stores south of Dallas.
  • Comparable Store Sales Reports: BJ’s Restaurant (down 2.7 percent), Bravo Brio Restaurants (system-wide sales down 1.4 percent, Bravo down 1.3 percent and Brio down 1.5 percent), Denny’s (system-wide sales up 0.9 percent, with company-owned locations up 1.5 percent and franchised locations up 0.8 percent), Jack in the Box (system-wide sales up 1.9 percent, company-owned locations up 2.1 percent and franchised locations up 1.8 percent), Panera Bread (system-wide sales up 1.1 percent, company-owned locations up 1.7 percent, and franchised locations up 0.5 percent), Potbelly (up 0.7 percent), Qdoba (system-wide sales up 2.3 percent, company-owned locations up 2.0 percent, and franchised locations up 2.6 percent), Ruth’s Chris (up 5.5 percent), Steak N Shake (up 3.0 percent), Texas Roadhouse (company-owned locations up 2.1 percent and franchised locations up 4.5 percent) and Tim Horton’s (up 3.1 percent).

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

Foodservice industry Supplier’s Financial Data has the latest quarter for Ecolab. For complete report on Suppliers’ Financial Data please click here.

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