More Evidence That Rising Minimum Wages Are Going To Crush The Restaurant Industry

The following excerpt is from an article that originally appeared on Zero Hedge

Casual dining investors, despite the retail route, have become increasingly optimistic over the past month and a half with several of the largest names in the industry rallying 15-20% into the holiday season. 

As TDn2K points out, part of the optimism is attributable to a recent “acceleration” in average check size across the restaurant space with comps up 2.4% in November and 2.5% in October.  Despite many brands focusing on price promotions to drive sales and traffic amid a decline in mall/retail foot traffic, both figures are higher than the 2.0% check growth experienced the first nine months of the year.

On the other hand, strong pricing has been completely offset by abysmal traffic comps resulting in overall flat sales comps. As TDn2K notes, rolling 3-month traffic comps declined 2.5% in November across the United States, with the Midwest market fairing the worst at -4.1%.

Meanwhile, these steadily declining traffic comps in 2017 compound on lower traffic experienced in 2016 as well.

Of course, the key question that arises from all this is why restaurants continue to hike prices even as customers are clearly rebelling against them? 

As it turns out, to our complete shock mind you, the answer to that question just might lie in those ill-advised minimum wage increases that we’ve been warning about for years.  With the minimum wages in California, for example, set to rise roughly 10% per year for the next 5 years, restaurants are increasingly trying to offset those increases in price hikes…

“Higher check average increases are risky in a market with steadily decreasing traffic, but brands may be using price to support margins as they face rising labor and operating costs,” said Fernandez.

“Our concern is that these improved trends come despite the fact that the industry has not cracked the code on declining guest visits,” commented Victor Fernandez, executive director of insights and knowledge for TDn2K. “Brands have come to rely on rising checks to overcome the steady loss of traffic.” Same-store traffic dipped -2.5 percent in November, a 0.9 percentage point drop from October. It’s been almost three years since restaurants experienced a month of positive guest counts.

…but with price hikes simply being offset by traffic declines it’s clearly not working out as well for profits as investors might hope.  The last time we checked, raising prices did little to offset rising costs if traffic declines simply resulted in flat overall revenue trends.

Unfortunately, as we’ve pointed out numerous times before, given that the restaurant industry clearly has no pricing power, the only way to truly offset the impact of higher minimum wages on their bottom line is to cut staff and pursue automation upgrades where possible.  As we pointed out earlier this year (see: State Minimum Wage Hikes Already Passed Into Law Expected To Cost 2.6 Million Jobs, New Study Finds) a study from the American Action Forum estimated that some 1.8 million people could be at risk of losing their jobs just from minimum wage hikes already passed by states across the country.   

Minimum Wage

Conclusion: You’re going to see a lot more “Flippy’s” cooking your burgers at Chili’s in the years to come…

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