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Although food inflation is moderating and consumers are relaxing again, the persistent problem of labor costs will haunt the restaurant industry through 2024.
The federal minimum wage has remained at $7.25 an hour for more than 14 years, but more than 30 states have higher minimum wages, led by Washington, D.C., at $17 an hour. Twenty-two states will raise their minimum wages again on January 1st, with Oregon, Nevada and Florida also planning to raise their minimum wages later this year.
And California faces an impending wage hike thanks to the FAST Act, which Gov. Gavin Newsom approved last September. Starting April 1, 2024, restaurant chains with at least 60 locations nationwide will be required to raise the minimum wage for restaurant workers to $20 an hour.
This comes as the leisure and hospitality industry job market has yet to recover to pre-COVID-19 levels. The industry added approximately 40,000 jobs in December 2023, but total employment decreased by 163,000 compared to February 2020.
As a result, the cost of eating out has outpaced grocery inflation. Citi analyst John Tower said this could be a headwind for restaurants, as the cost of groceries has outpaced restaurant meals for the 10th consecutive month.
“Historically, when commodity inflation leads labor inflation, grocery pricing leads restaurant pricing,” Tower wrote. “When labor inflation outpaces commodity inflation, restaurant prices tend to exceed food prices. Going forward, we expect the relative value relationship to become even tougher for restaurants.”
Overall food inflation rose 2.7% year-on-year in December. Food prices rose by 1.3%, but eating out costs (restaurants) rose by 5.2%.
Food chains are now at a critical moment in their fight against the effects of higher wages as April 1 approaches.
“What’s happening in California is really unique,” Dutch Brothers CEO Christine Barone told Yahoo Finance at the ICR conference this week. Raising menu prices to offset labor costs is “absolutely an opportunity,” but the chain has not yet “finalized” that plan.
For franchisee-owned stores, Barone said the decision will be up to the owners, but the company will provide data and help in any way possible.
Michael Osanloo, CEO of Chicago-style restaurant chain Portillo’s (PTLO), said prices need to go up, especially since the company typically pays above minimum wage. Ta.
“We can’t go to $20 when California says everyone has to earn $20…We’re going to have to pay more than $20,” he told Yahoo Finance. . “That means the price in that market has to be such that the profit margin is the same in California, Minnesota, Texas and Florida.”
Portillo’s this week announced a 1.5% price increase nationally, which Osanloo said was “adequate” to offset 4-6% commodity inflation and 4-6% labor wage inflation. said.
Carroll’s Restaurant Group (TAST), which owns more than 1,000 Burger King and Popeyes franchises, is also keeping an eye on wage growth. Chief Financial Officer Tony Hull said during a panel discussion at the ICR conference: “Labor is something we’re very focused on… whatever the revenue growth is next year. “We want to make sure that growth slows down.”
Potbelly (PBPB) CEO Bob Wright told Yahoo Finance that the company is cautious about raising prices. “We want to make money on the residual growth, not just the sales value,” he said.
He added: “That said, we will likely need to increase menu prices slightly in 2024, similar to other industries, to offset various cost increases due to inflation, including labor costs.” he added.
In an exclusive interview with Yahoo Finance in November, Rachel Ruggeri, chief financial officer of Starbucks (SBUX), spoke about the company’s market and business, including its real estate portfolio in California, where the company has the most stores. He said he remains “committed” to the project. Starbucks hasn’t said whether it will adjust prices.
Meanwhile, Chipotle (CMG) Chief Financial Officer Jack Hartung told Yahoo Finance that the company will need to raise prices in the mid-to-high single digits to offset California’s wage increases. He said he plans to wait until closer to the April deadline to make the increase. final decision.
Some said they had already found a fix on their own.
Salad & Go, the upstart drive-thru salad chain led by industry veteran and former Wingstop CEO Charlie Morrison, is focusing all prep work in a few large kitchens. He said he is easing labor issues and paying more than $20 an hour there.
This business model allows for fewer employees in stores, averages an hourly wage of $15, and has room for growth.
David Kim, co-founder and co-CEO of GENK, told ICR that the Korean barbecue chain will open locations in California “as long as Governor Newsom remains in power.” “We have no intention of opening any more,” he said. This chain was founded there in 2011.
The chain is currently planning to expand into other states with lower labor costs, including Utah, Colorado, Washington, Oregon, Texas, Tennessee, Ohio, North Carolina, Massachusetts, New Jersey, New York and Florida.
Outside companies are also starting to offer solutions.
Rich Hull, CEO of Miso Robotics, said automation solutions, especially Flippy, an automatic french fry maker, are the future of fast food.
“If you look at the economics of paying people $20 an hour to work at a fry station, that just doesn’t work,” Hull told ICR meeting attendees. “Both restaurants intend to automate the worst parts of their commercial kitchens to improve economics… [or] You may want to start closing your stores. ”
Hull claims workers can be moved to ‘higher value positions'[s]This is to “justify paying a higher minimum wage” in California.
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Brooke DiPalma is a senior reporter at Yahoo Finance. Follow her on Twitter @brooke di palma Or email bdipalma@yahoofinance.com.
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