The Issue with Restaurants

While the restaurant sector is robust, it is facing many risk factors, chief of which are expectations of growth that harken back to the dot-com bubble. In addition to the unreasonable expectations, our restaurant sector focus dives into the key threats and opportunities affecting the bottom line of restaurant companies in the United States. As explained by former McDonald’s President and CEO Ed Rensi, the decline in retail mall traffic has been a major factor in the ongoing decline in chain restaurant sales. From the third quarter 2015 to the fourth quarter of 2016, chain restaurant sales fell by 2.4%.  

The trend shows a long-steady decline. From 2008 through 2016, the sector lost 14% of its annual foot traffic. Firms have attempted to raise prices to offset their losses, but it is clear that firms have been unable to sustain sales at existing locations. Restaurants have largely turned to delivery services to attempt to revive sales; online delivery platforms are offering more options than ever before.  

Healthcare mandates: The impact of the Affordable Care Act has been noticeable on the restaurant industry. Once Congress altered the definition of the full-time workweek to 30 hours, the National Restaurant Association said that the new classification has cost their members a wealth of opportunity costs tied to significant paperwork and IRS reporting requirements. 

Minimum wage: Across the country, cities have been the driver of minimum wage hikes. In an industry where labor represents a significant portion of company costs, minimum wage hikes are dramatically affecting entry-level positions. Companies have made the choice to do the same amount of work with fewer resources or to consider adoption of automation like ordering kiosks and advancements in robotics to handle kitchen duties. 

California has voted to hike its minimum wage to $15 by 2023. Though the state had inched its minimum wage up to $10.25 per hour in January 2016, San Diego took a major progressive step to hike its minimum wage to $11.50. The impact on the food-service industry has been immediate. 

According to the Fermanian Business & Economic Institute at Point Loma Nazarene University, the result was as many as 4,000 jobs lost, including new positions that were not created in the first place. 

According to the UC Berkeley Center for Labor Research and Education, 15% of all workers in the California’s restaurant industry would receive a raise under the state’s wage hikes. Only the retail industry has a higher percentage at 16%.

In Seattle, the debate has been sharp over the financial impact. A study by the National Bureau of Economic Research reveals that restaurants have slashed the average number of hours for each employee by 9.4% after the city raised wages by 37% in nine months. 

Automation: As Rensi explains, automation and robotics will help companies protect their bottom line. However, the process of automation can have a dramatic impact on the corporate culture and its human resources. Rensi says roughly 65% of leadership within McDonalds had started at the company in low-wage positions. 

One of the most significant financial trends impacting the industry has been the reduced amount of time that customers have for lunch. According to The Wall Street Journal, the number of Americans who go out to lunch fell to its lowest level in four decades in 2016.  

Many people in finance know the feeling of eating lunch at your desk. When that adds up across the United States, the effect on the restaurant industry is pretty staggering. According to the NPD Group, the trend of “desktop dining” cost the industry roughly $3.2 billion in 2016. Major demographic shifts remain a key challenge to navigate in the restaurant industry. At the center of this is the challenge to understand changing tastes and expectations among customers. The last two decades has seen a dramatic shift in dietary trends. More Americans prefer healthier meal options over the processed foods that dominated industry for decades. Fast-casual restaurants have been leading the transition of dietary changes among younger Americans. 

All this adds up to a dynamic industry facing multiple challenges. The difficulty and goal for the investor is to understand these challenges to put themselves in position to take advantage of the inevitable changes that are coming.   

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