On the Margin
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Higher wages aren't just hurting labor costs

Blog: Chains face higher building costs as wages for plumbers and contractors rise

This post is part of the On the Margin blog.

Labor costs have been a growing problem in the restaurant industry. A number of chains, including Bojangles Inc. and Texas Roadhouse Inc., noted that higher wage rates ultimately hurt their profit margins.

But that’s not the only place where labor costs are hurting the restaurant industry. It’s also costing them more to build new locations. 

Development costs at Texas Roadhouse increased to more than $5 million per location in 2016, from $4.7 million the year before, and costs increased further this year. Executives on the company’s earnings call on Monday said those costs will remain high into next year.

The reason? Higher construction costs. 

“It’s getting really tough, particularly building construction,” Texas Roadhouse President Scott Colosi said.

He said shortages in many of the trades that make up the construction business, such as framers or plumbers, have driven up costs. “They’re commanding top dollar, number one, to work in those jobs,” Colosi said. “And number two, the owners of those companies are paying top dollars to bid out their services. So that’s something that’s very concerning.”

Unemployment has fallen to 4.4 percent, essentially full employment, which means that companies have to compete for workers. This competition drives up wages and increases the cost of doing business.

Construction wage rates have increased 3 percent over the past year. The number of construction jobs increased by 16,000 in June, including 11,000 more specialty trade contractor jobs. Demand for projects has builders complaining about a labor shortage.

Associated General Contractors of America, an industry trade group, said that construction unemployment fell to its lowest level in history in June. “Companies are having to reach outside the industry to fill positions,” Ken Simonson, the association’s chief economist, said in a statement. 

Of course, higher wages in other industries is good for restaurants because they want consumers who have more disposable income they can spend to eat out. Nothing generates restaurant sales like higher disposable incomes.

Count Texas Roadhouse among those viewing the higher construction costs as a good news-bad news scenario. After all, the company’s same-store sales increased 4 percent in its second quarter ended June 27, and accelerated in July.

“I think it’s benefiting us on the sales side,” Colosi said. “So yeah, we’re paying up more to get our buildings built, but at the same time we’re winning a little bit more on the sales side. So one comes with the other, and I guess it’s a good problem to have.” 

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company. 

Contact Jonathan Maze at [email protected]

Follow him on Twitter at @jonathanmaze 

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