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Are labor costs hurting profits?

Are labor costs hurting profits?

This post is part of the On the Margin blog.

Labor costs are a growing problem, at least in theory. As Lisa Jennings reported back in August, several restaurant executives said during their second quarter earnings calls that wage pressure was growing. That problem only seems to have intensified since then.

Darden executives, for instance, said last month that wage pressure was growing. And this week, executives at Brinker International suggested that there’s some higher turnover in its restaurants as workers find opportunities elsewhere.

But, at least so far, these rising labor costs and wage pressures don’t appear to be hitting companies in the bottom line — for now, at least.

Consider this: Despite all of those executives talking about rising labor concerns, labor costs as a percent of sales actually fell in that second quarter, by 0.2 percent, according to the quarterly benchmarking survey from the accounting firm BDO. And labor costs were down in all sectors but one, pizza.

Restaurants appear to be gaining leverage on existing labor through a combination of higher prices or higher sales, as well as reduced discounts. And labor costs aren’t increasing enough to diminish profits. And some concepts are working on labor efficiency to improve profits, with positive results.

Gene Lee, CEO at Darden, said on the company’s most recent earnings call that Olive Garden has simplified the operation, which changes the mix of labor hours. “If it’s done correctly,” he said, “it allows you through that mix to keep your wage rate at or below last year as we take out some of the higher cost production labor in the back of the house.”

Even at a chain like Chili’s, labor costs haven’t posed that strong a challenge, at least not yet.

On the company’s earnings call this week, executives noted that wage rates are up 3 percent, driven by a combination of typical higher pay and rising minimum wages particularly in states like California.

And yet, margins at company owned restaurants improved slightly in the period, and overall labor expense was flat, executives said.

The chain has been working on expanding best practices to manage food usage, labor costs and other restaurant expenses throughout the system. “Our restaurant management teams continue to operate the business effectively,” CFO Tom Edwards said.

None of this is to suggest that labor costs won’t hurt margins in the future, particularly if sales falter. But for now, at least, rising wages aren’t hurting profits.

Contact Jonathan Maze at [email protected]
Follow him on Twitter at @jonathanmaze

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