For much of the post-recessionary period, economic growth was largely concentrated among higher-income groups. Even now, as the economy continues to add new jobs, real wage growth has been surprisingly stagnant.
But that could change, and soon, and the result might prove a boon for the restaurant industry.
According to Jefferies Equity Research, there are growing signs of wage growth, which could finally accelerate by the end of the year. Jefferies expects wage growth to hit 3 percent by the end of 2015.
That’s a key element for the restaurant industry, which needs more consistent wage growth to maintain sales momentum it has enjoyed for the past few months.
The restaurant industry has been more or less divided into two parts since the end of the recession: Chains that cater to upper-middle-class consumers, and everybody else. For concepts such as Chipotle Mexican Grill, Panera Bread and Starbucks, sales growth has been strong in recent years in part because their customers have been better off.
Indeed, according to Jefferies, the only group that has saw real income growth from 2010 to 2013 was the top 10 percent of earners. As such, chains with large numbers of customers in that cohort have had little problem getting customers in the door. And they certainly didn’t need to discount. (They also haven’t enjoyed a push from recent declines in gas prices.)
For everybody else, notably McDonald’s Corp., Burger King and mass casual chains like Applebee’s, the economy has been more difficult. High unemployment has conspired with stagnant wage growth to make sales growth more challenging.
That seemed to change last year, as the economy kept adding jobs. The unemployment rate fell to 5.5 percent in February, a post-recessionary low, after the economy added 300,000 jobs. More jobs typically translate into higher sales. As Denny’s CEO John Miller has said: If people are working they’re not at home cooking.
And, indeed, restaurant sales have been strong early this year, a sales improvement that has been pretty broad, affecting all sectors — even casual and family dining. The environment is improving enough to give CEOs confidence to end discounts and coupons.
Still, wages grew by only 3 cents in February, even though the rapid hiring should be fueling competition for workers, which should drive up pay. And wages for the most part have not quite grown the way they should.
As such, there remain pockets of the restaurant industry where consumers are focused on value. It’s why Burger King was able to grab so much market share this year by selling 10 pieces of chicken nuggets for $1.49.
Yet, while wage growth hasn’t been strong, the Jefferies report suggests there are signs it will grow soon. It notes that consumer confidence is improving faster for lower-income consumers. And while lower unemployment has yet to spark higher wages, past employment cycles suggest it will.
All that said, Jefferies Analyst Andy Barish noted in the report that any boost in spending habits by lower-end consumers might not find its way to the restaurant stocks that cater to those consumers. That’s because restaurant stock price valuations are so high that it’s difficult for those chains to appreciate in value any more.
“We’re less convinced of further upside for the low-end exposed restaurants,” Barish said. And while Barish expects that wage growth could boost same-store sales further, he nevertheless expects that a recent spate of double-digit sales increases will ease.
