Restaurant industry hurdles expected to continue in 2015

Dec. 10, 2014 | by Alicia Kelso

At the recent Fast Casual Executive Summit event featuring restaurant company executives, Firehouse CEO Don Fox said the industry's current headwinds are "unprecedented." His perspective spans 40-plus years. 

Such challenges – including record-high commodities prices, labor inflation, technology costs, the National Labor Relations Board decision that holds parent companies accountable for franchisee practices, and health care/menu labeling logistics – are expected to continue into 2015.

Wages

Perhaps the strongest headwind will come from rising labor costs. Restaurant employees walked off their jobs again last week in more than 190 cities throughout the country, the latest strike in a two-year movement calling for a higher minimum wage.

As the movement has grown to more cities domestically and globally, some industry organizations are warning of the potential consequences such large-scale protests have on small businesses.

But while the schism on both sides deepens, higher wage action also appears to be growing. The current federal minimum wage is $7.25, and President Obama is pushing for $10.10. The federal legislation is currently sitting idle in Congress.

Meanwhile, Seattle and San Francisco have both hiked their levels to $15, the same amount protestors are calling for, and Chicago's city council voted unanimously last week to go to $13 an hour by 2019.

Marla Topliff, CEO of Chicago-based Rosati's Pizza, acknowledges the need for higher wages, but has deep concerns about the level some are shooting for. 

"I feel that people need to make enough money to support their family. But, it's hard when you have franchisees – small business owners – who just found out they're now required to pay $13 an hour by 2019. That means every dishwasher gets that, so what are they supposed to pay their managers? That's where the issue comes in; if I'm paying the dishwasher $13 an hour, I'm going to have to double or triple that for the manager," Topliff said.

She thinks labor – positions and hours – will inevitably be cut to help franchisees afford the increases.

"With commodities as high as they are now, businesses could close. They won't be able to compete with all of these added cost pressures and they will close," she said. "Profits aren't going up for many companies, so how do you go from $8.25 to $13, with a rising commodities market?"

Rosati's, she notes, has always paid above the federal minimum wage levels. She strongly believes that $7.25 is "way too low" and thinks the President's $10.10 level is a good compromise.

"If you want the best employees, you have to pay for quality," she said.

Wisconsin-based Culver's has also historically paid more than minimum wage. President and COO Phil Keiser said this approach is ingrained in the company's philosophy. He believes a good compromise comes from a scale model. 

"We believe there is a difference between an adult trying to make their way through life and a teenager who is still sitting at their parents' table eating meals every night," Keiser said.

The scale solution has worked for both Culver's and Rosati's.

"I think for a kid, $10.10 is sufficient. If it's a mom supporting a family, we'll pay them more. We always have," Topliff said.

Both Keiser and Topliff also believe the minimum wage debate has been clouded by politics. Topliff believes the protestors have been influenced by labor unions who may have ulterior motives.

"The whole debate is making our business look bad, but there are many, many companies like us that try to do the fair thing and there are people in this business who worked their way up – a lot of people," she said. "But something's got to give – people say if employees have more money in their pockets, they'll spend more. But if prices keep going up on everything else, they won't be able to. It's a vicious cycle."

Food costs

2014 was also not a good year for food cost management. Beef, pork and cheese all flirted with record-highs, and there isn't much relief in sight.

"Regarding the beef market, this has been one of the most challenging years I can recall. The tightness of inventory has been hard. We just really have to look hard at how to keep it affordable," Keiser said.

He expects the beef market's volatility to continue for the next two to three years.

"The best we're hoping for now is relief in 2016," he said.

On a positive note, dairy should be much better in the New Year. Conversely, because of the shift in proteins to navigate high beef and pork prices, chicken is rising.

"As a small business, right now is a very difficult time and a lot of operators are treading water. These trends are why so many mom and pop restaurants close," Topliff said.

NLRB ruling

Another major concern on chains' radars is the National Labor Relations Board's ruling that McDonald's Corp. is a "joint employer" alongside its franchisees. The ruling, made in July, was handed down in response to a number of wage theft allegations – more than 180 cases – at a number of McDonald's franchisees across the country.

The implications of this ruling have yet to be finalized, but franchise companies are anxious.

"This will change the face of franchising permanently. If we are seen as joint owners, we're going to be responsible for hiring, firing, payroll, just about everything," Topliff said. "That's not really why or how (franchising) was set up. Our responsibility is to maintain the brand, support the franchisees and make sure anyone representing our brand is doing so in an appropriate and reasonable way.

"But to be responsible for the details, the payroll, insurance or how they run their companies will change the economics of companies like ours totally."

Topliff said McDonald's was an easy target for this ruling, both because of its size and because it has gone back and forth from majority company-owned to majority franchised.

"There is no excuse for wage violations, but that's not something we as the parent company can control," she said. "You should be going after the guy who owns the 20 or so franchisee doing the violations."

FDA menu labeling

While most chains are prepping to cover their employees under the Affordable Care Act, the menu labeling component of the legislation was finalized just last month after a nearly-5-year wait.

Now restaurant brands can work to secure their nutritionals for an accurate display of calorie information, and put the information on display in accordance with the law. Although many operators are relieved the wait is over, there are still plenty of questions.

"For the pizza industry, we were lucky with the final ruling. The fact that they're letting us do nutritionals by the slice as opposed to the whole pie is a big win for us," Topliff said. 'But there are some things that remain vague and if we have a year to get ready, we need to get ready now."

Some of that vagueness comes from alcohol offerings, for example. While beer sold in bottles with already existing labels will be compliant, regulations for mixed cocktails remain murky.

"There are a lot of specifics to alcohol. If you add mixers and you have to figure out the nutritionals for vodka and for cranberry juice, and calculate that as a whole drink, you're essentially asking the bartenders to be math wizards," Topliff said.

Also, nobody knows what the penalties will be for noncompliance, and it's unsure who will actually be doing the enforcement.

Keiser said his company has questions about who is going to enforce the regulations, how compliance will be monitored and how the process will affect operations, if at all.  Culver's has also tested menu boards with nutritionals to see if any additional staff training was necessary to answer consumers' inquiries about the information.

Competition

On top of these cost and regulatory pressures, both Keiser and Topliff point out intensified competition in foodservice, driven mostly by a burgeoning fast casual segment, food delivery startups and foodservice enhancement at c-stores, grocery stores and other retailers.

"Grocery stores have definitely become our competitors, which wasn't the case a few years ago. We're all fighting harder for market share now," Topliff said.

Keiser added that this trend, however, could be one positive in an otherwise pressure-filled atmosphere.

"The competition is healthy, it forces us to get better all the time," he said. "There needs to be tension about where you're going and where you think you ought to be."

Photo provided by Wikipedia.


Topics: Equipment & Supplies, Food Cost Management, Franchising & Growth, Operations Management, Staffing & Training, Trends / Statistics



Alicia Kelso
Alicia has been a professional journalist for 15 years. Her work with FastCasual.com, QSRweb.com and PizzaMarketplace.com has been featured in publications around the world, including NPR, Good Morning America, Voice of Russia radio, Consumerist.com and Franchise Asia magazine. View Alicia Kelso's profile on LinkedIn

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