Fast-Food Wages Jump. What Does That Mean for the Economy? - 7investing 7investing
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Fast-Food Wages Jump. What Does That Mean for the Economy?

The industry, which has never been one known for paying well, has had to pay up due to having trouble finding workrers to fill open jobs.

August 28, 2021

Fast-food wages climbed by 10% in the second quarter compared with a year ago. That’s largely a problem of supply and demand. There simply aren’t enough available workers to fill open jobs and that has forced companies to pay more and, in some cases, improve benefits.

This wage increase is the largest jump in years and it’s not affecting all service industry employees equally. Limited-service employees (think grocery and similar stores) saw their wages rise just 4.1% in the first quarter compared with a year prior.

Higher wages and open jobs impact consumers who eat at fast-food restaurants. Many chains have inched prices up while some eateries have had to limit hours or even close certain days of the week. In July, the unemployment rate came in at 8.4% for eating and drinking establishments, a big jump from 5.9% two years ago, according to Bureau of Labor Statistics data. In addition, many restaurants have been operating with fewer workers — not because of automation, but because they simply can’t fill their job openings.

What happens next isn’t a simple answer. Kids returning to school after a year of at-home (and often parent-assisted) learning may free up some people to return to the labor market. Some chains may also automate certain jobs but that’s expensive and generally not a short-term answer.

Labor shortages will be a problem that has a ripple effect across the U.S. economy over the next few years. Well-funded chains like Starbucks will pay more, offer better benefits, and continue to automate. Eateries that are less successful may struggle to stay afloat. Steve Symington joined Dan Kline for the August 23 “7investing Now” to examine the current situation and what might happen next.

A full transcript follows the video.

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Dan Kline: But here’s what’s happening in fast-food wages. Fast-food wages are up by 10% in the second quarter, compared with a year ago. Restaurants have been raising wages, because there are no workers, my 17-year-old has been working at Wendy’s (NASDAQ: WEN) and they’re paying him like I don’t know, like close to $11 an hour. He has no skills. He’s never worked anywhere before. He’s really good at it, but absolutely wasn’t coming in with a lot of experience. This is the largest quarterly jump in years. For comparison, hourly limited-service employees saw wages rise 4.1%. So like your Target (NYSE: TGT) worker, your Publix worker, only 4.1%. Steve, this is good for workers. But is it good for consumers?

Steve Symington:  I mean, I don’t think it’s a terrible thing for consumers. And maybe you can disagree, but I’d be willing to pay a little bit more for my food if I knew it meant the person serving to me was making a more livable wage. But I’m not sure how it actually applies, on a broader basis, are there repercussions to seeing wages climb? Because, I’ve definitely experienced some of the kind of annoyances with going to, trying to go to a Taco Bell (NYSE: YUM) and saying, sorry, we closed four hours earlier than usual because we don’t have any workers. Like literally signs like that put up on the drive-thru and I’m salty.

Dan Kline:  It’s actually a massive problem here in Orlando. I’m in, at the moment, in Davenport, Florida, right on the outskirts of Kissimmee and Orlando, which is the tourism capital of the US. I mean, maybe Vegas would argue, but there’s a lot of tourism here. There are nice sit-down restaurants that are just like closing Monday and Tuesday. There are fast food, places that are closing their dining room, not for COVID reasons, for we can’t staff it, we’re going to be drive-thru, a delivery only. There’s a real labor shortage. And let me give you some of the numbers.

The July unemployment rate for eating and drinking establishments was 8.4%. That’s up from 5.9% just two years ago. Restaurants are opening, full-service restaurants are operating with 6.2 fewer employees in the kitchen, and 2.8 fewer in the front of house. That’s going to lead to bad service, which is going to make you not want to pay those higher prices. I fully agree with Steve, when I say that nobody notices if their meal at McDonald’s (NYSE: MCD) went from $5.79 to $6.23. I absolutely think that’s true. But Steve, how do we solve this problem? Because wages alone clearly aren’t getting it done?

Steve Symington:  Yeah, and I guess that’s one of those things, where you’re also gonna see that there’s, there’s a kind of delayed effect, from increasing wages is going to solve it all at once. Do you find ways, some of the bigger chains might find ways to, to be able to cope with having fewer people? Do you automate something, do you have systems, kind of more bakery systems or like robotics automation. I’ve seen those restaurants where you’ve got a robot bartender or robots that can cook burgers or something like that. But that’s something that, seems like it would be prohibitive for all but the largest chains who could actually afford such kind of extravagant streamlined efficiency measures.

Dan Kline:  Even McDonald’s had to fight with its franchisees to put in their “restaurant of the future concept”. That concept does not cost anywhere near what automating Big Mac making would cost. So I think what you’re going to see is closer to what McDonald’s did, where you automate as much of the order taking as you can. You automate things like inventory that you can do with sort of off-the-shelf technology, you are probably not going to move to full-on automated Big Mac making. Now, can you automate the fry machine, maybe you can, because it’s a pretty or at least parts of it. Because it’s pretty simple. You’re seeing things like your non-Starbucks (NASDAQ: SBUX), places that make espresso drinks. It works like a Keurig like you push a button that says cappuccino and that’s what you’re getting. I do think you’re gonna see more of that.

But Steve, I’ve told my robot bartender story on air. I paid big money in Vegas to go to a robot bar and the bartender over-poured my gin and tonic and probably all the gin went away and it was just a big sticky tonic. Our friend Matt Frankel was with me and he got some drink that was so sickly sweet it was undrinkable. And you know what, you can’t complain to a robot. So I’m actually really curious. In February, I’m going to be on a cruise ship with our very own Maxx Chatsko that has a robot bar, and I am looking forward to going to the robot bar to see if that’s improved.

But Steve, isn’t some of this about making restaurant jobs more tolerable. When I ran the toy store, we did not pay high wages, but I made damn sure it was a fun place to work. Do you want to take a guess at what the average turnover rate is in the restaurant business?

Steve Symington:  High to very high?

Dan Kline:  Over 100%.

When your turnover rate is over 100% you’re endlessly training people, there’s a real expense to that. So I know like where my son is working doesn’t have like automated scheduling doesn’t have the ability to, to trade shifts, or do something, like your Targets of the world, your Walmarts (NYSE: WMT) of the world are really moving into being like sort of worker-friendly. Where it’s okay, you’re a student, you can only work after four o’clock, here’s how you log into available shifts. Here’s how, your kid’s sick for the day, there’s a way for you to swap shifts to do stuff. I actually think we’re gonna need to see a lot more investment there.

And the good news is, that’s not expensive to go out and license a third-party app that helps you do things like working with schedules. That’s going to be a pretty big improvement for the restaurant industry. The other thing I think we’re not talking about, because it tends to be political, is that there’s all these people that are not working, and forget why some of them aren’t working. Some of the people not working are not working because of childcare because their daycares didn’t reopen. I actually do think the opening of school is going to change that. A lot of kids, most kids are going back to school across the country. And that frees up caregiver time that that morning shift at Wendy’s can now be the mom who wasn’t able to work. But Steve, this probably isn’t going to solve the whole problem.

Steve Symington:  No, I’m not convinced it will. And I think it’s a multi-tiered problem that’s going to take some creativity and maybe an industry-wide response. That’s somewhat coordinated to fix. And it’s not going to be an easy fix. But I guess we’re outside of that, and we can watch it happen. But hopefully,

Dan Kline:  I’m really excited by it. Because I think it’s the Starbucks’s of the world that have worked. It’s not just wages, Starbucks is not a $15 minimum wage, guaranteed it is a lot of places, but it isn’t everywhere. But the college benefit, the tips, the flexibility of scheduling. I had a friend who, who worked at Starbucks, she’s now at Wawa. But she, she was a manager and she had a child and her husband’s a contractor. So they let her work like really early mornings when her husband was still home, you need to be that level of dynamic. And I think you’re gonna see your Starbucks and your Wawa’s, which are leaders, and they’re gonna set the tone and then your Target’s and Walmart’s and people like that are gonna do it. And then eventually, it’s going to have to trickle down.

But there are going to be some losers, there are going to be some fast-food chains that just can’t get workers and I’ve often joked, you know about the difference in quality between Starbucks and Dunkin Donuts workers. But it’s noticeable because Starbucks has national standards because they’re not franchised. And Dunkin Donuts very much depends on your franchise owner.

We appreciate that a lot of you are watching, we are not getting a lot of comments, but we’re going to take a comment from Max Lucas, hopefully this opens the floodgates, “In September, I will be asking for a 10% raise because of inflation. And I can be fairly certain I will get that because there are so many job openings. This just does continue to perpetuate inflation”. Yep, there’s going to be some price increase because of wage increases. And technically, price increases have actually wiped out the benefit of wage increases. But that’s a very, very squishy number. Because if you didn’t have to buy a car or a house, your increase has generally been better.

So if you have like a locked into a lease, or if you’ve owned a property for longer than the pandemic, and you got to raise things are generally going to be good. Wages are a tough thing to talk about, because we always talk about them on like a national basis. And the reality is $15 in Orlando, Florida is a lot better than $15 in West Palm Beach, Florida.

So that’s really important to think about that, like you can live certain places. I’m gonna guess Montana has places that are not overly expensive to live, they may also not be all that close to jobs. So all of this is very personal. And yeah, a lot of people are going to be able to go to their boss and demand a raise. But be careful what you wish for. Because the reality is if you like your job, and you go in and demand a raise, and they say well we’ll give you a 6% you kinda have to leave. That’s, that’s not a great scenario.


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