John Gordon - October 2021

The Restaurant Business: “ It really IS a tough business !”

by John A. Gordon, Principal and Founder, Pacific Management Consulting Group

Staffing Conditions are Getting Worse

As of mid-October, restaurant staff availability conditions are not getting any better. In fact, unfortunately it is getting worse. For some time, many restaurant executives and observers were under the assumption that restaurant ---and labor conditions throughout the United States-- would bounce back once extended federal unemployment periods ended in all 50 states. Those programs ended around Labor Day or earlier of course. No one has reported magical ease thereafter.

Then, on October 12, the US Bureau of Labor Statistics reported that 892,000 restaurant and hotel workers gave notice or walked off their jobs in August, a 21% increase over July. No other US industry category had that level of voluntary quits.<1>

It’s very difficult to run a people, service-oriented business without people. Last week, Restaurant Business reported the job marketplace Joblist survey results that 58% of current restaurant and hotel employees intend to quit by the end of the year. <2>  With many restaurants operating short and under complement now, any amount of additional staff loss would be a  bitter blow.

What Can Be Done Quickly to Be More Labor Position Competitive. With some-- but not overwhelming additional cost

Chain restaurant operators are working organizational and cultural issues to address problems of course, but those will take time to work. In discussion with clients and hourly employees, I’ve composed a list—a menu if you will-- of quick hitters that can be implemented quickly but will result in some additional OPEX. For those of you who know me from way back and know my youthful cost heritage might see my conviction that we must act fast. These actions are designed to make an impact fast and make our brand more market competitive. Of course, tests should be commissioned, and franchisors would have to recommend to franchisees, and of course, can be worked in company units.

Idea One: Movement to weekly pay cycle: many hourly non tipped employees are starved for daily cash. That is why there is so much emotion in the unit to retain tip jars. Movement to weekly pay cycles would increase payroll transmission costs but it would also provide a point of competition to beat the restaurant chain down the street and improve staff liquidity.

Idea Two: Lower employee meals charge to 33%:  I’ve never understood where the traditional 50% for employee meals rate came from, especially since we are trying to maintain roughly a 35% food cost margin. In any event, with some employees depending on us to eat, maybe this is the time to lower the charge rate. It is all corporate tax-deductible anyway per the IRS code.

Idea Three: A buddy for every new hire:  Realizing that most crew members are under stress and training beyond orientation isn’t happening a lot of the time, a new hire has to be bewildered. Black Box studies have shown over the years that turnover intention builds early in one’s time onboard. <3>  If anyone—especially a shift supervisor or senior employee who is naturally helpful to others—can be designated as the new hire’s “buddy” on day one…that would be a stress reliever and a communications enhancer for the new hire. For the buddy, it may enable instant bonus points.

Idea Four: Make uniforms more comfortable and breathable.   Another cost investment for some brands perhaps but the quality of work-life enhancement. Heavy poly blends don’t wrinkle as much but wear hot and are uncomfortable. A lower poly/higher cotton blend will be more tolerable in hot kitchens/front lines or when running entrees. A cost? Of course. But an investment that gives you bragging rights at a critical time.

Idea Five: Reinforcements to the Host/Hostess Stand: 

We know now certain large cities are enforcing COVID vaccination identification, and that duty is falling to the restaurant. For example, in the City of Los Angeles, very strict rules will begin on November 4. We know through surveys<4> employees are leaving us because they are tired of being the mask police and dealing with rowdy, irregular guests. I would suggest that additional reinforcements be available/deployable to greeting areas to back up our employees.  

Expense here? You bet.

The ideas are my own through conversation and experience. We are trained to stand out and compete. Do something to cause your brands to stand out in a positive way to attract and retain staff. Remember, there are “no secrets on the waterfront”, especially in this digital world. Word travels. The good that you do for staff will be repeated.

Absolute Necessity of Meaningful New Product New News

One factor that has not changed in the post Pandemic period is the absolute necessity to deliver meaningful new product new news to guests. This has always been necessary, but we are not now at the point as we were in the early 2000s where we had the crews and capacity to rollout and remove new platforms every period. What we do now has to be more meaningful and precise, and find offers with margins that provide profitable sales lift for longer periods. Some attractive new products have been seen lately, such as Brisket and Brisket Quesadilla (LTO) at Chipotle (CMG), Taco Pass concept (Taco Bell), Thighs (Wingstop), Spicier Nuggets (Burger King).

Reading QSR Sales Results This Fall—A Reminder

In addition, this fall, US consumers will have the ability to test and sample the loyalty programs of the Burger Majors—McDonald's, Wendy’s (earliest), and Burger King will all be live by late fall. Jack in the Box also has a loyalty program in place. So this should make for a lot of new news to sample and read. Now we have to read the results properly, versus a 2019 base (please) and consider that the inevitable increase in the average ticket is only about half price, with the other half mix, influenced by drive-thru behavior. Once we comp over 2019 and 2020, this comparability problem will be much less.

Dutch Bros. Enters With a Boom

Those of us who knew Dutch Bros knew it was doing well and would be a powerful brand. Once we got the SEC S-1, we could see the opening reception on Wall Street would be bombastic: the highly desired small box, drive-thru coffee and beverage model, no food to speak of, a proprietary owned energy drink at 24% of sales, laid back employees and culture, earlier franchising but where new franchising had been halted because management saw they could make more money themselves, and a close internal franchise culture at that. $1.7M AUV, 29% store contribution margin, $7.50 ticket, 14 years of positive SSS. 471 units, 209 company, the balance franchised units. The buildout is $635K (build to suit, unlevered cash on cash return 75%), while the Ground Lease 25K lot plus 900 sq. ft box investment is $1485K as given, with cash on cash return of 35%. They are busy all day and evening with a wonderfully balanced product mix.

Their core geographic base was Oregon, then moved to WA, Northern CA, and spreading now slowly into the Mountain states. It IPO’d on the NYSE in mid September and now has no debt. The original founder brother is active management and has private equity partners, gained in 2018.

One of the IPO bookrunners no doubt suggested a market penetration study, and a 4000 unit penetration potential number was published in the S-1. Finding that many DT sites will be an issue: Starbucks has been reverting to this very store type, and Dunkin is of course penetrating as quickly as it can via the traditional franchise model. In addition, Scooter’s (300 plus units), Biggby (250 units) and Pj’s (120 units) are looking for the same type locations, although they are bound to different geographical zones.

I’m working a project for an international QSR franchisor looking for drive thru potential brands and sites, and there is nothing more tight in the US right now than DT availability. Dutch Bros will have to use all skills possible and will wind up building most of those sites.

Dutch Bros is a powerful brand. I hope it is given time to build solidly over time.

About the author: John Gordon is a long time restaurant industry veteran with experience in restaurant operations, corporate staff (financial analysis and planning) and management consulting roles. Via his management consulting firm, Pacific Management Consulting Group, he specializes in complex financial, operational and organizational assessments, via earnings assessments, due diligence, expert litigation and other engagements. He is always reachable via 858 874 6626 or jgordon@pacificmanagementconsultinggroup.com.    

<1>   Restaurant Business, October 12, 2021, Peter Romeo,  Restaurant Workers Are Quitting At Historically High Rates.

<2>   Restaurant Business, October 7, Peter Romeo, Brace Yourself for a Mass Exodus of Employees.

<3> https://www.cnbc.com/2019/08/29/fast-food-restaurants-in-america-are-losing-100percent-of-workers-every-year.html.

<4>   Technomic News Release, Foodservice Industry Labor Crisis, August 24 2021.