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Escalating layoffs and slowing wage growth are welcome signs for much of the restaurant industry, according to analysts.
A Friday report from the U.S. Department of Labor revealed while job growth continues to accelerate, average hourly earnings slowed for the month of December. Additionally, thousands of layoffs across major tech players, including in Amazon’s stores division, show signs that the former metric could turn in 2023.
For the tech industry, this has tempered some expectations for growth during the year as a focus on profitability controls the zeitgeist. Meanwhile, beleaguered retailers like Party City (PRTY) and Bed Bath & Beyond are said to be teetering on the brink of bankruptcy. For the restaurant industry these unfortunate trends for other industries offer signs that a key headwind in terms of labor costs could turn in coming quarters.
Wage Inflation Escalation
Executives at major chains including Restaurant Brands International (NYSE:QSR), McDonald’s (MCD), Darden Restaurants (DRI), and Starbucks (NASDAQ:SBUX) have called out the trouble of escalating wages. For the latter, the issue has also increased the bargaining power of baristas, leading to a wave of tense labor negotiations. Amid these impacts, the rising costs have sparked increased investment in automation.
However, these investments will take time to bear fruit.
In the near term, many of chains have been keen to seek a respite from the rising costs by adjusting operations. According to trade publication Restaurant Dive, high turnover, low unemployment, and the established wage increases have left major chains scrambling to find ways to increase efficiency. This has led to lessened operating hours, smaller staffs, and longer shifts. Of course, these pressures have kept quit-rates elevated and continue a cycle whereby wages remain elevated in a still-tight labor market.
That has also begotten an arms race among major chains to woo workers. Such a battle has been particularly pronounced in the delivery space. For example, Domino’s Pizza (NYSE:DPZ) recently inked a deal with General Motors to purchase hundreds of electric vehicles to attract delivery drivers. Domino’s and Yum! Brands (YUM) have also been forced to compete with the likes of Uber and GrubHub for the same delivery drivers.
Shift Change?
Yet, according to Bank of America, the signs of peaking wage inflation and a flow of newly unemployed workers into the market as the macro picture darkens is set to reverse this labor headwind.
“A recession’s silver lining is that costs invariably come down — even when there are supply-related constraints. Labor availability continues to improve. Both benefit operators that bear the costs of running restaurants,” equity analyst Sara Senatore advised.
According to her analysis, job listing growth in the industry peaked in late 2021 and has since slowed, with turnover rates improving. The latest BLS report also offers hope that wage growth is finally plateauing after a stark rise post-pandemic.
“We think pizza is well positioned for increasingly budget-focused consumers while labor inflation slows,” Senatore said. “Benefits from a slacker labor market should manifest across comps (driver availability) and margins (wages) and unit growth (staffing) for the system.”
She maintained a Neutral rating on Pizza Hut-parent Yum! Brands (YUM), but assigned a Buy rating to Domino’s, naming it a top pick due in part to easing labor costs.
“Relative to the S&P, DPZ is trading at a 1.4x multiple, slightly above its 5-yr average of 1.3x but in line with its 10-yr average,” Senatore noted. “We expect, however, that estimates will be revised higher as sales accelerate and costs come down.”
