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Rising layoffs and slowing wage growth are welcome signs for many in the restaurant industry, according to analysts.
A Friday report from the U.S. Department of Labor revealed that as job growth continues to accelerate, average hourly wages slow down for the month of December. In addition, thousands of layoffs across major technology players, including in Amazon’s retail division, show signs that the old metric could turn around in 2023.
For the technology industry, that tempered some expectations for growth during the year as a focus on profitability moderated the zeitgeist. Meanwhile, beleaguered retailers such as 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 the coming quarters.
Escalating Wage Inflation
Executives at major chains including Restaurant Brands International (NYSE:QSR), McDonald’s (MCD), Darden Restaurants (DRI), and Starbucks (NASDAQ:SBUX) called the problem raising wages. For the latter, the problem has also increased the bargaining power of baristas, leading to a wave of labor negotiations tension. Among these impacts, rising costs have spurred increased investment in automation.
However, these investments will take time to bear fruit.
In the near term, many of the chains were eager to find a respite from the rising costs by adjusting their operations. According to the trade publication Restaurant Dive, high turnover, low unemployment, and established wage increases have left large chains scrambling to find ways to increase efficiency. This led to reduced operating hours, smaller staff, and longer shifts. Of course, these pressures have kept quit rates high and continued a cycle where wages remain high in an ever-tight labor market.
It also created an arms race among the big chains to woo the workers. Such a battle was particularly pronounced in the delivery space. For example, Domino’s Pizza (NYSE:DPZ) recently signed a deal with General Motors to buy 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.
Change Change?
But according to Bank of America, signs of peak wage inflation and a flow of newly unemployed workers into the market as the macro picture darkens are set to reverse this employment headwind.
“The silver lining of a recession is that prices keep falling — even when there are supply constraints. Labor availability continues to improve. Both operators benefit from paying the costs of making restaurants,” advised Sara Senatore, equity analyst.
According to his analysis, job listing growth in the industry peaked at the end of 2021 and has slowed, with improved turnover rates. The latest BLS report also offers hope that wage growth is finally flat after a sharp post-pandemic surge.
“We think pizza is well positioned for increasingly budget-focused consumers while slowing job inflation,” Senatore said. “Benefits from a tight labor market should be manifested through composition (driver availability) and margins (wages) and unit growth (employees) for the system.”
He maintained a neutral rating on Pizza Hut-parent Yum! Brands ( YUM ), but gave Domino’s a Buy Rating, naming it a top choice due to easing labor costs.
“Relative to the S&P, DPZ is trading at a multiple of 1.4x, slightly above its 5-year average of 1.3x but in line with its 10-year average,” Senatore noted. “We expect, however, that estimates will be revised higher as sales accelerate and prices come down.”
