Returning to labor—what BDO calls “the single most pressing issue on restaurants’ minds and margins—the cost of labor rose 0.5 percent in the first three months of 2019. BDO pointed out that statutory minimum wage increases typically go into effect January 1, which challenges the period more than others. Yet this hardly a flash-pan issue. It’s mounted quarter after quarter thanks to wage expansion and climbing turnover rates.
Labor costs came in at 32 percent of net sales in Q1. One suggestion from BDO is to invest in traffic forecasting algorithms to better predict how many employees may be needed throughout the day. While understaffed restaurants often garner the buzz, overstaffing locations is a significant issue, too. Texas Roadhouse spoke about this after its Q1 review.
“We talk about staffing for your next $10,00 a week in sales, but we don’t necessarily need to be staffed for our next $20,000 a week in sales,” president Scott Colosi said. “So we just want to make sure we’ve got a good balance and we’re disciplined, and we believed in the vast majority of our restaurants that’s the case.”
Another recurring theme lately is the move away from limited-time offers and deals designed to drive four-wall traffic. Berebitsky highlighted Olive Garden, which boosted check sizes 4.2 percent despite reducing promotion.
But is this a one-size-fits-all notion?
“As we mention in the report, though, it’s important to note that this won’t be the case for everyone—many are still reliant on LTOs to get customers through their doors,” Berebitsky says.
Olive Garden and Texas Roadhouse increased menu prices by 1.8 and 1.5 percent, respectively, in the quarter. Some chains can do that in this climate. For others, it’s a traffic deterrent they simply can’t afford to tack on.
Menu engineering and strategic pricing are tools that can balance these competing priorities, BDO says. Driving more profitable items over labor-intensive, low-margin items and adjusting serving sizes can produce a material impact on a restaurant’s bottom line.
“But restaurants shouldn’t forget their customers’ wallets,” BDO says.
Operators need to be wary of taking price given the possibility of an economic slowdown, as many have predicted. After growing strongly for nearly a year, the economy seems to have entered a period of uncertainty, created by the escalation of the use of tariffs. Capital investment is being restrained. This could lead to inconsistent consumer-spending growth. Also, wage gains will likely moderate along with job increases at some point.
“While raising prices may be a necessary evil for some brands, value remains a significant driver of customer loyalty,” BDO said.
Put simply, restaurant success will hinge on margins. The brands able to absorb or offset rising costs will be in a better position to compete.