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Escalating layoffs and slowing wage growth are welcome signs for much of the hospitality industry, according to analysts.
A report from the US Labor Department on Friday revealed average hourly earnings as job growth continues to accelerate slowed down for the month of December. In addition, thousands of layoffs among major tech players, including Amazon’s retail division, show signs that the previous indicator could change in 2023.
For the tech industry, this tempered some expectations for growth for the year as the focus on profitability controls the zeitgeist. Meanwhile, beleaguered retailers like Party City ( PRTI ) and Bed Bath & Beyond are reportedly on the brink of bankruptcy. For the hospitality industry, these unfortunate trends for other industries signal that a key labor cost bottleneck could turn in the coming quarters.
Escalation of wage inflation
Executives of major chains including Restaurant Brands International (NISE: KSR), McDonald’s (MCD), Darden restaurants (DRI) and Starbucks (NASDAK: SBUX) called for the problems of wage escalation. For the latter, the issue also increased baristas’ bargaining power, leading to a wave of tense labor negotiations. Amidst these impacts, rising costs have prompted increased investment in automation.
However, these investments will take time to bear fruit.
In the near future, many chains wanted to seek respite from rising costs by adjusting operations. According to trade publication Restaurant Dive, high turnover, low unemployment and steady wage increases have left major chains scrambling to find ways to increase efficiency. This led to shorter working hours, fewer staff and longer shifts. Of course, these pressures have kept attrition rates elevated and perpetuate a cycle in which wages remain elevated in a still-tight labor market.
It also set off an arms race among the big chains to attract workers. Such a battle was particularly pronounced in the area of delivery. For example, Domino’s Pizza (NISE: DPZ) recently signed a deal with General Motors to buy hundreds of electric vehicles to attract delivery drivers. Domino’s and Yum! Brands ( IUM ) was also forced to compete with Uber and GrubHub for the same delivery drivers.
Shift Change?
However, according to Bank of America, signs of peak wage inflation and an influx of new hires into the market as the macro picture darkens should reverse this labor headwind.
“The best thing about a recession is that costs always go down – even when there are supply constraints.” Labor availability continues to improve. Both benefit from the operator bearing the costs of running the restaurant,” advises equity analyst Sara Senatore.
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 will finally plateau after a sharp post-pandemic surge.
“We think pizza is well-positioned for increasingly budget-focused consumers as labor force inflation slows,” Senatore said. “The benefits of a weaker labor market should manifest through competence (driver availability) and margins (wages) and unit (employment) growth for the system.”
She maintained a neutral rating on Pizza Hut-parent Yum! Brands ( IUM ), but gave Domino’s a buy rating, calling it the best part because of lower labor costs.
“Relative to the S&P, DPZ is trading at a 1.4k multiple, slightly above its 5-year average of 1.3k but in line with the 10-year average,” Senatore noted. “However, we expect estimates to be revised higher as sales accelerate and costs come down.”
