The purpose of “The Question” is to get to the bottom of key issues of investment significance, and to call out those companies that are particular standouts (+ and -).
With Obama looking increasingly likely to take the election, he has been very outspoken about passing the Employee Free Choice Act, which would eliminate the secret ballot making it much easier to unionize. This in turn would result in higher wages and benefits.
Food and labor costs represent 60-70% of the cost of running a restaurant. I have no idea where Obama stands on food costs or if any of his policies will cause an increase in the cost of food. Labor costs represent 30%+/- of that total. Over the past three years, the industry has faced significant labor inflation and thus lower margins. Unfortunately, there is not much the industry can do. In this environment you can’t raise prices and you can’t cut labor or you will lose customers. The restaurant industry is one of the largest employers in the United States. Given the current environment, if Obama’s policies accelerate labor inflation, it will only cause more companies to go bankrupt and increase unemployment. How does anybody prepare for that scenario?
This is the question I threw out to some key executives within the restaurant industry. I have included a couple of the more interesting responses:
-The key will be whether or not the Republicans can hold 40 seats in the Senate. 40 seats will allow them to filibuster any bill proposed by the Democrats including the Employee Free Choice Act which if passed, will neither be free nor a choice (Please sign this card Mr. Penney…and we know where you live!). If the Republicans can’t hold a 40 seat minority, the first target will be Wal-Mart followed by Target, Home Depot, Lowe’s etc. Restaurants will be further down the list starting with McDonald’s and Burger King. Eventually, they will get to casual dining. However, it may be a tougher sell for restaurants with a primarily young and transitory workforce. Just like healthcare (which we offer from day one and most of our employees decline), I suspect restaurant industry workers see their jobs as less of a career and more of a stepping stone to bigger and better opportunities and thus may not find value in unionizing.
-Although I believe it would be tough to unionize pizza delivery drivers, we have actually seen sporadic attempts to do so. We believe the Employee Free Choice Act would make it easier to do so, and we strongly oppose it. With a democratic presidency and congress, we are sure to pass it.