Editor's Note: Below is an institutional research note written by Restaurants analysts Howard Penney and Shayne Laidlaw. To access our institutional research email sales@hedgeye.com. In the note, Penney and Laidlaw discuss the "debilitating afftects" the proposed $15 minimum wage is having on Restaurant companies and how the industry is now fast tracking new technologies as a result.
Their conclusion? "It’s no secret that minimum wage laws are having a meaningfully negative impact on the restaurant industry," Penney and Laidlaw write. "As a result, restaurant companies are fighting back, and their actions will end up hurting the very employees the government actions are intended to help."
It’s no secret that minimum wage laws are having a meaningfully negative impact on the restaurant industry. As a result, restaurant companies are fighting back, and their actions will end up hurting the very employees the government actions are intended to help.
Restaurant companies, especially the quick service ones, have begun to fast track the implementation of technology in their restaurants in order to offset the rising wage pressure. In simple terms, this means computers are taking jobs from humans. The QSR industry simply cannot afford the rising minimum wage instituted by the government and in turn they are looking to technology to help maintain their already thin margins.
In a previous note we published in September 2015, we highlighted the debilitating affects $15 minimum wage would have on the QSR industry. Part of the inspiration for the note was driven by Andy Puzder’s (CEO of CKE Restaurant) op-ed piece in the Wall Street Journal (click HERE to view).
In the table below we run through a hypothetical (but close to reality) scenario analysis of a typical QSR restaurant doing average unit volumes of $1.2 million, $1.4 million and $1.6 million. As you can see in the table on the left, the industry already operates under very thin margins.
On the right side of the slide, is the impact on profitability of taking minimum wage up to $15 per hour. What this analysis does not contemplate is the Andy Puzder scenario of pricing a significant reduction in the number of jobs and the impact of new technology (automation) on profitability.
As WEN is facing 5% to 6% wage inflation, the loss of jobs is now becoming a reality, WEN recently announced their intentions to install self-order kiosks at its 6,000+ locations, which will be installed by the end of 2016. Others have begun to do it on a smaller scale and in other international markets, yielding positive results.
During WEN’s 2Q15 earnings call, CEO, Emil Brolick made a strong statement against the rapid rise in minimum wage,
“I think the reality is that what you will see in some of these markets like New York, where there’s significant increases [is that] our franchisees will likely look at the opportunity to reduce overall staff, look at the opportunity to certainly reduce hours and other cost reduction opportunities, not just price. You know there are some people out there who naively say that wages can simply be passed along in terms of price increases.”
Emil went on to say, “…unfortunately, we believe that some of these increases will clearly end up hurting the people that they are intended to help.” These comments were clearly a precursor for what was to come, and we can expect many other QSR’s to follow in a similar fashion more aggressively as the wage rate increases are phased in over time.
Although we do not currently have a firm call on Wendy’s (WEN) we wanted to share a survey with you conducted by CivicScience, which sheds some light on what the installation of self-order kiosks means for the consumer’s experience.
SURVEY RESULTS
The business and political implications of this move could be profound. Wendy’s can gain a leg up in the market by reducing its labor costs, thus pushing other restaurant companies to speed up their technology initiatives. Perhaps more importantly, they could also drive a huge wedge in the public debate over minimum wage increases.
But it all hinges on a few big questions: How will consumers respond? Will the promise of more convenience and (theoretically) lower-cost food bring diners through Wendy’s doors? Or will the job market implications and (theoretically) poorer customer service keep diners away?
When the news broke on Friday, CivicScience (CS) launched a nationwide survey of U.S. adults to gauge their attitudes about Wendy’s announcement and kiosk ordering in general. They started by looking at how people felt about the socio-political trade-offs of self-serve kiosks:
The sample of just over 1,500 U.S. adults painted a clear picture. 39% of respondents believe kiosks will have a net negative impact, compared to 22% who believe it will be positive. Notably, twice as many people believe the negatives “greatly” outweigh the positives, versus those who believe the contrary.
What’s driving these numbers?
The first thing CS noticed was gender. Women were much more likely than men to view kiosks as a negative.
Age was another strong factor. GenXers are clearly the most supportive of kiosks, while Boomers are the most likely to be against them.
Let’s look at the only numbers that really matter: How do frequent QSR diners feel about kiosks?
The ratio among the most frequent fast food eaters holds pretty steady with the overall numbers. Negative sentiment outweighs positive sentiment by just under 2 to 1.
All of this must spell doom for Wendy’s, right? Maybe not. Look what happened to the results when we asked specifically about Wendy’s.
These numbers tell a much different story. Yes, 9% of respondents and 24% of Wendy’s diners say that they will eat there less as a result of the kiosks. However, 12% of respondents and 34% of ‘in-market’ diners say they will eat at Wendy’s more. The largest group of regular Wendy’s diners will be unaffected.
The numbers look even better for Wendy’s among the most frequent QSR diners. 17% of respondents who eat fast food at least once a week say they will visit the restaurant more because of the kiosks. 10% say they will visit less.
It’s obviously way too early to tell how Wendy’s kiosk initiative will shake out and whether they’ll inspire more QSRs to follow their lead more aggressively. A lot will depend on the execution, the marketing, the ease of use for customers, and the overall experience.
But, for now, it’s interesting to see the disparity between how people feel from a socio-political impact perspective and how they intend to behave. People may care a lot about the minimum wage – they may just care about convenience and savings a lot more.
