Labor market is slowing to serve as headwind for restaurants (NYSE:DPZ)
Escalating layoffs and slowing wage growth are welcome signs for much of the restaurant industry, according to analysts.
A Friday report from the US Department of Labor reveals while job growth continues to accelerate, average hourly earnings slowed down in December. Additionally, thousands of layoffs by big tech companies, including Amazon’s store division, show signs that the old figures could change in 2023.
For the tech industry, this has dampened some growth expectations for the year as a focus on profitability controls ideology. Meanwhile, struggling retailers like Party City (PRTY) and Bed Bath & Beyond is said to be on the verge of bankruptcy. For the restaurant industry, these unfortunate trends for other industries offer signs that a key headwind in labor costs could change in the coming quarters.
Rising wage inflation
Executives at major chains including International Restaurant Brands (NYSE:QSR), McDonald’s (MCD), Darden restaurant (DRI) and Starbucks (NASDAQ:SBUX) called for a wage escalation incident. Later on, this also increased the bartender’s bargaining power, leading to The wave of intense labor negotiations. Amid these impacts, increased costs have promote increased investment in automation.
However, these investments will take time to bear fruit.
In the near term, many chains have been looking for a respite from rising costs by adjusting operations. Based on Trade publication Restaurant Dive, high turnover, low unemployment and established wage increases have left major chains struggling to find ways to increase efficiency. This has resulted in reduced uptime, smaller staff and longer shifts. These pressures, of course, have led to high turnover and continued a cycle in which wages have risen in a still-tight labor market.
That has also sparked an arms race among major chains to attract workers. One such battle has been particularly pronounced in the delivery space. Example: Domino’s Pizza (NYSE:DPZ) recently signed an agreement with General Motors to purchase hundreds of electric vehicles to Attract delivery drivers. Domino’s and Yum! Brand (YUM) has also been forced to compete with the likes of Uber and GrubHub for the same delivery drivers.
However, according to Bank of America, signs of wage inflation peaking and new jobless labor flow into the market as a darker macro picture is set to reverse the headwinds. this labor.
“The best thing about a recession is that costs are always going down — even when there are supply-related constraints. Labor availability continues to improve. Both benefit operators who bear 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 improving. The BLS’s latest report also offers hope that wage growth is finally stabilizing after a strong post-pandemic surge.
“We think pizza is well positioned for increasingly budget-focused consumers while labor inflation slows,” the senator said. “Benefits from a slower labor market will show through comps (driver availability) and profit margins (wages) and unit growth (staff) for the system.”
She maintains a Neutral rating on Pizza Hut-parent Yum! Brand (YUM), but assigned a Buy rating to Domino’s, naming it a top pick in part due to reduced labor costs.
“Compared to the S&P, the DPZ is trading at 1.4 times, slightly above the five-year average of 1.3 times but in line with its 10-year average,” noted Senatore. “However, we expect those estimates to be revised higher as sales accelerate and costs drop.”