Considering Investing In Restaurants? Read This First
The raise in minimum wage hikes for restaurants could put them in further strain since they’re already experiencing reduced guest traffic.
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A potential recession is something all analysts watch out for, particularly if the economy has been expanding for quite some time. But in online stock trading, if you’re planning to invest in a particular industry, you need to be sure whether that industry isn’t going to have a recession-like situation soon. There could be a recession in the restaurant sector, according to Motley Fool’s Rich Duprey. He blames it on the minimum wage hikes for restaurant staff, coupled with an already struggling industry. From the 1st of January, 2020, minimum wage rates will be hiked by the District of Columbia and 24 states. It comes at a time when, as Duprey believes, the restaurant industry could be heading to a period of recession. Restaurants Already Struggling with Guest Traffic Drops Restaurants are facing a continuing dip in guest traffic. While the past two months witnessed an increase in comparable-store sales, that could largely be accounted for by the higher prices charged by restaurants and also the improved product mix. But the fall in guest traffic keeps rising. With the minimum wage hike, that could combine to significantly cut into the profits for restaurant chains. The wage hike regulation is the result of the movement called Fight for $15 that fights for doubling the minimum federal wage. It didn’t gather much steam in Congress, but at the state levels the activists have been able to wield greater influence . Shake Shack ($SHAK) and McDonald’s ($MCD) have already raised, on their own accord, the minimum starting wage at the start of 2019. In December 2019, New York City had already mandated a $15-per-hour wage. The other 24 states won’t necessarily hit that figure this year . District of Columbia will surely get there though. But even in these 24 states they’re rising to that wage point . Higher Minimum Wages an Additional Strain With slowing business, the higher minimum wages are an additional burden on restaurants in these states. While same-store sales had a meagre 0.1% growth this October, traffic reduced by
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more than 3% and suffered a 3.2% average decline consecutively for 7 months, as per data from TDn2K’s Black Box Intelligence. But restaurants are slowly transitioning towards a delivery or carryout model. Pizza Hut of Yum! Brands ($YUM) has been reportedly doing this. And there are also many delivery apps run by third parties that bring food from the restaurants to the consumers, making the need for coming to the restaurant and eating redundant . Reliance on Technology Could Cut Jobs Though Besides, restaurants are also now considering relying on technology for human- performed jobs. McDonald’s and Wendy’s ($WEN) have launched self-ordering kiosks while the former has also been reported to be testing robots for helping in cooking by dunking chicken nuggets, fish patties and fries in oil. McDonald’s has also been testing a host of other innovations, including voiceactivated orders at drive-thrus as well as machine learning for making order suggestions for customers based on trending items, weather or time of day. In fact, this Motley Fool article states that the age of robots in restaurants is coming soon. But still, there are human staff members in conventional restaurant setups, where you at least need people to take your order. Such restaurants will be negatively affected by the minimum wage rise. Paying higher wages to waitstaff would lead to staff higher in the management ladder also expecting a rise. And if that doesn’t happen, the higher level employees tend to leave, raising the turnover rates of restaurants. Duprey points out that the TDn2K survey reveals exactly that growth in turnover of managers in restaurants as a result of stagnant pay. Restaurants Need to Reduce Jobs to Bear the Strain, or Go Bankrupt So when the minimum wage is raised, restaurants would resort to the only practical solution to ensure profitability - reducing job positions. Or they could also pursue the less aggressive solution of reducing the working hours of their staff. They could also raise prices of the items in their menu, but that could reduce demand. Duprey reckons that one of these options will have to be pursued or restaurants would go out of business .
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He quotes the New York City Hospitality Alliance survey that discovered that more than threefourths of restaurant owning respondents cut the hours of work for their staff, while 36% of them cut jobs. Duprey also announces worse news - one upscale restaurant chain owning 35 restaurants declared bankruptcy. Seattle has a $16-per-hour stipulation, and the bankruptcy filing of the hotel chain quoted exactly that . Raising Consumer Demand Essential Restaurants could evolve to deal with the new minimum wage regulation and hang on, but to be truly profitable they need to ensure consumer demand rises. Investing in any industry requires tons of research, and surveys like this can help you analyze the situation. Helping you trade from the comfort of your home is advanced stock market trading software from an experienced online stock broker.
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