Add Labor Value During Wage Hikes? Here’s How.

A line between success and failure can often be drawn between adopters of innovation and emerging technology, and those who are unable (or refuse) to evolve within a changing market. There are plenty of examples in modern times of businesses failing to identify disruptive innovation mines in the fiscal road ahead in time to turn them into springboards for success. Nokia kept making “dumb” phones while everyone else created hardware for Android in response to Apple tossing the iPhone gauntlet through the floorboards. Blockbuster had the opportunity to purchase Netflix multiple times, and probably would have had they realized the disruption Netflix represented to their business model. Oops. Circuit City or CompUSA, anyone? Too soon?

When taking a closer look at QSRs and Fast Casuals in the restaurant industry, it’s easy to see how quickly trends are changing. Whereas major name brands can weather the storm while navigating amongst the rising upstarts waving their “better food, better experience” banners, companies trying to be the next Five Guys or Which Wich to do battle with the golden-arches & $5-footlong juggernauts are seeking differentiators beyond new food to push their concept above the tidal wave of fly-by-nights. Major name brands may (or may not) be able to undergo a transformation and come out profitably on the other side by reaching into their deep pockets to consult teams of researchers, but failing to immediately adapt and capture shares of a changing market for most smaller companies simply means closing shop for good.

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"Crisp Kitchen uses self order to eliminate lines during peak hours, realizing otherwise lost revenue."

The Inevitability of Rising Labor

There’s a patient elephant in the room waiting with his proboscis poised above your pocketbook. Minimum wage, like it or not, will likely force major decisions for most restaurateurs in the immediate future. In Chicago, for example, minimum wage is scheduled to jump from $8.25 to $10 per hour on July 1st, a 21.2% increase. In an industry where labor represented 26% of business costs in 2013 (with food ringing in at 31%), a 5%+ increase in costs could potentially obliterate profit margins that have wavered anywhere from 2-6% in the past decade. How will restaurants in Chicago survive long enough to see the remaining increase – $13 per hour – that will go into effect in 2019?

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"Wow Bao in Chicago features "Hot Asian Buns" and self order kiosks at every location."

A knee-jerk reaction to combating rising labor will be raising prices, but studies have shown that the price-sensitive QSR market may lose sales by up to 1% for every 1% in price increase. While Fast Casuals might be partially protected from price sensitivity, they will still need to come up with other ways to make the equation balance on the P&L at the end of the quarter, and it probably won’t come from lower food costs. Though they may be able to reduce this somewhat by controlling inventory and waste, most already-efficient concepts can only do so much, and even if they successfully reduced food cost to zero, would the difference counteract a 5%+ increase in labor? The most likely way most concepts will combat this will be by raising prices as the trend toward “local and fresh” will leave little room for lower cost ingredients, taking on the risk of losing market share as they do. Since other costs (like rent) are less malleable, the best bet for restaurants to survive is to reduce labor or to get more of it for their dollar, and not having a plan to mitigate this could prove lethal without deep pockets or a strong brand.

Self-order’s Perfect Storm

Technology has always been a differentiator in most industries, and restaurants are no different. The Internet has been the single most disruptive innovation of our time, making possible countless other innovations that have impacted every industry. When paired with smartphones (another worldwide game-changer), what restaurants have received is a device that has conditioned consumers to do for themselves via a user interface instead of over the counter. Teens raised on smartphones and other portable Internet-anywhere devices have them rewriting their DNA as most latter-alphabet generations currently prefer text messages to face-to-face conversations. These same consumers also prefer a user interface to any human interaction that stands between them and their consumables, and they also represent the largest consumer force that’s every walked the planet. Catering to their demands will bring the gravy train for concepts that can capture their attention.

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"Kiosks lets guests order and pay quickly, essentially putting them to work for the concept as DIY cashiers."

It’s no wonder that major players like Panera & McDonald’s as well as older brands fighting to be relevant such as Hardee’s are similarly placing their chips over self-order to handle repetitive tasks that don’t require a human touch. Self-order at the counter allows existing labor to focus on production, customer service and other activities that are more valuable than simply standing at a counter or in a drive thru window to translate a guest’s order into a Point of Sale terminal and occasionally make change. These concepts (and countless others) have done the legwork and have come to the conclusion that self-order is an idea that belongs in their business plan, and in the words of one Hardee’s exec, allows them to interact with millennials in the ways they prefer to interact, thus to better catch their wandering attention and well-documented brand loyalty.

Value Added Labor Brings Brand Value

Implementing self-order does not require the replacement of workers, as doomsayers in the minimum wage wars might profess. Popular franchises have ensured to communicate to both the public and to their employees that positions and responsibilities are shifting, not disappearing. As self-order replaces tasks that can be put into the hands of the consumers such as ordering and paying– in essence, putting them to work for the restaurant – existing labor can be shifted toward production roles or toward improving customer service. As for the kiosks, they drastically cut order time while processing card transactions on the spot to neatly streamline throughput while freeing up labor. One prominent Boston chain reported that they would rather have kiosks take the orders while employees help customers. For them, it has never been a question of labor; they just want to give their guests a better, faster experience.

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"With a lot of appeal for Millennials, many new concepts are popping up like Dharma Sushi & Thai which features a creative menu, craft beer and self order."

As any restaurant owner knows, how to increase throughput is a key question when planning just about anything in a new location. Table placement, drive thru lanes, POS layouts and more all play factors in a restaurant’s ability to get guests through the order process and out the door. Increasing throughput also means more product and – you guessed it – more labor in addition to larger sales. However, instead of having an employee tied to a register for order translation, concepts can have more and more skilled production members, or they can have brand ambassadors whose sole purpose is to deliver a better experience for the guest. A better experience means better customer loyalty, and better loyalty means a stronger brand. At the end of the day, a strong brand is what allows the old-timers to weather the storm while they’re learning from the early adopters about how to take advantage of disruption.

 

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