000644 Tight Labor Market Boosts Price Of Dining Out

Minneapolis, MN - The tightest U.S. labor market in 30 years is forcing restaurant owners to raise wages to attract good employees -- and diners are often absorbing those costs when they pay the check.

Food retailers are quietly passing along rising labor costs in the form of stiffer tabs for meals and beverages, but a relentless focus on boosting worker productivity has helped keep price hikes in check, industry executives said this week at a conference with analysts here.

“We have chosen to raise wage rates to remain competitive,” said Michael Casey, chief financial officer of speciality coffee seller Starbucks Corp. “The only alternative is deteriorating service and a longer line.”

Labor costs as a percentage of restaurant revenues have climbed steadily in recent years as Starbucks' product mix has slanted increasingly toward labor-intensive espresso drinks, Casey said. This year, the chain raised drink prices in the UK, Canada and two- thirds of its California stores, he said, following a widely publicised systemwide increase in May 1999.

“We plan to continue to use pricing as one of the tools for managing our business,” Casey said.

With 10% of America's work force employed in restaurants, recruiting and retaining labor is the industry's greatest challenge, said Allan Hickok, an analyst with U.S. Bancorp Piper Jaffray.

“There is a Darwinian element to all of this,” he said. The most popular restaurant chains with the best concepts attract top talent, while struggling restaurants are left to sift through the bottom of the labor pool.

At Morton's Restaurant Group Inc., which operates 52 upscale steakhouses primarily in the United States, managers earn bonuses by meeting growth targets.

“We're always working on paying those people more,” said Morton Chief Financial Officer Thomas Baldwin.

As a result, he said, employee turnover at Morton's is just one-fifth of the industry average of 100% annually for managers and 200% for hourly workers.

A limited labor pool has yet to crimp the plans of expansion-minded companies such as Starbucks, which expects to open 750 new stores this year, or Morton's, with plans to increase its U.S. base to 80 to 100 restaurants eventually.

Cheesecake Factory Inc. aspires ultimately to operate 150 to 200 casual-dining restaurants, compared with just 36 at present.

“We are fully staffed and meeting all our recruiting requirements,” said David Overton, chief executive of Cheesecake Factory, which serves pasta, pizza and salads in addition to baked goods. General managers for the chain earn in excess of $100,000 a year, covering base salary plus bonuses, a company car and stock options, he said.

Cheesecake Factory prices went up half a percent when the menu changed this month, on top of two similar adjustments last year, but the company has also set a goal to increase labor productivity by 1% of sales annually, Cheesecake officials said.

Morton's also has limited price rises to 1% annually, with the most recent hike last quarter largely driven by higher beef costs, Baldwin said. No further hikes are in the works.

“For most of these companies, their labor costs as a percentage of sales have not escalated,” said Hickok.

One reason is that restaurants are busy automating as many functions as possible. Starbucks is experimenting with hand-held devices for taking orders, for example, while the Wendy's International Inc. fast-food chain has installed super-powerful dishwashers that speed cleanup.

“We continue to implement productivity initiatives, and that has helped offset our rising labor costs,” said Wendy's Chief Executive and President Jack Schuessler.

Wendy's Treasurer John Brownley said the company was recently able to chop labor costs by 0.3% of sales.

A U.S. economic slowdown could help alleviate upward pressure on wages, he said, but also would make it harder to raise menu prices.

RETURN TO HOME PAGE

E-mail: sflanagan@sprintmail.com