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At Black Box Intelligence (formerly TDn2K) we just released “The Restaurant Industry Snapshot” for December 2014. I have to say I remained on the fence about the economy and the effect it will have on our industry, even taking into account the improving same store sales and traffic results in Q2 and Q3 of last year. We all know that the year started out in a hole; Q4 2013 with negative 0.5% same store sales and Q1 2014 negative 0.7%, due to horrible weather. The big unknown was how would weather impact Q4 2014 and how will it affect Q1 2015. Is a recovery really here?

We know that weather helped us in Q4 2014; we just don’t know how much. I believe the bigger issues are what we do know; the consumer is more optimistic, job growth is improving, lower fuel prices are helping and disposable income increased. Let me be specific on these four key issues.

The Consumer Confidence Index recorded 92.6 for December, a 1.6% increase over November. This is the highest level since the beginning of 2007 before the great recession.

Regarding job growth, I tend to listen to our retained economist and friend Joel Naroff, President of Naroff Economic Advisors. Joel’s comment after the December job report was “Companies of all sizes are adding jobs and that should mean continued solid payroll gains. I remain optimistic about the job market.” In our own Workforce Intelligence (formerly People Report) data tracking over 1 million restaurant employees each month, the latest data shows a robust 4.1% increase.

Fuel prices have declined from $3.31 a year ago to $2.18 today, according to the AAA’s national average. However, in research we are conducting, we are finding that fuel prices alone do not absolutely correlate to sales. Our assumption on that finding is that there is a ceiling of prices over approximately $3.50 a gallon which does negatively impacts sales. When prices fall below that ceiling, we compete for other expenditures for the increased disposable income.

One of the most powerful correlations that we find in our research is between US restaurant sales and traffic compared to US personal disposable income (DPI). We don’t think it is a coincidence that we had the best same store sales in the history (6 years) of Financial Intelligence (formerly Black Box Intelligence) data following the highest recorded DPI in history of the US of 13,155.9 USD Billion in November. So from the macro perspective it does seems that we are in a great position for 2015 regarding revenue growth.

On the balance of the revenue optimism is the continued pressure on cost, particularly on the labor line. We hear a lot of discussion on the fluctuation of commodities impact on cost of goods. But as every operator and investor knows, the “prime cost” formula includes not only costs of goods, but total labor expense as well. I don’t hear much about the topic of prime cost, but it represents on average +/- 60% of restaurant overall cost and much a higher percentage of controllable expense. Total labor expense typically is at least half of the prime cost, meaning it is the number one or two expense categories in operating restaurants.

So why should you care?

Operators have a clear line of sight on cost of good increases by product, and can set pricing to overcome the fluctuations. Most companies raise prices every year, based primarily on commodity outlooks and in turn expect to control labor increases through higher sales or reduced staffing.

Total labor cost includes a lot more moving parts requiring greater analysis; market wage rates, market turnover percentage, benefits cost, local minimum wage rates, and oh by the way, service standards in delivering the brand promise. All of these factors contribute to the pressure on cost, service delivery of the brand and the resulting impact on sales and traffic!

With Workforce Intelligence (formerly People Report) and Financial Intelligence (formerly Black Box Intelligence) we now have a unique view of how each piece of the total labor expense impacts not only cost, but also sales and traffic.
Here’s the punch line.

Everybody knows the impact of ACA and minimum wage impact on their business by now. As a matter of fact a great deal of effort and focus has been expended on determining those impacts.

The best in class operators that have simultaneously been seeking to understand the real cost of turnover, are those that could reap big rewards in their top and bottom lines. We have done several case studies that utilize both Workforce Intelligence (formerly People Report) and Financial Intelligence (formerly Black Box Intelligence) databases to determine why top restaurants and market operators excel, and the bottom underperforms so poorly. In each case, we find that compared to the market, (not necessarily the brand),that the top performing restaurants and markets typically hire above the market rate , invest more in training, and achieve the results of lower turnover and turnover cost. This requires a culture tuned into the ever challenging demands of a more diverse workforce than ever. No surprise, that outcome leads to significantly higher sales performance compared to their market competitors. Top line increases and bottom line improvement. Who doesn’t want that?

With all the good news on job growth comes the bad news for employers who want to grow sales and profits. The best talent has choices, and turnover hurts your brand, your sales and your bottom line.

Just as best in class operators buttoned down for the great recession, they will now go to work on the most important things to take advantage of this new prosperity potential. They will be relentlessly focused on having the best people, in the right places at the right times. They will take advantage of the increasingly tight labor pool of great talent, as the way to steal share of that critically important growing consumer disposable income.

The winners in this new cycle will be the activists for the best talent!

Happy New Year!

BoomerCEO

PS- we will be discussing all of this and much more at our 20th Global Best Practices Conference later this month.