[img id=”1″ align=”right”]Earlier this July, we had the opportunity to sit down with Joel Naroff and Victor Fernandez from our Black Box Intelligence (formerly TDn2K) team for our quarterly member webinar series. Joel is the Black Box Intelligence (formerly TDn2K) economist and President & Founder of Naroff Economic Advisors, a strategic economic consulting firm. Together, we discussed restaurant industry Q2 results [see latest snapshot here], and Joel and Victor reflected on changes in particular trends such as income gain, turnover rates and the impact of technology in the coming quarters. Here’s a peek at a few of the questions during the conversation:
Q: You know the old phrase- the rising tide doesn’t lift all boats. Are we starting to see more of a divergence in our data between top and bottom performers? It seems to be strung kind of like the economy- the rich get richer and the poor get poorer. Are we seeing that from a performance standpoint in our Workforce Intelligence (formerly People Report) and Financial Intelligence (formerly Black Box Intelligence) data, too?
A: Victor: A few years ago, sales growth was tough for everyone, no matter what you did. Sales were bad because the economy was doing so poorly. Then, the gap between top and bottom was not as prevalent. In 2013 we were looking at about 5.7 percent difference between the top quartile and the bottom quartile in terms of sales. If you look at it now, it’s grown to about 7.7 percent.
Today, sales are better and people have a little more income, consumer confidence is a lot stronger than it was. That’s where we see some movement in terms of sales. The good brands get the better chance to get that initial benefit of additional sales. There’s more of a gap in between the two [types of brands] so the tide is kind of raising everyone, but the ones that have been better at it are rising much faster and are seeing much better return on that performance side.
When you look at what’s happening in Workforce Intelligence (formerly People Report), it’s kind of the opposite. Leading up to 2014, not a lot of employees were venturing out to see what was out there because there was not a lot to be found to begin with, so turnover was relatively easy to manage. Since 2014, the gap has grown and we sit at about 13% between top performance and the rest of the industry.
Q: It appears that possibly this pressure we’ve got on turnover is showing up in our service ratings as well. Is that the way you’re reading that, Victor?
A: Victor: That’s true, but what’s also interesting is that it’s more defining at the brand level than at the industry wide level. I believe the reason for that is because the brands and consumers have different standards of what service should look like and feel like. At the brand level, brands that have a big percentage of negative service responses have bad turnover levels in those markets. So, we are seeing that reflection, but it’s more at that brand, market and unit level than at the industry wide kind of analysis.
Q: Joel, we obviously are happy with good news that you delivered today talking about the second half of the year. How do you see this projecting into 2016?
A: Joel: If you project out the issue of income gains, it’s not just a matter of whether we hit full employment. I think most economists are now assuming that by the end of this year we will be at full employment. What that implies is that in 2016, we’ll move below full employment and that will put pressures on wages. But, there’s a second thing that may actually create somewhat faster growth in compensation. It’s the idea that for the last seven years, businesses haven’t had to worry about raising compensation, and therefore are being very aggressive at holding the line. The problem with being aggressive at holding the line is that we wind up with large numbers of job openings and as people see those openings becoming available, they’re beginning to leave. So, we then wind up with growing quit rates and turnovers. What that ultimately means is that when the dam breaks and businesses start to say “Hey, I can’t hold the line anymore,” then you get a combination of both businesses recognizing the need to raise wages, and the labor shortage situation itself kicking in.
You’ve got retention costs and you’ve got attraction costs that come together in 2016. So, again, it’s that two-headed monster that we have. On one head, we’ve got the income which is likely to grow a lot faster next year than even the second half of this year, and that will propel the consumer spending side. On the other side, though, we’ve got the real challenge of managing the rising compensation cost pressures.
I’m expecting to see at least 2.5 to 3 percent growth [in the economy] in 2016. That’s likely to allow businesses to raise their prices a little faster. But, they’re going to have to do that in the face of this rising compensation. So, I look at 2016 as being a really good year for the restaurant industry in terms of demand, because we will get raises in income across the income ladder. That spreads the gains across the entire industry.
Q: Do you see any gains in productivity in other sectors like retail that we can learn from in the restaurant business?
A: Joel: There’s no question that just about every segment of the economy is looking for a way to improve productivity. But, what separates the restaurant industry from retail, for example, is that a brick and mortar store can improve productivity through mobile [activity] that allows a product to be shipped. In the restaurant industry, even if it’s a take-out situation, you still need to get the people to come out to the restaurant. So, what seems to be the next stage is the on-demand movement. If you’re mobile, can it be delivered?
Delivery is the biggest challenge in what separates the restaurant from other industries like retail. Clearly, we are implementing wide changes in technology within the restaurants themselves and those changes in technology are extremely logical. For example, the touch screens and the different ways of ordering and even pre-ordering allow you to be able to get to the restaurant and have the order waiting when you show up. This is more directed towards the millennial group which is becoming the greater and greater segment of the market.