This Week in Foodservice: Affordable Care Act Impact on Restaurants Still Uncertain

With roughly six months remaining in 2013, restaurant operators still remain unclear as to how the federal healthcare legislation will impact them in 2014. A few chains, though, continue to move forward cautiously.

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Some restaurant chains are treading carefully when it comes to expansion plans for fear of driving up health insurance costs next year. The Wall Street Journal reported that chains are managing their businesses to reduce their financial exposure to the Affordable Care Act. ECW Enterprises, owner of East Coast Wings & Grille, has limited franchisees to 3 to 5 units in order to keep employment at less than 50 people so as to avoid having to comply with the requirement of the law to offer health insurance. The writer also quotes White Castle executives saying that the chain is "significantly slowing its growth plans in light of rising healthcare and other costs." White Castle will open two to three restaurants this year vs. five last year, five in 2011 and a dozen three years ago.

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Another article, also in the WSJ, asserts that restaurants will experience "less pain than feared." As reported here in March, Wendy's has recalculated that the new health care law will cost about $5,000 per year per restaurant, not the $30,000 the company initially announced. The story went on to quote an analysis by Barclay's that projects that since the law requires coverage of children to age 26 that many young restaurant employees will choose to remain on their parents' policies. Further, Barclay's believes that many employees will choose to forgo paying for insurance and pay the penalty instead at least in the early years of the program when the government will charge as little as $95.

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Perhaps the most difficult aspect of the Affordable Care Act is the uncertainty that surrounds it and business people hate uncertainty. Many of the plan's details have yet to be codified and some employers are even unsure what level of health insurance they must offer. Some bet the program may be greatly revised or eliminated all together. Even though polls show more Americans are against the law than for it (according to USA Today) the chances of any drastic revisions are unlikely, leaving chain owners and executives difficult to plan. For instance, the WSJ article referenced above quotes a White Castle spokesperson as saying they don't know how many of the employees will sign up for health insurance. Meanwhile, a McDonald's spokeswoman says even though the chain estimates the new law will cost $10,000 to $30,000 per year per restaurant, the burger giant will open more new restaurants in the U.S. this year than in any of the past 3 years and she is unaware of any franchisees scaling back expansion plans.

A personal story from this writer involves a friend who will retire next year from a national retail company, not a in the foodservice business. She met with representatives from the retailer's human resources department recently to discuss her benefits and options, but the topic of her health insurance came up and the HR folks stated simply that when it came to next year, they didn't have a clue on what was going to happen.

Economic News This Week:

  • Initial jobless claims shot up by 32,000 for the week ending May 11. Total claims were 360,000, up from an upwardly revised 328,000 the previous week. This was a six-week high after the number of unemployment claims dropped for three straight weeks. The more reliable 4-week average for claims was 339,250. The spike may have been a fluke. Or, perhaps the decline in claims for the previous weeks my have been an aberration. The fact is that 360,000 claims is right about where they had been hovering for the first 4 months of the year. Some experts speculate the federal funds sequester is driving increased layoffs.
  • Retirement age continues to increase, according to a poll by the Gallup Organization. The study, fielded in April, found retirees reporting they were 61 years old when they actually retired. This was up from 60 in both 2012 and 2011 and substantially above the age of 57 reported in 1991 when the researcher stated asking the question. Obviously, more people holding on to their jobs longer means fewer openings for younger workers.
  • The housing market took two steps forward and one step back this week. On the negative side, housing starts in April fell by a nasty 16.5 percent over a strong March. The U.S. Commerce Department estimates that April starts would mean 853,000 new dwellings on an annualized basis. The somewhat volatile multi-unit construction starts fell 37.8 percent in April while single family homes dropped by 2.1 percent. Home building permits went in the other direction increasing 14.3 percent in April, which translates into an annualized rate of 1,020,000 – the highest level since June 2008. And, the National Association of Home Builders Confidence Index rose by 3 points to 44 in May despite lingering concerns about the costs of building supplies, labor and lots.
  • The Consumer Price Index fell by 0.4 percent in April with falling gasoline prices responsible for much of the decline. Without food and energy price changes, "core" consumer prices were up 0.1 percent. In the past 12 months the Consumer Price Index is down 1.1 percent indicating that inflation is under control.
  • Wages adjusted for inflation were up 0.5 percent in April, the biggest gain in 5 months.
  • Industrial production fell by 0.5 percent in April, pulled down by declines in manufacturing and utilities.
  • Capacity utilization dropped to 77.8 in April after being revised down to 78.3 in March.
  • The N.Y. Federal Reserve's Manufacturing Index for May was minus 1.4, indicating a contraction in manufacturing activity. This was down from positive 3.05 in April. New orders and intentions to hire new workers were down.
  • The Philadelphia Federal Reserve's Business Activity Survey came in at minus 5.2, an even steeper decline than N.Y. New orders, shipments and labor all declined on the the Philadelphia index, which stood at a positive +1.3 in April.
  • Leading economic indicators rose 0.6 percent in April after falling 0.2 percent in March according to the Conference Board. Seven of the ten indicators the Board monitors were up.
  • The preliminary May Reuters/University of Michigan Consumer Index shot up to 83.7, the best reading since July 2007. The final April report was 76.4.

Foodservice News This Week:

  • Lowering blood alcohol limits for driving has received a cool reception from the National Restaurant Association as well as the American Beverage Institute, which represents 8,000 restaurants that serve beverage alcohol. The National Transportation Safety Board has proposed lowering the blood alcohol limit for driving from the current level of 0.08 percent to 0.05 percent. The NTSB has no authority to set limits for drunk driving but can enforce their rules by withholding federal funds. This is how the government agency got the states to adopt the 0.08 percent limit although it took 20 years. Restaurants fear not only the loss of profits from their bar business but an overall loss of food sales as well if people can't drink at their establishments. Restaurant spokespersons point out less than 1 percent of highway deaths involve impaired drivers in the 0.05 percent to 0.08 percent range. They also note that a person of small stature could hit or exceed the 0.05 percent level with just one drink.
  • France looks to frozen foods to protect their bottom lines as wages climb. Made from scratch dishes are being replaced by frozen product as minimum wage in France has climbed more than 36 percent in real terms since 1990. Of course, in the land of great chefs and great dining, there are holdouts who still make everything in their kitchens and this group is lobbying for full disclosure on where the food comes from.
  • Sandwiches are a fast growing foodservice product, according to data from Technomic. The total sandwich category itself is not growing but more consumers are eating them away from the home. Nearly half of all sandwiches are ordered out, which is up from 44 percent in 2010.
  • Smaller menus at McDonald's are apparently in the works as the fast food giant reduces its current 145 items now being offered. McDonald's menu has grown 70 percent since 2007 according to Bloomberg News which quoted a corporate email to McD's franchisees. At least seven items are potentially going to be removed although a spokesperson for the chain played down the matter, stating that the company has been adding and removing menu items for decades.
  • McDonald's china expansion will result in 75,000 new positions this year on top of the 90,000 people they currently employ in the country.
  • Two Memphis barbeque giants died on the same day. John Willingham, founder of Willingham's World Champion Bar-B-Que and Don Pelt's, founder of the Corky's BarBQ, both died on the opening day of the Memphis in May World Championship Barbeque Cooking Contest this month.
  • Growth Chains: Krystal plans on opening 13 new locations by the end of the year. Noodles & Company's franchisee in New Jersey plans on opening 40 restaurants in the Northern and Central parts of the state while another franchisee has plans for 20 locations on Long Island, N.Y. Tim Horton's has signed an agreement for building 100 restaurants in Saudi Arabia. Starbucks has announced they plan on growing from 350 outlets in India to 4,000.
  • Comparable Store Sales Reports: Ark Restaurants (down 4.4 percent), Country Style Cooking (down 4.1 percent), Diversified Restaurant Holdings (up 3.5 percent), Granite City (up 2.7 percent), Jack in the Box (system up 0.1 percent, company-owned up 0.9 percent and franchised down 0.2 percent), Qdoba (system down 1.5 percent, company-owned down 0.5 percent and franchised down 0.9 percent) and Steak N Shake (up 0.3 percent).

For details and same store sales of other chains, click here for the Green Sheet.

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