Minimum Wage Debate Rages on, Darden Gets Strong Advice, Sysco Merger Under Scrutiny and Much More

This Week in Foodservice provides reports from the minimum wage fight, a story that the Sysco/U.S. Foods merger may be challenged by the government, news on Darden’s fight with some of their investors, Johnny Rocket’s new concepts, and a whole lot more.

The controversy over the effects of a minimum wage increase goes on. The mayor of Los Angeles has proposed raising the minimum wage in L.A. to $13.25 by 2017 through a 3-step phase in. To support his idea the mayor asked 3 labor and employment professors at University of California at Berkeley to investigate the impact of his proposal. After “drawing on a variety of government data sources” the professors concluded that the impact of the increase would be largely positive. They stated that new higher wages would have “a modest impact on business operating costs and consumer prices.”

In the report to the mayor, the study says that “Previous economic research on federal, state and local minimum wage increases have found little to no measurable effect on employment or hours from minimum wage policies.”

The Los Angeles Register, in an editorial response to the report, noted the study did admit that some apparel jobs may locate out of the city, some companies may earn lower profits, and that there will be modest one-time price increases.

And in Chicago where there have been proposals for a minimum wage of $13 to $15, the Chicago Sun Times has also weighed in on the topic with a series called “Faces of Minimum Wage” which included a story on a Chicago restaurant owner who got his start in the business as a $6.25 an hour dishwasher. He and his partners now own 7 restaurants in the area. In the article he points out the slim profit margins, that 40 percent to 45 percent of his costs are labor as well as the fact that the large proposed increases will drive up the salaries of other employees as well. He concluded that if some teenager who comes to him and says he wants to learn the restaurant business, it would be “absurd” to pay him $15 an hour.

And the minimum wage debate rages on.

Economic News This Week  

  • Job openings in July stayed very close to June’s 13-year high. The Bureau of Labor Statistics put the number of job openings at 4.67 million, which is down just 2,000 from June. The Bureau also reported the number of people who voluntarily left their jobs was 2.52 million, the highest since June 2008.  People leaving their jobs voluntarily is considered to be a sign of a strengthening economy.
  • Initial jobless claims continue to trend down with the number of claims declining by 36,000 to 280,000 for the week ending September 13. Still better was the 4-week moving average, which now stands under 300,000, at 299,500.
  • Median household income in 2013 was $51,939 which was not statistically different from 2012, according to the US Census Bureau. When adjusted for inflation, the Bureau says income is 8 percent below the level of 2007. The Producer Price Index was flat in August with a 0.3 percent drop in the price of goods offset by a 0.3 percent increase in the price of services. “Core” prices, which exclude food and energy, were also flat last month. Producer prices for food fell 0.5 percent. The Bureau of Labor Statistics calculates that producer prices have risen 1.8 percent in the past 12 months indicating that inflation remains under control.
  • The Consumer Price Index fell 0.2 percent driven by a drop in energy prices with the price of gasoline falling 4.1 percent. The Bureau of Labor Statistics pointed out the decline in the overall index occurred despite rises in the prices of food, shelter and new vehicles. The “core” index, which does not include food and energy, was flat. This is the first time since October 2010 that the index did not increase. In the past 12 months, the CPI is up 1.7 percent, which remains far below the Federal Reserve’s “target” of 2 percent.
  • U.S. industrial production fell unexpectedly in August to minus 0.1 percent. The U.S. Federal Reserve said the decline was chiefly due to a 7.6 percent drop in the production of motor vehicles and parts, which pulled down the entire manufacturing segment. Excluding auto and parts production, manufacturing rose 0.1 percent. Output at mines and utilities rose last month. The Fed also revised July’s industrial production down from +0.4 percent as originally reported to +0.2 percent.
  • Capacity utilization fell in August to 78.8, a decline of 0.3 percent from July. The Federal Reserve also said August’s rate was 1 percent down from August 2013 and 1.3 percentage points from its long run (1972-2013) average.
  • The New York Federal Reserve Empire State Manufacturing Survey shot up 13 points in September to a brisk 27.5. Any number over zero indicates growth. The indices for new orders, shipments and employment all rose.
  • The Philadelphia Federal Reserve’s Manufacturing Activity Index fell 7.5 points to 22.5. But the 28 score in August was a 3-year high. (Any number over zero shows positive activity.) New orders and shipments both rose while the employment index rose 12 points, the highest since May 2011.
  • The National Association of Home Builders/Wells Fargo Housing Market Index rose 4 points to 59 in September. This is the highest reading the Index hit in almost 9 years. Any number over 50 means that more builders are optimistic than pessimistic about their business.
  • Housing data slipped from July as the Census Bureau reported that housing starts declined by 14.4 percent in August. However, single-family starts dropped just 2.4 percent to 643,000 on a seasonally adjusted annual rate. Building permits fell 5.6 percent from July while single-family permits dropped 0.8 percent to a seasonally adjusted annual rate of 631,000.
  • The Small Business Optimism Index advanced modestly in August, rising 0.5 points to 96.1. The National Federation of Independent Business also reported that the percentage of small businesses planning a capital expenditure in the next 3 to 6 months rose by 27 percent, up from 23 percent in July. Those businesses with job openings increased from 24 percent in July to 26 percent in August. The Federation concluded optimism of small business people has been trending up over the last 6 months.
  • The leading economic indicators had a modest advance of 0.2 percent to 103.8 in August. The Conference Board revised July’s increase to 1.1 percent from the originally announced 0.9 percent. A spokesman for the board believes the economic recovery will continue to gain traction though not necessarily at the same pace as earlier this year.
  • The Gallup Confidence Index is steady once again at minus 16 for the week ending September 14. The index has stayed within one point of minus 16 for 7 weeks. It is almost amazing that a broadly based index is rock steady.

Foodservice News This Week

  • The Sysco/U.S. Foods merger might be challenged by the Federal Trade Commission, according to the Wall Street Journal. While Sysco has maintained that the huge number of distributors in the foodservice industry will keep a high level of competition after the merger, foodservice operators, manufacturers, and distributors have expressed concerns. The article speculates that the FTC may require extensive divestitures in order to obtain regulatory approval.
  • Hedge fund gives Olive Garden a ton of advice. Starboard Value, which has been engaged in a battle with Darden’s management for months, cannot be accused of being critical without offering any concrete suggestions to improve the situation. In fact, the company offered a 294-page critique of Olive Garden’s failings, including serving too many breadsticks, not adding salt to the water before boiling pasta, using too much salad dressing, and not selling enough wine.
  • Johnny Rockets comes up with four new concepts. Burger Business reports the innovative chain will test a drive-in movie design, a drive-thru concept, a food truck and a mobile pop-up restaurant. The new prototypes will operate under the Johnny Rockets Route 66 name and at least one or more of the new ideas could be operational by the end of this year.
  • The price of food away from home rose 0.2 percent, according to the Bureau of Labor Statistics’ August Consumer Price Index. In the past 12 months food away from home prices were up 2.5 percent vs. 1.7 percent for the overall index. Grocery prices were up 2.9 percent in the same time period.
  • Beef and veal prices rose sharply in August with the Consumer Price Index reporting a jump of 4.2 percent. This is the largest one month increase in 10 years for this category. While some major foodservice operators protect themselves from this type of price pressure through contracts and other means, sooner or later the price rise will impact foodservice.
  • Corporate Stirrings: Papa Murphy’s Holdings has acquired 9 stores from a franchisee in Minneapolis. Darden critic Starboard Value received support in their battle with the chain’s management when another investment firm, Barrington Capital Group LP, announced they intend to support Starboard Value’s slate of candidates for the Darden board of directors at the upcoming stockholders meeting. Carrols Restaurant Group has an agreement to purchase 30 Burger King units in North Carolina.
  • Growth Chains: Quizno’s plans on opening 100 new restaurants in the next 10 years. Peter Piper Pizza has plans to add 50 more locations by 2019.  Sonic Drive Ins plans to open 50 to 60 new franchised drive-ins in 2015. Marco’s Pizza plans to add 500 new stores by 2016, giving the chain 1,000 locations. Auntie Anne’s has opened an operation in a Meijer superstore with 2 more planned. McAlister’s Deli will open 10 restaurants in North Carolina, South Carolina, Colorado and Wyoming in the next 10 years.
  • Comparable Store Sales Reports: Country Style Cooking (up 4.1 percent), Cracker Barrel (up 1.2 percent), and Fazoli’s (up 4.9 percent).

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

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