Common Cents & Make Mine Automated

Earlier this week, the Bureau of Labor Statistics (BLS) announced there were 9.286 million jobs available in the United States during April 2021. This was/is easily an all-time high, not even close. However, employers seem to be having a difficult time attracting unskilled and semi-skilled workers, at least at the wages they would like to pay. The reasons are pretty simple: the government has been very generous with its unemployment and pandemic-related benefits, and workers’ attitudes have changed over the last 12-15 months.

I would suggest, if not argue, much of the reason for the change(s) is due to the public debate over a $15/hour Federal minimum wage. There is no way this hasn’t skewed unskilled workers’ assessments of their worth. Absolutely no way. The problem is you can’t legislate the true value of a workers’ output, no matter how hard politicians try. Yes, the government can set a price floor, but that doesn’t mean everyone can reach it.

Such will be the case in the fast-food industry moving forward.

Most of the people reading this newsletter probably don’t eat a lot of fast food. Sure, you might turn into, say, a McDonald’s when you are on a long road trip, and you want to get something and go. However, greasy burgers, fries, tacos, and even fried chicken sandwiches likely don’t make the cut too frequently.

Even so, we all know the larger chains and how most compete for business, right? Take the aforementioned McDonalds’s; does it primarily compete on price or on product? If you are having a difficult time answering the question, let me rephrase it: when you think of McDonald’s, do you think fast & cheap OR high quality? How about Burger King, Arby’s, Wendy’s, Krystal (White Castle for those of you not in the South), Subway, etc.? Heck, that is what the ads on the TV are all about, right? 5 for $5, get a bag of sliders for like $1, $5 footlong subs, buy one and get one free, super value meals, value menus, $5 meal boxes, and the list goes on and on. You get the picture.

Do want fast & cheap OR high quality?

With that in mind, and conversely, how does Chick-fil-A compete? How about Chipotle? When you think of these companies, do you think fast & cheap OR high quality? I imagine the majority of us when say the latter. When I think of Chick-fil-A, I think of peculiarly good service in the fast-food industry. As for Chipotle, it uses uber-fresh ingredients, right? As its website proclaims: NO artificial flavors, colors or preservatives; NO freezers, can openers, or shortcuts.

With this in mind, how many of you would be willing to pay, say, 10% more for a meal at Chick-fil-A or Chipotle? Would this increase even register with you? Now, how many of you would be willing to pay much extra at the other group of fast-food joints? Maybe a few folks, but nowhere near everyone? After all, if your competitive advantage is being cheap and you are no longer cheap, how are you competing? Obviously, not very well.

This has a point.

A couple of years ago, I went to a conference outside of Philadelphia, and stayed in a town named Radnor. Not far from my hotel was a restaurant called honeygrow, the lack of capitalization is intentional. On the website, the company proclaims: “Made with only the highest quality ingredients, our stir-fry, salads, and honeybar offer the perfect combination of flavors to satisfy whatever you’re craving.” Interestingly, the place didn’t have ‘front of the house’ personnel, essentially no cashiers, as in none. Customers tap in their orders on a very user-friendly kiosk/monitor, and pay with a card swipe. The only people working there, from what I could tell, were preparing food.

I ordered the red coconut curry, a stir-fry noodle dish, which came/comes with: red coconut curry sauce, rich noodles, roasted tofu, pineapples, jalapenos, carrots, scallions, and cilantro, and I added broccoli. With an iced tea, the bill came to be…I have no clue, seriously. That isn’t what I remember about honeygrow, at all. What I do recall was how fresh and tasty my meal was, fantastic, AND the technology. You see, there weren’t a lot of self-service kiosks in restaurants in Birmingham a couple of years ago, and they are still pretty uncommon. However, I had previously used them in San Francisco and New York, so I was familiar with the concept.

Huh. Kiosks weren’t in Birmingham, but they were in these larger metropolitan areas. Is Birmingham that far behind the curve OR does Birmingham just not have the economic necessity to use them? At least to the extent of more major population centers? While we can debate the former, the answer is the latter. The cost of unskilled labor in our area doesn’t engender the use of self-service kiosks in restaurants the way it would in more expensive, wealthier areas. Period.

So, what happens at fast-food restaurants around here which compete on price IF they can’t attract enough workers at the ‘true’ market clearing price for unskilled and semi-skilled labor? The answer is pretty straight forward, as I have seen it firsthand in a number of places: business owners use technology to replace the capacity lost due to unprofitable labor costs.

Consider this snippet from a post by Felix Behr on mashed.com on June 10, 2021:

“It looks like more and more robots will continue to infiltrate the fast-food industry. In the latest case, as CNBC reported last week, 10 McDonald’s restaurants in Chicago are testing voice ordering technology in drive-thrus. So far, only about one-fifth of the orders need to be taken by humans. The computers have an 85% success rate for accurately taking down orders for Big Macs and fries.

When the test was first announced in March, Lucy Brady, McDonald’s chief digital customer engagement officer, explained to CNN the reasoning behind this initiative: “Humans sometimes forget to greet people, they forget, they make mistakes, they don’t hear as well. A machine can actually have a consistent greeting and remain calm under pressure.” The algorithmic-like food and service that some McDonald’s fans expect might go well with tech-based ordering systems. After all, the complaints some people lob at fast food chains tend to revolve around poor customer service or orders that have fallen to the vagaries of chance (via Forbes). The fast-food industry is primed for automation.”

Consider the next to last line in the second paragraph: “the complaints some people lob at fast-food chains tend to revolve around poor customer service or orders that have fallen to the vagaries of chance.” Perhaps interestingly, and as an aside, I actually recall the one time, again the one time, I got bad service at a Chick-fil-A. It was in the Detroit airport, and I was taken aback when the cashier didn’t say: “my pleasure.”

So, why wouldn’t franchisees replace humans, which are prone to make mistakes and forget to greet people with technology which doesn’t do such things? The answer is obvious: cost. However, what happens when the cost of the technology is less than or comparable to employee related costs? Bingo. Oh, and it just isn’t the hourly wage. As any CFO or business owner will gladly tell you, there is far more to employee costs than just the salary or the hourly wage.

This takes back to the beginning.

Earlier this week, the Bureau of Labor Statistics (BLS) announced there were 9.286 million available jobs in the United States during April 2021. Of these, 1.338 million were in ‘accommodation and food services,’ which was the largest sub-industry. Just think about that number: 1.338 million job openings at hotels, restaurants, and bars. That is an 9.9% vacancy rate and an enormous amount in absolute terms. By comparison, across all industries, the rate is 6.0%. Intuitively, this wouldn’t happen IF there wasn’t a mismatch between what the workforce thinks it is worth (or can get paid for doing nothing) and what employers are willing to pay.

So, what happens if this mismatch doesn’t improve? You know the answer already, the number of job openings in ‘accommodation and food services’ will go down and the number of self-service kiosks at places like Burger King, Wendy’s, McDonalds, and others will go up. Remember, when you compete on price, you have to keep your costs low. After all, no one really wants to pay a lot of money for a puny, value menu McChicken sandwich. Do they?

 

Take care, have a great weekend, and be sure to listen to our Trading Perspectives podcast.

John Norris
Chief Economist

 

 

 

 

 

 

 

 

As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself. Finally, we do NOT make a market in any of the companies listed in this newsletter, and I do not own them personally.