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Will Obamacare Carve Up the Restaurant Industry?

By Rich Duprey - Mar 30, 2013 at 12:02PM

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Health-care reform will take a toll on industry that features high numbers of low-wage workers.

Because restaurants typically operate on razor-thin margins, President Obama's signature health-care reform law has largely been criticized by the industry for imposing onerous new costs that will potentially wipe out whatever profits they make.

Under the Affordable Care Act, companies with 50 or more employees have to provide them health insurance if they work 30 hours or more, or else face a $2,000-per-employee penalty. That led many restaurant operators, such as the CEO of Olive Garden and Red Lobster parent Darden Restaurant's (DRI 0.36%), to say worker hours would have be cut to avoid paying for expensive health-insurance premiums.

Binge eating
He was joined in his criticism of the law by other restaurant operators, including pizza-shop chain Papa John's (PZZA -2.71%) and burger joints Wendy's (WEN -0.47%)McDonald's (MCD 1.27%), and Burger King, all of which are chafing at the law's costs.

While Darden eventually walked back its statement and Papa John's CEO says his comments were misconstrued, others continue to assert there will be real damage coming.

McDonald's, for example, maintains that complying with the law will cost it $10,000 to $30,000 per restaurant, and as of the end of last year the fast-food chain operated more than 14,000 restaurants in the United States. The CEO of DineEquity's Applebee's chain hasn't altered his charge that the chain's New York City store alone would be subject to fines of $600,000 a year if it didn't provide insurance, yet the company faces the prospect of tens of millions of dollars in higher costs across the chain if it does.

Some restaurants have seen individual stores begin to make good on the threat. A Wendy's franchise in Nebraska cut all non-management workers to 28 hours a week, as did a Yum! Brands (NYSE: YUM) Taco Bell franchise in Oklahoma. Others, such as burger joint Five Guys, are starting to raise prices, while RREMC Restaurants, a privately held franchisor of several dozen restaurants including Denny's and Dairy Queen, will begin imposing a 5% surcharge on their menu to cover Obamacare costs.

Someone else's problem
Darden may have retreated from its critiques because of the negative publicity it created, while others believe the burden won't be so high because many employees will simply opt to instead pay the $95-a-year penalty for being uninsured. It will be cheaper than paying the monthly premiums associated with the insurance plans companies offer, while others will choose to be covered by the government's Medicaid plan or will sign on to a spouse's policy.

Still, the burden will fall heaviest on the smaller restaurants. McDonald's reported almost $5.5 billion in profits last year, so it can more readily afford to pull its seat up to the table and offer health insurance for its employees. Harder to quantify, however, will be just how many restaurants at around the 50-employee threshold will simply fire a few people to ensure they don't make the cut-off.

Standing in line at the soup kitchen
According to the National Restaurant Association, the average restaurant makes between just $0.02 and $0.06 in pre-tax profits on each dollar of sales. While that doesn't even include all the restaurants that never make a profit and go under, it highlights that the added costs of Obamacare will have to come from one of a three sources: lower profits, higher prices, or lower wages. Maybe a combination of all three, because there's simply little room for restaurants to maneuver.

In the end, the real lasting impact of the Affordable Care Act may not be universal health care coverage, as originally promised, but rather a nation of part-time workers paying more for our meals when we go out to eat. If we can afford to.

Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends McDonald's and UnitedHealth Group and owns shares of Darden Restaurants, McDonald's, and Papa John's International. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
$260.06 (1.27%) $3.26
UnitedHealth Group Incorporated Stock Quote
UnitedHealth Group Incorporated
$537.26 (0.12%) $0.66
The Wendy's Company Stock Quote
The Wendy's Company
$21.11 (-0.47%) $0.10
Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
$125.79 (0.36%) $0.45
Papa John's International, Inc. Stock Quote
Papa John's International, Inc.
$90.73 (-2.71%) $-2.53

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