The restaurant industry has been in a state of flux over the past few years.
Consumers have been cautious when it comes to spending money while eating out which is likely a hangover from the recession when people actually did not have the money for restaurants. At the same time, the public has become more demanding from eateries of all types, but specifically fast food and fast casual.
It used be enough to be good or cheap and now the public is demanding both, which has caused huge problems for perennial success stories like McDonald's (NYSE:MCD). Even current darling including Chipotle (NYSE:CMG), Panera Bread (NASDAQ:PNRA.DL), and Starbucks (NASDAQ:SBUX) face risks as their promise of better quality comes with its own problems.
Overall, while the industry is healthier, it still faces a number of risks, including one which comes from its own success.
Though the restaurant industry in the United States has posted increased sales for each of the past six years, it still faces a number of risks which could undermine its long-term health.
The downside of a better economy
"With the economy slowly improving and national employment trending upward, signs are pointing in the right direction for restaurant industry growth," said Hudson Riehle, senior vice president of research for the NRA, in a statement. "Certain components of the business climate remain a challenge, accelerating industry sales in some regions and putting a damper on them in others, but the overall industry is definitely in a better place now than several years ago."
An improved economy and an upbeat industry forecast has meant more hiring. The NRA predicts that the industry will add 3.2% to its employment rolls in 2015. "About one in 10 employed Americans will work in a restaurant this year," Riehle added.
That could cause problems because declining unemployment has made hiring a more difficult and potentially more expensive prospect.
"Employment growth has created at least one challenge not seen since the 2008 financial crisis created the recession: competition for workers," wrote the NRA.
An increasingly competitive market for employees pushes wages higher and can increase turnover. That can increase costs for operators and lower margins or force price increases.
The wage increase movement
Currently 29 states have a minimum wage above the national one, according to the National Conference of State Legislatures, and a few have even moved to guarantee that wage to waiters -- who typically worked for a small hourly sum plus tips. Minimum wage increases are a political hot button and some argue that they don't actually raise costs for restaurants because the money is saved by cutting turnover.
The U.S. Department of Labor actually takes the stand that minimum wage increases and removing exemptions from tipped workers does not harm the restaurant industry. The DOL addressed the topic in a fact/myth section of its website:
Myth: Raising the federal tipped minimum wage ($2.13 per hour since 1991) would hurt restaurants.
Not true: In California, employers are required to pay servers the full minimum wage of $9 per hour-before tips. Even with a recent increase in the minimum wage, the National Restaurant Association projects California restaurant sales will outpace the U.S. average in 2014.Myth: Raising the federal tipped minimum wage ($2.13 per hour since 1991) would lead to restaurant job losses.
Not true: Employers in San Francisco must pay tipped workers the full minimum wage of $10.74 per hour – before tips. Yet, the San Francisco restaurant industry has experienced positive job growth over the past few years according to the Bureau of Labor Statistics.
It's hard not to see the political agenda being pushed by the DOL. Yes, these specific examples may be true but clearly the potential of mandated pay raises for workers impacting profits will vary from market to market.
Wage increases not driven by market conditions may work out just fine in many cases, but this type of forced expense is clearly a risk for the industry.
A shortage of ingredients
In its 2014 annual report Chipotle provided a guidance that suggested it could have trouble sourcing the high-quality avocados it uses in its guacamole.
In the event of cost increases with respect to one or more of our raw ingredients, we may choose to temporarily suspend serving menu items, such as guacamole or one or more of our salsas, rather than paying the increased cost for the ingredients.
That set off a consumer panic that the media dubbed "Guacapocalypse." The statement was really just a throwaway line designed to cover all the bases for the company, but, it did come true to a point in 2015 when the company experienced shortages with the pork it uses for its "carnitas."
The shortfall required the company to remove pork as a choice from some of its restaurants because it could not source enough that was "responsibly raised." Though the shortage was short-lived, it did expose the risk that trumpeting using better ingredients brings.
If you say you meet certain standards, it's not acceptable to substitute freely when supplies become low. That creates a risk of popular items being out of stock and that risk can grow as consumers push more chains toward higher-quality products.
Daniel Kline owns shares of Apple. He wrote this at a Starbucks over a Cinnamon Dolce Latte. The Motley Fool recommends Apple, Chipotle Mexican Grill, McDonald's, Panera Bread, and Starbucks. The Motley Fool owns shares of Apple, Chipotle Mexican Grill, Panera Bread, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.