In our March 2015 report The Economics of Automation: Quick Serve Restaurant Industry, we asserted that the twin threats of rising wages and increasingly volatile food prices suggested a more challenging environment ahead. While commodity inflation doesn’t appear to be a threat in the near term, increasing labor cost pressure has emerged as a major theme impacting the industry. We believe wage inflation to be both cyclical and structural: The labor market is tightening as the economy improves, and regulatory and legislative action is driving a step-change resulting in higher wages.

Figure 1. Flash Automation.11.17.15

 

In most cases, restaurants can partially offset labor inflation by raising menu prices, but they’re also utilizing technology to automate specific tasks, primarily in the pre-ordering and ordering process. Historically, the industry has been a relatively slow adopter of automation. While other factors are surely at play, this is likely a reason contributing to the industry’s modest productivity gains relative to the broad economy (Figure 2).

 

Figure 2 Automation report Nov. 17.15

 

As previously highlighted, the key reasons for automating are to drive sales growth, reduce labor costs, or a combination thereof. We note that automation is currently complementing labor, particularly in the ordering process. However, should wage pressure intensify, companies’ focus may shift to labor substitution.

 

Figure 3. Automation report. Nov. 17.15

 

Please see the attached document to read the full report and important disclosures.

 

Michael Shavel, CFA, is a Global Thematic Analyst at Cornerstone Capital Group and a former Research Analyst at AllianceBernstein’s Global Growth and Thematic team.
 
Andy Zheng is a Research Associate at Cornerstone Capital Group.