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Are Fast Food Investments Doomed?

Mike Dunn | Author | Copyright 2013 All rights reserved

Is an unintended consequence of ObamaCare the elimination of low wage entry level jobs?

Obamacare is now law and the changes are just beginning to ripple through the economy. Is an unintended consequence the elimination of low wage entry level jobs? It appears so. With the new law requiring all companies with over 50 employees to provide benefits to employees that have over 30 hours a week, you WILL see many more layoffs, employees hours cut and thousands of closed Investing in 2013restaurants. Investors will now think twice about building a new fast food restaurant or investing in any labor intensive venture. The problem for the American worker is reduced labor intensive ventures by definition means fewer lower and lower middle class jobs. The result is low wage jobs that traditionally employ high school and senior citizen workers will be eliminated by the use of technology. By next year, you will be ordering your burger and fries in the drive thru via voice recognition since the restaurant can’t afford to hire the 18 year old boy or girl anymore.

Why am I so sure this will happen?

Starbucks is a clear case study. Starbucks sells very expensive coffee and drinks. I know. I’m there everyday. It has been widely reported that their largest cost line item in the company is heath care. Their health care costs are more then their payroll, cost of good sold (coffee, milk, cups), prime retail space rent for the thousands of stores, or administration costs.  Moreover, Wendy’s just announced layoffs yesterday, other CEOs have announced cutback or closures.  If a company sees no chance of success in their business model they will adjust, shut down the busienss or go out of business.

I thought providing health care is a good thing?

It is as long as the company can increase their prices and not lose customers or business with the price increase AND the employee produces enough to pay for him or herself. In theory, that does NOT work in most cases. As you increase your price demand usually goes down. Employers with employees and job titles that produce way more than the costs “may” be able to absorb the increased costs. In the fast food and restaurant industries – this is impossible.

No matter what happens there will be fewer restaurants and much higher prices. Your $6 dollar burger and fries will soon be $11.00. This will result in more people eating at home or eating pre-prepared meals.

What about retail brick and mortar stores?

Big box and all retail stores will increase their efforts to move more of their sales online to save human resource costs. It has been reported that Walmart and Target are trying to move of their business to the profitable eCommerce plays.  Many people have a barcode reader apps on their smartphones that can read a bar-code and search for the cheapest price online and buy it somewhere elseHow to pick a mutual fund while in the big box store. A friend of mine did that in Target yesterday. The big box stores must come up with a way to combat this or they will just be providing a merchandising service to the public.

What are the investment opportunities?

There are always opportunities in change. By connecting the dots, what are the growth industries?

  • Companies that can automate tasks currently done by the minimum wage worker can now be cost justified. Find those companies first and you can do well.
  • Companies that are making point of sale units that have voice recognition for fast food is a clear play. The company to first hit this market should be a winner.
  • Companies that make material handling solutions and now cost justify selling more elaborate and expensive systems to their customers.
  • Companies that can further automate the restaurant industry will win.
  • Companies that can make pre-made foods sold through grocery stores may be a substitute for fast food.
  • More people will be forced to eat at home so grocery stores should see a trend of  increased top line sales as the direct correlation in the price rise in the fast food and restaurant industry.
  • The trend of large big box stores trying to move their sales online and reducing their brick and mortar footprint and workforce will increase.

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What is a low end worker to do?

The new goal of the low end worker will be to be productive enough to be able to justify a company spending $25 an hour on them. They may just make $10.00 per hour but the health care and taxes will cost the company approximately $15 more per hour just to break-even. It is vital that low end and low skilled people understand this. If now, they will be highly frustrated or give up. The answer is:

  • Train to improve their job skills
  • Practice their interviewing skills.
  • Learn how to work and function in a more professional work place since the low end jobs are all but gone.
  • Learn business etiquette and take a business acumen course.

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