by Cal Evans and Brooke Blackwell, Synovus Credit Market Intelligence
Odds are you’ve seen evidence of the supply issues affecting our economy these days. Maybe you noticed the “Help Wanted: All Shifts” signs at every fast-food restaurant on the block. Perhaps your most recent trip through the drive-thru took a little bit longer than usual and your value meal cost one or two more dollars. Worst of all, maybe your local quick service restaurant (QSR) was entirely out of your favorite guilty pleasure! All of these are caused by supply issues, felt more acutely now than at any point in recent history, and they can be tied to labor shortages, material shortages, or both. Let’s look at a Southern food staple, the chicken sandwich, to get a taste of the economic hurdles in play.
Before we bite into the sandwich, so to speak, let’s go back one year to April 2020. There were 6.2 million jobs lost in the Accommodation and Food Services sector that month as hotels and restaurants shuttered due to the pandemic. Many of those jobs were permanently lost as some enterprises went out of business, but most survived as many restaurants took advantage of elements of the CARES Act to keep their doors open. These businesses adjusted to leaner operating conditions and new cost structures (think digital delivery services), trimming back staff to match lower demand. Since February, however, demand has risen dramatically for restaurants.
Figure 1 shows the 2021 percentage increase/decrease in weekend restaurant reservations compared to 2019. Note that some states, like Florida and Texas, are performing at levels that are far beyond 2019 restaurant reservation numbers. These full-service restaurants may not be serving chicken sandwiches per se, but the QSRs that do offer them have seen sales growth more than that in full-service restaurants, and they’ve generally performed well since last Fall.
Figure 1: OpenTable Weekend Bookings - 2021 vs. 2019
Source: OpenTable, "Weekend Bookings - 2021 vs. 2019"
The increase in vaccinations, travel and disposable income is no doubt fueling the heightened demand. But demand has rarely been an issue during the pandemic. Two input supply issues are the culprits, the first being labor. Note in Figure 2 that the recovery in Accommodation and Food Service employment is somewhat tepid relative to the numbers lost during the pandemic. In April, however, there was a strong increase of about 241,400 jobs for the sector (187,000 in Food Service). This gain aside, the Bureau of Labor Statistics lists 900,000 job openings in the sector in its March Job Openings and Labor Turnover Survey report. That number is likely to triple by May.
Figure 2: Accommodation and Food Services Employment
Source: U.S. Bureau of Labor Statistics, “Job Openings and Labor Turnover Survey,” March 2021
Open jobs are not being filled fast enough, and employers in the Accommodation and Food Service industry now find themselves in a bidding war for labor. Whether you believe the enormous amount of stimulus poured into the economy is serving as a disincentive to work, or you cry “fowl” on that theory and blame the situation on an inordinately large supply/demand mismatch, no one can argue that non-skilled labor is now priced at a premium.
New incentives to attract workers range from signing bonuses, to expanded health benefits, to educational opportunities, and more than one national franchise has resorted to hosting job fairs to attract entry-level talent. As the saying goes, there is no free lunch! The costs of these initiatives are passed along in part to the customer. If workers can’t be found to meet demand, your wait in the drive-thru for that chicken sandwich will be longer. If workers can be hired, they will be paid a higher wage than one year ago. You’ll see that cost reflected on the menu when you pull up to the drive-thru speaker to order. If time really is money then, either way you look at it, the price of that sandwich just went up - probably not to $50, but more than you may think is reasonable.
So, we know labor is an issue, but let’s deconstruct that chicken sandwich and see what supply issues can be found in its two main ingredients. Starting at the top (and bottom), the bun presents some unique issues. During the pandemic, plunging demand caused some commercial bakeries to shut down completely, reducing the supply of bread products available to restaurants. Those factories could’ve been put back online but they rely on the same general labor pool as the restaurants and as such face the same labor challenges. Assuming the buns are available, who will deliver them to the restaurants? A driver shortage in the trucking industry has been in place since before the pandemic, and freight volumes have recovered to pre-pandemic levels. Though volumes are equal, the costs of freight are much higher than they were before the pandemic, up 17% since 2019 as of March per the Cass Freight Index, and 27.5% over 2020 costs (see Figure 3). There’ve been anecdotal examples of franchise restaurants even having to pick up buns from the bakeries in trucks driven by restaurant general managers, not professional commercial drivers. These labor supply and cost issues explain why all four major long-haul truck suppliers for U.S. freight services (Daimler, Navistar, Volvo, and Paccar) are engaged in partnerships with self-driving truck development companies.
Figure 3: Cass Freight Index March Data
Source: Cass Information Systems, Inc., “Cass Transportation Index Report,” March 2021
Most important of all is the chicken itself. In a series of articles about chicken production released in April, Bloomberg stated that the supply of chicken was being impacted by extreme demand, an increase in feed costs, and the closure of several production facilities due to 2020 COVID-19 outbreaks.1 The primary chicken feed source is corn, which has seen its spot price rise 140% year over year (see Figure 4), causing farmers across the globe to switch to soybeans and wheat.2
As with almost every other lower-wage role, poultry processors are having a hard time finding workers to match the demand seen in the market, sending meat inventories plunging and causing national product outages in restaurants like Bojangles and KFC.
Figure 4: Corn Spot Prices YOY
These labor and input supply issues apply to multiple industries. Lumber, for instance, faces the exact same labor, production, and distribution challenges and, correspondingly, has seen prices escalate 30% year over year much to the dismay of many a homebuilder. None of these issues have a quick fix, and the effects of the pandemic and record stimulus will have to pass naturally to see relief.
So, the question is: Given all these inflationary trends, can we hope to dodge short-term price increases for the chicken sandwich? The obvious answer, unfortunately, is “no such cluck.”
Contact Synovus Banking or your Relationship Manager for more information on the economy.
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