Shake Shack in Harvard Square hasn’t been adapting well to the higher Massachusetts minimum wage, which was $8/hour when they opened in 2014 and is now 37.5 percent higher ($11/hour as of January 1, 2017).
First they cut their late-night hours.
On Saturday night we went there with another family. The trash can next to the front door was overflowing. The line was long (positive sign for investors) but there were a lot of empty tables, suggesting that the long line was more about slow service than high volume. (It took about 20 minutes for them to make our “fast food”.) My friend took her daughter to the bathroom and reported no toilet paper in any of three stalls plus a “disgusting” overflowing trash can. Another mom commented “You would never see anything like this at McDonald’s.” The handful of workers that were in the restaurant were charging pretty hard to keep up. The inability to empty trash cans or service restrooms seemed to be due to a lack of sufficient staff. (And in fact, it would be economically irrational for anyone in Massachusetts to work for less than about $24/hour (2013 data; see Table 3) if there were a way to collect welfare instead.)
As minimum wage trends up to $15/hour and labor force participation consequently trends down toward Puerto Rican levels, is a business like Shake Shack especially vulnerable? Their business is more labor-intensive than McDonald’s. They operate on a smaller scale so they can’t invest in robots as efficiently as McDonald’s can. They can’t raise prices too much before people notice that actually the fries are a lot better at McDonald’s.
I was impressed with Shake Shack as a business (see my 2015 posting), but now I think that I didn’t appreciate how vulnerable they were to higher labor costs. I guess the market is smarter than I am because the stock has done poorly compared to the S&P 500. The gross and operating margins don’t seem to follow any pattern from year to year, but the major push for higher minimum wages is fairly recent.
Readers: What do you think? Is this one headed to zero?
Related:
- “Shake Shack’s Financial Shenanigans” (June 2016): “Shake Shack’s insiders are manipulating net income growth with private LLC conversions and sales. Management continues to hype the numbers with ‘adjusted’ and ‘non-GAAP’ figures.”
- “Survival of the Fittest: The Impact of the Minimum Wage on Firm Exit” (April 2017): “a one dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of exit [shutdown] for a 3.5-star restaurant (which is the median rating)”
Not sure if ethnic family restaurants are available (and good) around Harvard Square, but these tend to be the best and most interesting food bargains in most US locations, due to lower labor costs, potentially higher quality and/or shorter food supply chains, cheaper rent due to “non-glamorous” locations and decor.
Tyler Cowen argues these points eloquently in his excellent “An Economist Gets Lunch.”
A business like Shake Shack is also vulnerable to the inadequacies of one bad manager or a few truant employees.
Last time I went there Harvard Square surroundings have a feel of any inner-city shopping plaza place. I was expecting more refined atmosphere of high learning and top science.
I wouldn’t draw conclusions from one high labor cost urban location. Shake Shack has 4 location in Massachusetts and dozens in the Gulf Arab states (where they just bring in more Indian laborers if they are short).
Your kvetching also sounds like Yogi Berra’s famous remark that “nobody goes there anymore – it’s too crowded.”
The Gulf Arabs have figured out how to keep labor costs low without ruining it for their citizens – just don’t allow imported labor to ever become citizens. Bring them over on contracts and send them home after a few years. For some reason we can’t seem to do that in the US. If we bring someone in to please the capitalist desire for cheap labor, not only does he get to stay for life and become a citizen but he gets to bring his kids and send them to free public school and his grandma who gets free medical care and all of his sisters and cousins and aunts ad infinitum.
I should add – capitalist desire for cheap labor and Democrat desire for voters who will vote reliably Democrat – a perfect storm.
As far as I could tell, Shake Shack is basically a classy version of Five Guys. Because of the upscale branding, Five Guys manages to sell a relatively cheap product for high premium in high traffic, premium locations like high end malls and airports and high-traffic tourist locations. So it manages the trifecta of premium prices, high volume and high gross margin. Other burger places (and there are a ton of them) manage two of the three but not all three. So Shake Shack should be OK even with higher labor costs. It’s probably not as high-labor as a place like Noodles Etc or Cosi that have a much larger menu.
*Shake Shack, not Five Guys
Maybe we, as a society, don’t need businesses that rely on paying slave wages as their business model? Growing up a few decades ago there were very few low-wage fast-food restaurants, yet we survived just fine (often on a single income for a middle class family with 3 kids!).
As minimum wage trends up to $15/hour and labor force participation consequently trends down toward Puerto Rican levels
The labor force participation rate that you’ve probably seen includes all Americans over the age of 15. Its recent decline has been mostly been caused by the retirement of large numbers of baby boomers, a well known phenomenon. For some reason the rate is cited by people who want to assert that there has been no economic recovery in the 8 or 9 years. It’s unclear why anyone would derive satisfaction from such thoughts. However, even that rate has been increasing in the past couple of years. The one that you want to look at is the Employment-Population Ratio for people aged 25 to 54. It shows the portion of that age group actually working and it has recovered 2/3 of what was lost between 2007 and 2010.
https://data.bls.gov/timeseries/LNS12300060
Similar to Neal’s point, you should keep in mind that, if a restaurant has only a handful employees, one person calling in sick can be a big problem on a busy evening.
Most importantly, there are many of these fast food chains in America. At any given time there are some growing while others are shrinking and others going bankrupt. At least the remodeling of the restaurants keeps people employed. If Shake Shack is just another joint selling burgers and fries, it’s hard to say if it will grow in the future. It certainly has a lot of competition. The decline in its stock price may be due to the fact that people on Wall Street got overly excited about it a few years and the excitement is probably fading.
with the HBS 07 alumni reunion starting up, i’ll ask what some others think about this and get back to you.
Vince: I would be convinced by your “aging population” theory if not for the rising/stable labor force participation rate in Singapore, which has an older population than the U.S.
See also the June 2016 Obama Administration report: https://obamawhitehouse.archives.gov/sites/default/files/page/files/20160620_cea_primeage_male_lfp.pdf
One area where I think Americans lead the world is in making up excuses for our lackluster economic performance. The CIA is the only group left in the U.S. that can face the truth! (see
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html
where they chronicle our slide relative to the world’s top performers)
@philg: It isn’t surprising that some small countries can outperform a much larger country on a per capita basis. The Bay Area’s economy is larger than all of the countries ranked ahead of the U.S. on the CIA’s list and would rank #3 on a per capita basis.
Neal: California may be rich for any number of reasons (not least the awesome quality of the land/climate that we stole from Mexico), but its labor force participation rate was shrinking during years when Singapore’s was constant/rising (and higher than California’s). See http://www.governing.com/gov-data/economy-finance/state-labor-force-participation-rates-data.html
I don’t think it is sensible to say that Switzerland, for example, is richer than the U.S. in the same way that a particular U.S. urban area is richer than the U.S. average. Switzerland has a lot of non-urban areas (actually, by California’s traffic-clogged standards, Switzerland has no urban areas!). Switzerland’s pharma companies don’t have guaranteed sales to a much larger market (whereas a Bay Area pharma company has 330 million potential customers whose purchases will be fueled by federal tax dollars).
Aging population US is not. US population grew 30-50% since when baby-boomers were entering middle age. Their retirement should not affect labor force participation and if their jobs and skills remain in the USA. But it may be affected by more young people going to college (often study useless to harmful ‘subjects’).
Opposite is true: older social security recipients, normally excluded form labor force (as incapable), re-entering labor force at higher rate https://www.ssa.gov/policy/docs/ssb/v72n1/v72n1p59.html
Summary:
“The labor force participation rates of men and women aged 62–79 have notably increased since the mid-1990s. The result is a dramatic increase in the share of total money income attributable to earnings. For persons aged 65–69, the earnings share of total income increased from 28 percent in 1980 to 42 percent in 2009. For this age group in the late 1980s and early 1990s, Social Security benefits and earnings were roughly equal shares of total money income (about 30 percent); the earnings share is now more than 12 percentage points larger. When we focus on aged persons who receive Social Security benefits, earnings shares have increased markedly throughout the 62–79 age range since the early 1990s. We show that for aged persons with labor market earnings, those earnings have a large effect on their relative position in the distribution of annual money income of older Americans.”
@philg: I agree it doesn’t make sense to compare the Bay Area to Switzerland, and it doesn’t make sense to compare the U.S. to Singapore for similar reasons. One thing I was trying to point out is that the CIA list shows that the U.S. still has a higher per capita GDP than the EU or any other large (or medium sized) country. I expect that a more careful analysis would show that our lead relative to other countries of comparable size is shrinking. This is also not surprising since much of that lead was built up when those other countries were battered by the devastation of war, autocracy, and/or communist ideology.
While this may suggest the sky is not falling (at least, not yet), none of this argues against the presence of the symptoms of U.S. economic malaise which you point to. I agree that there are problems with the U.S. economy which Americans should address. I would point out that the prime age male labor force participation rate report you link to indicates that your preferred bogeymen on that issue are relatively minor factors in the story.
Most of the economic lead of the USA over western Europe shrank during Obama presidency, with equally sluggish economic growth in US and western Europe.
The labor force participation rate of prime age males is lower than it has been in the past. On the other hand, there many more women are in the workforce than there were a few decades ago. So the combined rate is at the level is at was in the middle of 1986, which is also a considerably higher rate than that which existed in 1950s and ’60s, probably the best period for the US economy in the past century.
More importantly, you have to keep in mind that the labor force participation rate includes both employed people and unemployed people looking for work. Thus, if 10 million non-working Americans started looking for work next month but didn’t find a job, that would push up the labor force participation rate. That’s the reason that it tells you little about employment by itself.
Restaurants probably do best when they hire family and safety net recipients who have to keep their visible taxable income below the poverty line … and pay their help out of the cash register.