What Olive Garden and Red Lobster tell us about the economy
By Neil Irwin,
What can bottomless pasta bowls and cheddar biscuits tell us about the economy? More than you might think.
Darden Restaurants, the Orlando-based company that owns Olive Garden, Red Lobster and other mid-scale restaurant chains, on Friday morning reported solid financial results for the quarter ended in August. Revenue was up almost 5 percent from a year earlier, and earnings were up 4 percent. Darden is not alone; other restaurant chains are also reporting solid growth.
Buried inside those numbers, and in the longer-term trends of which they are part, are some lessons for where the U.S. economy is going. The restaurant industry has been one of the bright spots of the past decade. There were 18 percent more jobs at full-service restaurants in July than a decade earlier, compared with 2.2 percent more jobs overall. A typical Olive Garden or Red Lobster, according to a Darden filing with the SEC, has three to five managers and 50 to 185 hourly employees.
In a world in which any product that can be easily shipped is subject to intense global competition, things that can’t be shipped (like a freshly steamed lobster or made-to-order pasta dish) are an area in which U.S. jobs are relatively safe. Restaurant jobs benefit not just from the fact that a prepared steak will be cold by the time it is imported from China, but also from long-term trends in how Americans live.
A century ago, eating chicken for dinner meant killing and plucking a chicken from the back yard. Now it can mean visiting your neighborhood Olive Garden and eating that chicken cooked and sliced over pasta and a gooey alfredo sauce.
Details of Darden’s earnings report Friday show some of the less promising trends for the U.S. economy behind this generally optimistic story.
First, the middle class remains squeezed while the affluent seem to be faring fairly well. At Darden’s premium brand, the steakhouse chain Capital Grille (where the average per-person check is between $70 and $72), same-restaurant sales rose 4 percent. At the firm’s restaurants aimed at the middle class, same-restaurant sales were more mixed: up 0.3 percent at Olive Garden and down 2.6 percent at Red Lobster.
Second — and this is part of the same story — restaurant workers are getting a smaller share of the money that comes in the door. Revenue rose 4.8 percent in the quarter compared with a year earlier, while restaurant labor expense rose only 2.2 percent. It is part of a trend: In the 2010 fiscal year, labor costs represented 33.1 percent of sales; labor costs fell to 31.3 percent in the 2012 fiscal year and down to 30.4 percent in the first quarter of the 2013 fiscal year.
To Darden and its investors, that is good news. On its conference call Friday morning, one analyst asked whether the decline in labor costs was a one-time thing or would continue over time. “We would expect to continue to see year-over-year improvement on the restaurant labor line,” said Brad Richmond, chief financial officer of Darden. “Maybe not as great as in the first quarter.”
This isn’t to blame Darden; employers pay only the wages they must to get capable workers. It is instead an indictment of the U†.S. economy as a whole. If the unemployment rate were 5 percent instead of 8.1 percent, it would surely be harder for Darden to find qualified chefs and waiters, and it would have to pay more. In fact, you would expect an industry that is growing as a share of the economy to see higher wage gains than in shrinking industries, as workers’ training lags behind changes in the economy.
High unemployment means that workers at Darden don’t have the negotiating leverage to demand big raises; there is always another jobless worker around to take their job.
Economies can adjust in healthy ways. The United States could, in theory, have moved from the housing-centric economy of six years ago to the more service-oriented economy of today by displaced construction workers getting jobs in the kitchen of an Olive Garden. Instead, nearly five years later, we still have mass unemployment, which is bad for almost everybody.