How Chipotle feels about spending $2 billion a year on labor

Unlike many of its peers in the restaurant space that have a franchise model, Chipotle Mexican Grill owns all of its 3,000 — on the way to a goal of 6,000 — restaurants. That means it also owns the relationship with near-100,000 employees, many on the front lines and in lower-paying, higher turnover restaurant positions. Even before the pandemic, turnover in the food sector was typically above 100% annually.

For Chipotle senior management, focus on investment in workers is nothing new, but at a time of a national labor shortage and wage inflation in lower-paying industries, it has a message for competitors: if you think about labor as a cost you are thinking about it the wrong way.

This week, the latest JOLTS report from the Labor Department showed a record level of workers quitting jobs that are concentrated in the restaurant and retail sector, and a continued record level of open positions.ADVERTISING

The jobs situation is so tight CEOs from these industries are taking to desperate appeals. After many in the business world lashed out at extended unemployment benefits as a government assistance effort that was the primary reason people were staying out of the workforce, Barry Sternlicht of hotel operator Starwood Capital said on CNBC Wednesday the government now needs to pay people to come back to work. “The whole service economy is in a crisis,” he said. “The country can’t really work without its service people back.”

Marissa Andrada, chief diversity, inclusion and people officer at Chipotle, says it has been able to attract and retain talent by making an investment in workers ahead of the pandemic rather than as a sudden response to it.

“We feel like the investments we made in people in the past couple of years have set us up for the rest of the world opening up,” Andrada said at CNBC’s @Work Summit on Wednesday.

Starting in 2019, Chipotle invested in education benefits for workers, and it has since extended those to debt-free education for all employees rather than only tuition reimbursement, the latter being a benefit model that education experts said was not well-designed for low-wage workers and received limited use. This year has seen companies like Amazon, Target and Walmart all make moves to offer debt-free college degrees as well (Walmart has had a program in place for years, though it had been charging employees $1 a week.)

Rachel Carlson, the co-founder and CEO of Guild Education — which offers a platform for companies including Chipotle to make education available to workers and is a two-time CNBC Disruptor 50 company, including No. 49 on the 2021 Disruptor 50 list — said in a separate session at the CNBC @Work Summit that there are still wide gaps to bridge between employers and employees over understanding of a company’s role in education.

She said Guild research shows that today’s workers are still afraid to tell an employer that they don’t plan to stay with the company for 40 years, let alone 20 years, with a lingering idea about their “grandfather’s General Electric career.” But employers are much more likely to see shorter tenures as a win. 

“I am in conversations with CFOs … and leadership teams saying they are thrilled when this role is sustained by one leader, one employee, for three years, five years. We need to have the conversation about what is today’s ‘tour of duty,’” Carlson said.

In addition, she said Guild knows that even as more big companies offer education benefits, “We know a very significant amount of employees feel uncomfortable telling employers they don’t have a high school diploma or college degree. … They inflate data or avoid answering it.”

‘Every dime we spend on the labor line’

Andrada said the company also leaned into a health care concierge service for employees and their families, and she stressed that was an investment made pre-pandemic.

“We are grateful we’ve been able to attract and retain talent,” she said, though she added the company is not immune to current labor conditions and, “there are pockets across the U.S. where there are challenges.” 

Jack Hartung, Chipotle chief financial officer, who spoke with Andrada at the CNBC event, said since the company runs all of its restaurants it has to look at an investment in people in a different way than as a typical profit & loss cost. “If you look at it that way, the main objective is to minimize cost.”

For Chipotle, “almost all managers in the future will come from the crews of today,” Hartung said. “So every dime we spend on that labor line, whether wages or benefits or education is an investment in the future, and that’s a different way to think about it.”

Andrada noted that the pathway from an hourly employee to being a six-figure general manager in a restaurant can take as little as three years, though labor economists are quick to point out that in any future for a low-wage service business, there will be many less general manager jobs than front-line lower wage ones.

“We stated as a goal that we wanted to exit the pandemic stronger than we came into it,” Hartung said. “We don’t want to just eke through, we want to make sure we make investments along way that make us stronger.” 

That doesn’t mean the company has been able to avoid the negative headlines related to labor that many big companies face, some which stem from legal battles that began many years ago. And by at least one core labor economist measure, Chipotle wasn’t exactly rushing to make sure its employees’ overall wellness, including financial, was being met ahead of peers. While the movement for a $15 minimum wage has existed for years, Chipotle didn’t enact that labor spend until 2021 amid a tight labor market and it is making up for that cost in other ways: earlier this year, Chipotle raised menu prices by 4% to cover the minimum wage move.

Chipotle, Gen Z and millennial consumers

But on a market basis, the company’s approach is working. Chipotle shares have tripled since the March 2020 Covid bottom, and Wall Street is positive on the company for reasons that can be, if not exactly, at least tangentially correlated to management’s long-term strategy.

In a bullish thesis on Chipotle in mid-September, Piper Sandler said its long-term return on investment capital compared favorably to many peers. Goldman Sachs analysts noted in a recent bullish call on the stock that labor costs will continue to rise.

“It is key for investors,” Piper Sandler analyst Nicole Miller Regan told CNBC via email on Wednesday about the company’s approach to investing in workers, which is estimated to be slightly over $2 billion in 2022. But she added it remains more difficult for Wall Street to model precisely. “I am not sure as analysts we have all of the data to model it,” she wrote.

Chipotle is consistent on its messaging about being a people-first organization, and even if that remains a moving target as far as the stock target price, and Wall Street does see the company as an ESG brand leader of the future that appeals to key demographics.

In a note this week, Cowen wrote that among millennial and Gen Z consumers Chipotle stands out among restaurant chains for issues including food transparency, a rapidly-growing digital business, reducing waste, packaging, and energy use, including 22% of electricity that is generated from renewable sources. While Cowen’s analysts noted a generally high level of trust relative to peers, notably missing among the ESG factors cited in the report was labor standards and treatment of workers.”

Cowen analyst Andrew Charles said staffing is the restaurant industry topic of the moment for investors, and a “massive issue” which has led the sector to cool off a bit. Chipotle is not immune from the labor market pressures, but it is also an issue that sets them apart.

“They are best-equipped in the industry to deal with it,” he said, noting that their per-store annual sales are high relative to peers ($2.5 million per store) giving them more room to raise wages and benefits, including education and health, such as telemedicine-delivered mental health services which Andrada highlighted.

“It really ties to culture and I would argue these guys really have that down,” Charles said. “And they are growing stores at a healthy clip and growing a company-operated system and can identify talent within the system.”

While the treatment of workers has not come through clearly in ESG analysis as a driver like sustainability measures Cowen was able to track, Charles said going to $15 an hour was “a big bet.” And he added with the restaurant industry competition coming down to staffing right now their approach has been spot-on.

Andrada said companies need to “get really clear about who you are and what you stand for.”

For Chipotle, that includes being “manically focused on people-first,” she said, and that “makes decisions on investments in people really easy.”

Ultimately, worker issues and its broader culture may come through in the ESG market picture. “Chipotle has always been and will always be rooted in purpose and in this ESG world we live in, that suits them very well and is a big tailwind,” Charles said.

There is a fundamental difference between looking at labor as an operating cost, which an organization wants as low as possible, or as an investment that needs to be made every year as part of a long-term return on investment strategy, Hartung said. Whether it is an investment in education or any other employee benefit, a company won’t see that return necessarily “next year,” he said, but the return will be sustainable. “We have $300 million to $400 million in capex a year, mostly in restaurants. Wages and benefits are a $2 billion number every year.”

The company would not put the money into labor unless it expected to generate a return in the future, in the form of both leaders and financials. “Over time, we will have great people and results,” Hartung said. 

Source: CNBC

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