Business

How Chipotle spends $ 2 billion a year on payroll

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HOUSTON, TEXAS – JUNE 9: Employees speak together at the Mexican Chipotle Grill on June 9, 2021 in Houston, Texas. Menu prices at Chipotle Mexican Grill are up about 4% to cover the cost of raising the minimum wage to $ 15 an hour for employees. The restaurant industry raises wages in the hopes of attracting workers in times of labor shortages. (Photo by Brandon Bell / Getty Images)

Brandon Bell | Getty Images News | Getty Images

Unlike many of its colleagues in the restaurant space who have a franchise model, Chipotle Mexican Grill owns all of its 3,000 – and 6,000 – restaurants on the way. This means he also owns relationships with nearly 100,000 employees, many of whom are on the front lines and in low-paid positions in high-turnover restaurants. Even before the pandemic, turnover in the food sector typically exceeded 100% per year.

For Chipotle’s top management, focusing on investing in workers is nothing new, but in a time of national labor shortages and wage inflation in low-wage industries, this is a message to competitors: if you think of labor as a cost, you think of it. not right.

This week, the latest JOLTS Labor Department report showed record layoffs of workers concentrated in the restaurant and retail sectors, as well as continuing record levels of job openings.

The jobs landscape is so complex that executives in these industries are making desperate appeals. Barry Sternlicht of hotel operator Starwood Capital told CNBC on Wednesday that after many in the business world pounced on expanded unemployment benefits as a government effort to provide relief that was the main reason people were left out of the workforce, the government now has to pay people who come back to work. “The entire service sector is in crisis,” he said. “The country cannot work without the support of service personnel.”

Marissa Andrada, Chief Diversity, Inclusion and Human Resources Specialist at Chipotle, says she has been able to attract and retain talent by investing in workers in the run-up to the pandemic, rather than as a sudden reaction to it.

“We feel that the investment we have made in people over the past couple of years has made us open to the rest of the world,” Andrada told CNBC. @Work Summit on Wednesday.

Chipotle has invested in educational benefits for workers since 2019, and has since expanded into unsecured education for all employees, not just training costs, the latter being a benefit model that education experts say was not well designed for the poor. wage earners and received limited use. Companies such as Amazon, Target, and Walmart have also taken steps this year to offer debt-free graduate degrees (Walmart has been around for years, although it charges employees $ 1 a week).

Rachel Carlson, co-founder and CEO of Guild Education, which offers a platform for companies including Chipotle to make education accessible to workers, and is a two-time CNBC Disruptor 50 company, including 49th on the 2021 Disruptor 50 list. In a separate meeting, the CNBC @Work Summit highlighted that there are still large gaps between employers and employees in understanding the role of the company in education.

The Guild’s research shows that today’s workers are still afraid to tell their employer that they don’t plan to stay with the company for 40 years, let alone 20, with a long-held view of “their grandfather’s career at General Electric,” she said. But employers are far more likely to see gains in terms of tenure.

“I talk to CFOs … and management teams who say they are thrilled to have one leader, one employee, for three years, five years in this role. We need to discuss what today’s responsibilities are, ”said Carlson.

In addition, she said the Guild knows that while larger companies offer educational benefits, “we know that a very significant number of employees feel uncomfortable telling employers that they do not have a high school diploma or higher education. … They bloat the data or don’t respond to it. “

“ Every penny we spend on a line of labor ”

Andrada said the company also turned to a healthcare concierge service for employees and their families, stressing that this is an investment made before the pandemic.

“We are grateful that we were able to attract and retain talent,” she said, although she added that the company is not immune to current working conditions and “there are areas in the US where there are problems.”

Jack Hartung, Chipotle’s CFO, who spoke to Andrada at the CNBC event, said that since the company operates all of its restaurants, it should view investing in people differently than a typical cost of profit and loss. “When you look at it from this perspective, the main goal is to minimize costs.”

According to Chipotle, “almost all future managers will come from current teams,” Hartung said. “So every cent we spend on this line of work, whether it’s wages, benefits, or education, is an investment in the future, and that’s a different way to think about it.”

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Andrada noted that going from an hourly employee to a six-figure general manager in a restaurant could take as little as three years, although labor economists are quick to point out that in any future there will have to be far fewer general manager positions for a low-paying service business than for an advanced one with more low wages.

“As a goal, we stated that we want to get out of the pandemic stronger than we came to it,” said Hartung. “We don’t just want to survive, we want to make sure we are making the investment that makes us stronger.”

This does not mean that the company managed to avoid negative headlines about labor which many large companies face, some of which have arisen as a result of litigation that began many years ago. And by at least one basic criterion of economics in the world of work, Chipotle has been slow to ensure that the overall well-being of its employees, including financial, is higher than that of colleagues. While the $ 15 minimum wage movement has existed for years, Chipotle did not introduce these labor costs until 2021 in a tight labor market, and it is offsetting those costs in other ways: earlier this year, Chipotle raised menu prices at 4% to cover the minimum wage.

Chipotle Gen Z and Millennial Consumers

But on a market-based basis, the company’s approach works. Chipotle’s stock has tripled since its Covid bottom in March 2020, and Wall Street views the company favorably for reasons that may be, if not entirely, at least indirectly correlated with management’s long-term strategy.

In an upbeat thesis about Chipotle in mid-September, Piper Sandler stated that its long-term return on investment capital is advantageous compared to many peers. Analysts at Goldman Sachs noted in a recent stock price increase announcement that labor costs will continue to rise.

“This is the key to success for investors,” Piper Sandler analyst Nicole Miller Regan told CNBC in an email Wednesday of the company’s approach to investing in people, which is estimated to be just over $ 2 billion in 2022. But she added that it was still more difficult for Wall. Street for accurate modeling. “I’m not sure that we, as analysts, have all the data to model,” she wrote.

Chipotle has consistently declared its people-centricity, and even if that remains a moving target up to its target share price, Wall Street does see the company as the ESG brand leader of the future that reaches out to key demographics. …

In a post this week, Cowan wrote that among Gen Z consumers and millennials, Chipotle stands out among restaurant chains on issues such as food transparency, fast-growing digital business, waste reduction, packaging and energy consumption, including 22% of electricity. generated from renewable sources. While Cowen analysts noted a generally high level of trust compared to peers, among the ESG factors mentioned in the report, in particular, the lack of labor standards and attitudes towards workers. “

Cowen analyst Andrew Charles said recruiting is a hot topic for investors in the restaurant industry and a “major issue” that has left the sector on the cold side. Chipotle is not immune to labor market pressures, but this is also the problem that sets them apart.

“They are the best equipped in the industry to handle this,” he said, noting that their annual sales in each store are high compared to peers ($ 2.5 million per store), which gives them more opportunities to raise wages. fees and benefits, including education and health care, such as telemedicine mental health services, to which Andrada drew attention.

“It really has to do with culture, and I would say these guys are really bad,” Charles said. “And they are developing stable stores, developing a company-driven system, and can identify talent within the system.”

While the treatment of workers was not clearly reflected in the ESG analysis as it was such a factor as resilience measures that Cowan could track, Charles said the $ 15 an hour move was “a big bet.” And he added that the competition in the restaurant industry is now down to staffing, and their approach has proven right.

Andrada said companies need to “clearly understand who you are and what you stand for.”

For Chipotle, this includes “a manic focus on people in the first place,” she said, and it “makes decisions about investing in people very easily.”

Ultimately, workers’ concerns and their broader culture can manifest themselves in the ESG market picture. “Chipotle has always been and will always be purpose-based, and in this ESG world we live in, it suits them very well and is a big tailwind,” said Charles.

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

The company would not invest in labor if it did not expect to generate profits in the future in terms of both executives and financial performance. “Over time, we will have great people and results,” said Hartung.


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