Labor shortage 'isn’t going away' as Chipotle hikes menu prices: Analyst

Peter Saleh, BTIG Restaurant Analys joins the Yahoo Finance Live panel to discuss the latest as restaurants raise menu prices as employee costs increase.

Video transcript

ZACK GUZMAN: Welcome back. As we've been covering, more and more restaurants are having to get creative with keeping and retaining talent as the business starts to come back. When we look at restaurants, fast casual, of course, has also been enjoying in an uptick here, both pre-pandemic and post-pandemic. And Chipotle is among those latest passing some of the increases in terms of wages being paid to workers along to customers.

As the company said, it will be raising its menu prices by about 4% due to increased wages. And it's raising a couple of questions now about what other restaurants might follow in doing so and what it means for the company itself. And for more on that, I want to bring on Peter Saleh, BTIG restaurant analyst here back with us,

And Peter, when we look at this, you actually have a price target of 1,725 on Chipotle, noting about 25% upside there. Talk to me about how pricing power and really, teasing out winners and losers here if they are going to be paying workers more becomes important and maybe why that could be a plus here for Chipotle.

PETER SALEH: Yeah, so thanks for having me on. Look, I think the labor shortage is an industry-wide problem. And it doesn't seem to be going away anytime soon. And I think you're going to see, Yes, Chipotle is one of the few that has announced a price increase and being more aggressive to try and offset some of the margin pressure from having to raise wages.

But while they're the ones who have actually announced it, the rest of the industry is moving in the same direction we believe as well. You're going to just see more and more price increases to offset this. There is a pretty severe labor shortage.

I was talking to a management team, not Chipotle's but another management team a few weeks ago. And they're saying they had-- they were part of a job fair out in Michigan where there were 60 other companies involved looking to fill 500 positions. And they only had four candidates show up.

So there is a severe labor shortage. And until that's resolved, I think you're going to see this battle for employees. And the only way to really make them happy is to pay up and give them more benefits.

AKIKO FUJITA: So Peter, I wonder how this sets things up, at least, in the medium term because we have heard over and over, especially from lawmakers who said that look, the reason there is a shortage right now is because of these enhanced unemployment benefits, which are set to expire, but largely because some workers simply don't want to return to work.

And yet, we had a conversation yesterday with one company works very closely with a lot of these food outlets who said he doesn't think that has anything to do with the benefits, that employees just simply have more leverage right now because the demand is so high from them. How do they set things up for some of the big players like a McDonald's as well as a Chipotle that you cover?

PETER SALEH: Yeah. Several weeks ago, we hosted a restaurant called Tech Forum. And we had several executives that opined on this exact issue. And I don't think everybody's in agreement that that is the core issue, this unemployment benefits.

I think many believe that, you know, workers just want more flexibility. They want more work/life balance. They don't want the overtime as much. So I think there is a shift in the trend. Clearly, employees want to get paid more, and they want more benefits. But I'm not exactly sure how much of an impact the higher unemployment is really making here.

I think it's more just employees' psyche and what they're really looking for. I think that's really what's driving this. And it does not seem to me like this is a short-term issue. I think this is more of a long-term problem that the restaurant industry and really anybody employing hourly employees is going to have to deal with.

ZACK GUZMAN: Yeah, I used to work in the industry as well. You know, back when I was in high school, it was a good job at a V Pizza if I can shout them out. But when we talk about how this is going to set up winners and losers, last time we spoke, you were talking about a franchise mix and the way that that's going to be important to watch here.

But when it comes to maybe some of those on the value side, I assume there would be more-- more pressure here if they were to raise prices to suffer the consequences. Talk to me about how you're breaking down winners and losers if we are to expect this to hit menu prices in the future.

PETER SALEH: Yeah, I think the larger brands that are more sophisticated and that can move quicker to hire employees, I think goes when-- I feel like the independence, the mom and pops are going to struggle. I feel like the larger brands have opportunities to increase benefits and provide promotion opportunities that attract employees.

So in my opinion, again, it comes back to the larger brands. It's not necessarily whether your value or your higher end. I think they're all going to struggle. And they'll all have to raise menu prices. To me, this is more about how big of a brand? Are you a recognized brand versus an independent mom and pop?

My guess is that the larger brands have more resources and more ways to attract those employees versus the independence of mom and pops, which really make up about 50% of the overall category.

AKIKO FUJITA: So if we're talking higher or better benefits, higher wages, that seems to suggest higher costs overall. Chipotle has already raised their prices. Who's likely to follow? And who do you think is best positioned to take the hit if you will?

PETER SALEH: So if you look across the restaurant industry, past five even 10 years, I think the average menu price increase has been somewhere around 2%-- 2 and 1/2% every year. My guess is this year will be outsized. We might be 3% if not higher to offset some of these labor pressures. And we're also getting commodity inflation as well.

Look, I think you're going to see it across the board from every operator. I think the operators who have taken less price in the past probably have a little bit more that they can take now. Operators, like Darden with Olive Garden, they've taken less pricing. I think Chipotle has, in my opinion, probably been a little bit more of a value on the plate to the consumer. They probably have a little bit more opportunities.

But, you know, you look across the industry-- everybody's going to be raising prices, whether it's 2 and 1/2%, 3%, 3 and 1/2%. Prices are going higher. And you're just going to see more inflation. There's really no other solution other than implementing more tech which can help offset a little bit of these price pressures.

ZACK GUZMAN: And Chipotle at 4%. The first one we're discussing here. But clearly, the conversation we're going to return to. Peter Saleh, BTIG restaurant analyst-- appreciate you joining--