What Do Restaurant Chains Think Of Obamacare?


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Companies presenting at this year's ICR XChange investors conference in Miami were often asked, usually more than once, about the impact on health insurance mandates set to take effect in 2014. We couldn't help but notice that their views were somewhat muted.

Indeed, Jack in the Box executives even noted during their breakout session that Obamacare, which will require employers to start providing health coverage, "isn't the end of the world."

"We're embracing it, not fighting it," said Dave Prokupek, CEO of Denver-based burger chain Smashburger. He expects the law will increase labor costs by 100 basis points. By contrast, he noted, over the past three years ground beef costs have risen by 300 basis points. The upshot: it'll increase costs, but other costs are more troublesome.

Kevin Reddy, CEO of another Denver-based concept, Noodles, joked that the first step he took to deal with Obamacare was at the ballot box. But he then said that the company has to strike a balance between keeping costs under control and being able to attract good workers. Other companies likewise said they should focus on keeping good workers. At least one, Ruth's Chris Steak House, already provides coverage to part-time workers that qualifies under the law's definitions as comprehensive--meaning it won't get hit.

That said, the law will clearly cost some restaurant chains. We took particular interest in the comments from Chipotle, which noted that it will likely provide coverage to hourly employees, but also acknowledged that this coverage could cost it a bundle. The company has about 30,000 hourly employees, roughly 15,000 to 20,000 of whom would qualify as full-time under the law, meaning they work more than 30 hours a week.

Chipotle’s cost per employee would be about $2,500, making the worst-case scenario a $50 million hit to its cost structure. Still, that’s $37,000 per unit, or 1.7 percent of revenues.

Of course, the company doesn't expect that many people to take the coverage. And no restaurant chain expects an immediate onslaught of workers opting for coverage when the law takes effect in 2014. That's because the penalties on workers who don't take coverage are phased in over time, and many employees are expected to pay the penalty at first.

Still, analysts speaking at ICR had differing views of the potential impact of the Affordable Care Act. “Invest in companies that embrace that change,”said Nicole Miller Regan, noting that companies that take too many drastic steps to keep the costs down will be hurt in the long run with customers.

On the other hand, "It won't be good for the overall industry at all," said Paul Westra, analyst at Cowen & Company.

 

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