What Chipotle thinks of spending nearly $ 2 billion a year on labor

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HOUSTON, TEXAS – JUNE 09: Employees talk together at a Chipotle Mexican Grill on June 09, 2021 in Houston, Texas. Menu prices at the Chipotle Mexican Grill have increased by about 4% to cover the costs of raising its minimum wage to $ 15 an hour for employees. The restaurant industry has raised wages in hopes of attracting workers during times of labor shortages. (Photo by Brandon Bell / Getty Images)

Brandon Bell | Getty Images News | Getty Images

Unlike many of its restaurant peers who have a franchise model, Chipotle Mexican Grill has all of its 3,000 restaurants – on its way to a goal of 6,000 – restaurants. That means he also owns the relationship with nearly 100,000 employees, many of whom are on the front lines and in lower paying, high turnover restaurant positions. Even before the pandemic, turnover in the food business was generally over 100% per year.

For Chipotle’s senior management, focusing on investing in workers is nothing new, but in an era of national labor shortages and wage inflation in lower-paying industries, it is has a message for competitors: if you think of labor as a cost, you think about it the wrong way.

This week, the Ministry of Labor’s latest JOLTS report showed a record level of workers leaving concentrated restaurant and retail jobs, and a record level of open positions.

The employment situation is so tense that CEOs in these industries are launching desperate appeals. After many in the business world complained about the extension of unemployment benefits as a government aid effort which was the main reason people stayed out of the workforce, Barry Sternlicht of hotel operator Starwood Capital told TBEN on Wednesday that the government must now pay people to come back to work. “The entire service economy is in crisis,” he said. “The country cannot really function without the return of its military.”

Marissa Andrada, head of diversity, inclusion and human resources at Chipotle, says she was able to attract and retain talent by investing in workers before the pandemic rather than as a sudden response to this one.

“We think the investments we’ve made in people over the past two years have prepared us for opening up to the rest of the world,” Andrada said at TBEN’s @Work Summit on Wednesday.

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

Rachel Carlson, co-founder and CEO of Guild Education – which provides a platform for companies like Chipotle to make education available to workers and is a two-time TBEN Disruptor 50 company, including # 49 on the 2021 Disruptor 50 list – Told in a separate session at the TBEN @Work Summit that there are still big gaps to be bridged between employers and employees on understanding a company’s role in education.

She said the Guild’s research showed that workers today are always 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 of ​​”their grandfather’s career at General Electric”. But employers are much more likely to view shorter terms as a victory.

“I’m in conversation with CFOs … and leadership teams who say they are thrilled when this role is supported by a leader, an employee, for three years, five years. , ‘”said Carlson.

Additionally, she said, Guild knows that while more and more large companies are offering educational benefits, “we know that a very significant number of employees feel uncomfortable. tell employers they don’t have a high school or college diploma. … They inflate the data or avoid responding to it. “

‘Every penny we spend on the line of work’

Andrada said the company had also looked into a healthcare concierge service for employees and their families, and she stressed that this was an investment made before the pandemic.

“We are grateful that we have been able to attract and retain talent,” she said, although she added that the company was not immune to the current working conditions and that “it there are pockets in the United States where there are challenges. ”

Jack Hartung, CFO of Chipotle, who spoke to Andrada at the TBEN event, said that since the company runs all of its restaurants, it needs to view investing in people in a different way than it does. a typical cost of profit and loss. “If you look at it that way, the main goal is to keep costs down.”

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

Andrada noted that going from an hourly employee to a six-figure general manager at a restaurant can take as little as three years, although labor economists are quick to point out that in any future for a company of low-wage services, there will be far fewer general manager jobs than low-wage front-line ones.

“We have declared as a goal that we want to come out of the pandemic stronger than we have entered,” Hartung said. “We don’t just want to survive, we want to make sure we make investments that make us stronger.”

That doesn’t mean the company has been able to avoid the negative work-related headlines that many large companies face, some of which stem from legal battles that began many years ago. And according to at least one fundamental measure of the labor economist, Chipotle wasn’t exactly rushing to ensure that the general well-being of his employees, including financial ones, was achieved before his peers. While the movement for a minimum wage of $ 15 has been around for years, Chipotle only embraced this labor spending in 2021 in a tight labor market and it is offsetting that cost in other ways: earlier this year, Chipotle increased menu prices by 4% to cover the minimum wage movement.

Chipotle, Generation Z and Millennial Consumers

But on a market basis, the business approach works. Chipotle shares have tripled since the Covid low of March 2020, and Wall Street is positive for the company for reasons that may 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 her long-term ROI compared favorably with many peers. Goldman Sachs analysts noted in a recent bullish call on action that labor costs would continue to rise.

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“This is the key for investors,” Piper Sandler analyst Nicole Miller Regan told TBEN by email on Wednesday of the company’s approach to investing in workers, which is estimated at just over $ 2 billion in 2022. But she added that it remains more difficult for Wall Rue to model precisely. “I’m not sure, as analysts, that we have all the data to model it,” she wrote.

Chipotle is consistent in its message about being a people-centric organization, and even though it remains a moving target when it comes to target share price, and Wall Street sees the company as an ESG brand. leader of the future that calls on key demographic data. .

In a note this week, Cowen wrote that among Millennials and Gen Z consumers, Chipotle stands out from restaurant chains for issues like food transparency, a rapidly growing digital business, waste reduction. , packaging and energy consumption, 22% of which is electricity generated from renewable sources. While Cowen’s analysts noted a generally high level of trust compared to their peers, labor standards and the treatment of workers were notably lacking among the ESG factors cited in the report. “

Andrada said companies need to “be very clear about who you are and what you stand for.” For Chipotle, that includes being “manually focused on people first,” she said, and that “makes decisions about investing in people really easy.”

Hartung said there is a fundamental difference between viewing labor as an operating cost, which an organization wants as low as possible, or as an investment that must be made every year as part of a long-term return on investment strategy.

Whether it’s an investment in education or some other benefit to employees, a business won’t necessarily see that return “next year,” he said, but the return will be long-lasting. . “We have between $ 300 million and $ 400 million in investments per year, mostly in restaurants. Salaries and benefits are $ 2 billion each year.”

The company wouldn’t put money into work unless it expected to generate a return in the future, in the form of both executives and financiers. “Over time we will have great people and great results,” Hartung said.

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