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The Return Of The AutomatLabor shortages can mean investment gains.Remember the automat? In the first half of the century, Horn [...]

April 1 1990 by Chief Executive


The Return Of The Automat

Labor shortages can mean investment gains.

Remember the automat? In the first half of the century, Horn & Hardart’s mechanized cafeteria-style restaurants were the rage. More than 400,000 people ate in them daily. Customers were attracted by the automats’ convenience, low prices, and curious mechanics. A nickel put in a coin box unlocked a little glass door, liberating the muffin that went so well with your coffee. And there were no waiters to contend with or tip.

The automat was the prototype of today’s fast food chain drive-up restaurant. It cashed in early on a major trend-the working family-with its mom and pop both too tired to cook and needing to eat in a hurry. The result was big profits for Horn & Hardart and its predecessors. The automatic cafeteria held the lid on labor costs, always a big factor in service industries.

Today, American business might do well to remember and emulate the spirit of the automats. Current statistics indicate that the U.S. is heading for a severe labor shortage in the ’90s that will have a significant impact on productivity and profitability. The coming labor crunch spells trouble for many labor-intensive companies, but proactive firms are positioning themselves now, and those are the firms investors after a profit will seek out.

HELP WANTED

Experts agree that the next decade’s labor shortage was caused by earlier changes in the U.S. birth rate. Young workers, the kind service industries like nursing homes and fast food chains thrive on, will enter the work force in smaller numbers. And as more young women pursue higher education, the ranks of the secretarial pool will also decline. Increased efforts to stem the flow of illegal immigration, as well as congressional attempts to cap immigration quotas, will help lower the labor force growth rate.

Projections suggest a growth rate of just one percent annually over the next nine years, compared with 2.2 percent annually from 1970 to 1986. And there are darker days ahead: Work force growth during the ’90s is expected to be the lowest since the ’30s. Intensifying the shrinkage is a low unemployment rate. With both a low growth rate and low unemployment, a squeeze is definitely in the works as the table on the opposite page illustrates.

HANDLING THE WORK FORCE CRUNCH

In the ’70s, many corporations found it easier to increase payrolls as a means of increasing productivity, rather than improve output per employee. Service industry wages increased more slowly than in manufacturing. Now the reverse is true. In the ’90s, companies face a clear-cut challenge if they want to survive and prosper in the wake of a labor shortage.

Management will be under pressure to reduce labor-intensiveness with automation, and to use labor more efficiently with both intensified recruitment and retention, and better employee training. Hewlett-Packard President John Young notes that the average worker will be “retrained five times” during his or her working lifetime. Wendy’s is now offering full medical benefits to all employees, and Pizza Hut is creating a scholarship program, with these goals in mind.

The businesses that will prosper in the new work force environment are those already well-positioned to implement the necessary changes, and those that can help other companies meet the challenge. Investors weighing earnings growth can narrow the field by concentrating on four main business groups.

The new “automats,” companies that use laborsaving technology to serve customers, such as McDonald’s and Federal Express, will have an edge. Mail order and TV home shopping services will be the automats of retailing. Quality retailers, like Toys “R” Us, that use automated inventory control systems, will pull ahead of old-line department stores.

Providers of streamlined production technology should see earnings gains. With labor scarce, robots will have to take up the slack. The key issue here is quality control in an atmosphere of greater automation. Motorola and

Hewlett-Packard are well positioned here, and new joint ventures with Japanese robotics firms should be explored.

Companies that promote labor efficiency, such as temporary help companies, will grow. British Blue Arrow took over Manpower, but now plans to bring the American subsidiary public once again, and Wall Street interest is already keen on the transaction. This includes business information companies that make information more readily available, thus reducing manpower, such as Reuters, Dun & Bradstreet, and AT&T.

Training and related companies that help educate the work force are already beginning to prosper. Ads for training school faculty now compete with the traditional academic variety. But the training industry does not have a pristine image because of irregularities involving the 90 percent of vocational school revenue that comes from federal loans. (One victim was beauty school operator Wilfred American Education, once recommended in Barron is by Magellan fund manager Peter Lynch, whose stock plunged from $16 to $1 in the last four years.) But winners like CareerCom will not only help entry level workers get their first job, but also provide on-the-job training for corporations.

In today’s volatile and confusing investment environment, one key to investing is to be selective. Identifying long-term values by factoring in companies that will benefit despite or because of the work force crunch will help investors increase the odds for success. These are companies with potential for high growth, and growth is doubly powerful because it can lead to price appreciation and a higher price/earnings ratio both. That’s why growth stock prices have spiralled upward at higher rates in the past.

Investors going after growth stocks during the work force crisis should consider the brief recommendations given here. The tight labor market to come is a broad economic trend with certain overall market impact. To profit from that trend, investors have to do what analysts call “disaggregating a trend:” breaking a trend down into its key components. How many investors saw that fitter American lifestyles would turn the sneaker into a shoe worn to the office.

Growth is an industry affair. Don’t put the cart before the horse by picking a popular company first. Find the industry that stands to benefit from projected growth. The labor crunch won’t have an effect on banks, but automatic teller machine makers will see improved earnings.

Finally target a growth company. That will be an industry leader whose fundamentals you’re sure about. Earnings need to come from solid capitalization, low leverage, wide profit margins, and correctly charged depreciation. That’s the firm whose stock will lead the trend you want to take advantage of.


Robert L. Hand is a New Orleans-based investment executive specializing in pension plans.