The impending minimum wage increase in California has triggered a wave of preparation measures among fast-food chains in the state. With the new $20 minimum wage set to take effect on April 1, restaurants are exploring various strategies to maintain profitability. Some are cutting jobs and increasing automation, while others plan to raise menu prices.
Chipotle, one of the major players in the fast-food industry, acknowledged that they would need to implement a mid-single-digit price increase in California to cover the cost of the wage increase. Jack Hartung, Chipotle’s chief financial and administrative officer, expressed this during a February earnings call. Similarly, El Pollo Loco executives stated that the wage hike would result in a 12 to 14 percent increase in labor costs for their business in 2023. They are working on making their labor tables more efficient and believe that cutting jobs and hours can recoup a significant portion of the added labor costs. The rest will be covered by mid-to-high single-digit percentage spikes in pricing.
However, El Pollo Loco is not solely relying on price increases to manage the impact of the minimum wage increase. The company is also adopting measures to reduce expenditures. This includes implementing new salsa processing equipment that is easier to use and clean, as well as utilizing kiosks and digital ordering to cut labor costs. Maria Hollandsworth, the company’s chief operating officer, emphasized their commitment to scrutinizing all costs to offset the expected incremental labor costs resulting from legislative changes.
Burger chain Jack in the Box is even testing robots that can operate fryers and dispense drinks. This move towards automation is an attempt to reduce labor costs and adapt to the minimum wage increase. Meanwhile, pizzerias across the state, such as Round Table and Pizza Hut, have already started slashing jobs in anticipation of the wage hike. According to state Employment Development Department data, approximately 1,300 delivery positions have been cut this year.
Some restaurants, including El Pollo Loco and pizza chains, have also opted to use third-party delivery services as a means to avoid certain labor costs. This decision allows them to navigate the increased expenses associated with the minimum wage increase while maintaining profitability.
The National Owners Association, a group of McDonald’s franchisees primarily based in California, estimated that the minimum wage law would cost each restaurant location around $250,000 per year. This significant cost has led to lobbying efforts against the bill by various restaurant chains. Secretary of State data reveals that restaurants, including Jack in the Box and Chick-fil-A, collectively spent over $4 million lobbying against the bill last year. While their efforts did manage to reduce the proposed minimum wage from $22 to $20 per hour, it still represents a 25 percent increase from the existing $16 minimum wage across all industries in California.
The minimum wage legislation has not been without controversy. Reports of secret backroom dealings and non-disclosure agreements used by labor unions have raised questions about the transparency and fairness of the process. Critics have seized upon a Bloomberg article that accused billionaire restaurant owner Greg Flynn of securing an exemption for bakeries operating on-site through hefty donations to California Gov. Gavin Newsom. However, both Newsom and Flynn have denied these allegations. Legal experts and the state’s Labor Commission have also clarified that the exemption would not apply to Panera Bread, despite the initial claims. The details of how the exemption came about and which restaurants qualify for it remain unclear, although it appears that the Great Harvest Bread Company is currently the only eligible chain based on recent legal interpretations.
As the April 1 deadline approaches, fast-food chains in California are taking proactive measures to navigate the impending minimum wage increase. From price adjustments and labor cuts to automation and exploring exemptions, these companies are striving to protect their margins while balancing customer traffic. The impact of these changes on consumers remains to be seen, as higher prices may lower demand, particularly among budget-conscious individuals. However, the fast-food industry in California is determined to adapt and maintain profitability in the face of this significant wage increase.
