On April 1, 2024, the minimum wage for fast food workers who work at a “National Fast Food Chain” will increase to $20/hour in California. This is a full 25% higher than the current $16/hour for all other workers. This minimum wage is the major provision of Assembly Bill 1228 that was signed by the Governor on September 28, 2023. AB 1228 also establishes a Fast Food Council that will have the right to impose further requirements.
I have been following this legislation closely for the past couple of years and have read numerous articles about the bill including the actual text (link provided at end of this blog). To prevent complete boredom, I have quoted AB1228 in many places but not where I didn’t feel it would contribute to your knowledge.
In my opinion, this legislation has the potential to have the largest impact on California’s retail industry this year compared to ANY other issue including the Presidential election, interest rate shifts, worldwide political turmoil or any other items that are filling your news feeds. I am sharing my thoughts because many in our industry will be affected by this legislation. If you want to discuss how it might affect your business or property, reach out to me. I would welcome the discussion.
I believe there are going to be both obvious and not so obvious consequences of this legislation.
First, let me provide some brief highlights of the bill:
- According to the legislation, a “National Fast Food Chain” is a set of limited-service restaurants consisting of more than 60 establishments that share a common brand or that are characterized by standardized options for décor, marketing, packaging, products and services and which are primarily engaged in providing food & beverages for immediate consumption on or off premises where patrons generally order or select items and pay before consuming with limited or no table service.
- To clarify as I understand it the 60 establishments applies to anywhere in the United States. The ownership structure is not a factor meaning ANY strategies one might consider with separate ownership entities does not matter. The legislation applies to a single franchisee OR a 100-unit franchisee who operates under 10 separate LLC’s. This was to ensure that if it walks like a duck and sounds like a duck, it is a duck.
- The Fast Food Council will be comprised of 9 voting members including two representatives of the fast food industry, two representatives of fast food restaurant franchisees or restaurant owners, two representatives of fast food restaurant employees, two representatives of advocates for fast food restaurant employees. And the tie breaker will be one unaffiliated member of the public (pick me, pick me).
- Except for one of the advocates for the fast food industry who will be appointed by the legislature, the balance of the Council members are appointed by the Governor. I guess the concept of taxation without representation has been forgotten.
- This Council will have authority to make rules and regulations that govern “working conditions” which include health and safety, workplace security, the right to take time off for protected purposes, and the right to be free from discrimination and harassment in the workplace. There is a lot of leeway here and virtually no discussion of what may be coming because of these provisions.
- The $20/hour minimum wage kicks in on April 1, 2024. It will then increase by a maximum of 3.5% per year each January 1. This means that it is very possible that the minimum wage on January 1, 2028 will be almost $23/hour.
- One of the quirkiest aspects of this bill is how Panera Bread and Boudin Bakery are exempt because as of September 15, 2023 they sell bread that is purchased independently of any other product. Sorry Subway and other sandwich makers. You don’t qualify nor can you qualify even if you started selling bread independent of your sandwiches. Also, I don’t think bagels are considered bread.
Now that we have established the basic parameters, the following are my thoughts on what the implications of the legislation could be:
Very Few New National Fast Food Chains in CA: Our team members have spoken to numerous fast food chains at various industry conferences and it’s very apparent that most are not looking at California as an area for expansion. As I mentioned in a blog post back in August, of the largest 500 restaurants in the country, over 200 of them are not in California so there might be a fair amount of lost opportunities.
Closure of Marginal Fast Food Restaurants: I expect to see a lot of underperforming restaurants close. Wages are approximately 30% of fast food sales. In 2013, California’s minimum wage was $8.00/hour. Going from $8.00/hour to $20/hour is a 150% increase. We have all noticed that restaurant prices have gone up significantly over the past few years and that was when the minimum wage went from only $8.00/hour to $15.50/hour. But now there will need to be more price increases to address the additional $4.50/hour. Good locations can raise prices and/or absorb some decrease in margin, but I doubt the marginal locations will be able to absorb further increases.
To better understand the math, a fast food restaurant that does $1.5M in sales takes about 29,000 hours of labor per year to operate (equivalent to 14.5 full time employees). At $4.50/hour, that equals approximately $130,000/year of increased costs. I can assure you that there are many restaurants doing $1.5M in sales that cannot absorb this $130,000 in costs. The question is whether they can raise prices another 10% to cover these costs or have we reached a point of maximum price increases.
An Opportunity for Smaller Operators: Even though a national chain may not succeed in a particular location, there is still a chance that an independent fast food operator with a unique product, a lower cost model, or some other competitive advantage could be very successful at the location. We anticipate that as the national brands close locations, smaller operators will lease or buy these sites.
Potentially Higher Costs for Smaller Operators: I recently spoke with an operator of a handful of coffee locations and asked if he thought he could avoid having to pay higher wages. He answered, “absolutely not”. He indicated, despite his efforts, a lot of his employees would leave him quickly for higher wages at a national brand. I then asked about tip income. I was expecting tips to add an additional $5 to $10/hour to an employee’s wages but he indicated it’s only about $3.00/hour.
Loss of Fast Food Jobs: There are a minimum of 500,000 fast food workers in California (I read one estimate by a reliable source that has the number at 744,000). With very high likelihood there will be far fewer of these workers within the next few years. As such the legislation that was intended to help these workers will likely end up hurting a lot of them.
Substantial Increase in Technology Implementation: I often order at a fast food restaurant using their app. I’m confident that the industry will further incentivize the use of these apps to eliminate the need for employees taking orders. I was recently at a McDonalds and saw ordering kiosks that looked like giant slot machines. Not only do they eliminate the need for employees to work the counter, they were fun as well. I also recently visited Hof’s Hut in Seal Beach where I met Rosie the Robot (photo above) who delivered our food to the table. That’s the front of the house. The back of the house will likely also invest in automation to reduce labor in the cooking process. Robots could be flipping burgers, assembling tacos, making French fries, pouring drinks and more.
Possible Increase in the Underground Economy: This is one that I am not so sure about. Traditionally, when business regulations go up, more people get paid “under the table”. In order to pay people in this manner, the owners need to have cash coming in the door. This is where I am a bit ignorant. Pre-pandemic I always used cash. Now I use plastic for just about every transaction. My adult children almost never use cash. However, if there is a lot of cash circulating, especially in independent locations, then that could be a reason to work in a restaurant that is not a National Fast Food Chain. If this is the case, then government agencies will be negatively affected through lower income tax revenue.
Higher Wages in Retail and Full-Service Restaurants: Although the traditional retail and full-service restaurants are not included in the legislation, they compete for the same labor. As a result, expect to see rising labor costs in these establishments which will also cause a push for more automation and reduced employment.
Higher Costs for Fast Food Customers: Again, this is an area where I do not have complete information, but I suspect most lower wage workers regardless of industry are not dining at the Cheesecake Factory, Yard House, California Pizza Kitchens, Lucille’s Bar B Que, or Lazy Dog type restaurants as much as they are going to Taco Bell, McDonald’s, Raising Cane’s, Wienerschnitzel, Subway, and similar establishments. As a result, even though a few hundred thousand restaurant workers will benefit from AB1128, millions more of everyday consumers could face even higher prices for fast food.
Reduced Tipping: I think tipping may go down a lot. Many are already revolting from the suggested tips when paying on the credit card terminals. When people realize how much these employees are being paid they may decide not to tip as much which could easily result in lower wages for those that previously relied on tips. Alternatively, this could be very positive as earning a consistent wage for lower wage workers is an important benefit.
More Take Out and Pick Up Only Options: Operating a dining room is expensive. In some places staff deliver the food to the table. And in all places the dining room must be kept clean. That takes LABOR. And when I talk to people in the industry, I am frequently surprised to hear how little of the revenue relies on indoor dining compared to drive thru, pick-up and delivery options. Also, eliminating the dining area reduces construction costs and security concerns which are other sources of grief for operators.
Increase of Outsourcing: Two of the largest Pizza Hut franchisees that operate in California have already announced that they will lay off 2,000 drivers and resort to using third party apps for their delivery services. Expect to see more of these changes.
Fewer Menu Choices: To cope with the rising labor costs, operators are going to have to get more efficient in the kitchen. One way to do this is to eliminate menu choices. El Pollo Loco has announced that they will offer only one kind of salsa vs. two (I think we can all live with this decision) but you get the gist of the challenge.
Conclusion
This blog is a lot more negative than usual but no matter how I slice it, I don’t see a win for our industry with this new legislation. The reason I write these blogs is to share knowledge to help all of our clients make better decisions. We are all going to be impacted by this new legislation, but one thing I am confident about is that as an industry we are resilient and will figure out how to make lemonade out of lemons – we always do.