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California's minimum wage increase goes into effect April 1.

California’s minimum wage hike comes into focus in Q3

California’s minimum wage increase goes into effect in April, and some companies are preparing more pricing hikes, while others are looking at retention tactics and automation.

California Governor Gavin Newsom signed AB 1228 into law in September, which will raise the minimum wage for quick-service workers to $20 per hour starting April 1, with an annual increase in line with inflation. The state’s current minimum wage is $15.50 per hour.

Unsurprisingly, the move sent shockwaves throughout the restaurant industry and, given the timing, was a massive theme throughout third quarter earnings calls. Some companies already have a plan in place, while others are taking more of a wait-and-see approach. Yum Brands is already anticipating an approximately $10 million impact in Q4 at its California-based Habit Burger and Grill.

“On the fourth quarter, we now expect an operating loss at Habit of approximately $10 million, largely driven by restaurant asset impairment chargers, which will be higher than we had initially expected due to anticipated impacts from the California Assembly Bill 1228, previously referred to as the FAST Act,” CFO Chris Turner said during Yum’s earnings call earlier this month.

Other brands are less definitive at this time, including Red Robin, which counts about one-tenth of its North American footprint in California. During its earnings call, CEO G.J. Hart said he’s not sure how much the law will affect his company yet and is continuing to evaluate if there needs to be more price increases or not.

“We’re watching it very closely and we do expect a little bit of a creep,” he said.

Chipotle and McDonald’s, meanwhile, are bracing for even more impact. Chipotle anticipates the law could increase labor costs by upwards of 3%. The chain, which already pays its California workers around $17 to $18 an hour, has raised menu prices four times in the past two years and plans on doing so again in the state once the wage increase goes into effect.

“It’s going to be a pretty significant increase to our labor. We haven’t made a decision on exactly what level of pricing we’re going to take, but to take care of the dollar cost of that and the margin part of that, we haven’t decided yet where we will land. It’s going to be a mid-to-high-single-digit price increase, but we are definitely going to pass this on,” CFO Jack Hartung said during the company’s call in late October.

McDonald’s CEO Chris Kempczinski added that “certainly there’s going to be some element that does need to be worked through with pricing,” adding that the wage increase will hit franchisee cash flow in the short term.  

It’s worth noting that restaurants have been increasing menu prices for over two years now to offset historically high food and labor costs. In October, prices for food away from home were up 5.4% versus last year, according to data from the U.S. Bureau of Labor Statistics. Consumers have grown pricing fatigued accordingly, and traffic industrywide has started to erode. Additionally, though industry employment is flirting with pre-pandemic levels, job openings in the sector topped 1 million at the end of August, and those opening remain higher than pre-pandemic levels.

That said, Kempczinski added that the company is somewhat optimistic about McDonald’s position as this law goes into place.   

“What we’ve been talking about with our franchisees is this is an opportunity for us to gain share because this is an impact that’s going to hit all of our competitors,” he said. “We believe we’re in a better position than our competitors to weather this, and so let’s use this opportunity to actually accelerate our growth in California.”

And, though the law is specifically written about QSR at this point, many sit-down concepts are watching closely and anticipating a ripple effect. If that becomes the case, Darden Restaurants CEO Rick Cardenas is also optimistic.

“Our employment proposition is great. Our average wages, including tips, are over $22 now across the country, but when you look in California, it’s higher than that. So as labor costs continue to grow, and we’ve had that in other markets … we’ve been able to execute and continue to gain share there,” he said. “It’s probably going to impact the ones that have a little less capital and a little less ability to withstand that.”

BJ’s Restaurants, which also has a large presence in California, is also expecting to benefit from the bill as it potentially brings QSR prices closer to casual dining prices, and as many of its hourly team members already make at least $20.

“So, I do think we’ve got an inherent benefit. I also think that, because of this, you’re going to see fast food and fast casual raising their prices and getting their prices closer to casual dining,” BJ’s CEO Greg Levin said. “I think it’s a different experience at times in that we’re trying to drive guests into our restaurants that want that more experiential dining experience.”

Further, Levin said the higher wages will put more money in consumers’ pockets.

“And they tend to want to go out and use it on discretionary items and we get a benefit of that,” he said.

There is also a potential benefit of these higher wages driving more efficiency and productivity, as well as implementing strategies to improve turnover. Denny’s is a good example here, as CEO Kelli Valade and CFO Robert Verostek outlined during the company’s recent earnings call.

“As you would expect (AB 1228) is clearly on our minds and will be one of the key things we’re focused on. Clearly there will be pricing required, and we look to take that in a very strategic way. It’s not going to be some blanket level,” Verostek said. “We will also look to utilize other means, whether our virtual brands … we’re looking into automation to ensure labor we deploy in California is the most efficient.”

“We just keep adding value proposition for employees, so we’re really comfortable there,” Valade added. “We’ll look at everything we have in partnership with franchisees – automation, robotics – because we feel like there’s things we can absolutely do to offset that labor and to help with the business model at a time where it’s really critical.”

Contact Alicia Kelso at [email protected]

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