It’s been nearly nine months since California raised its minimum wage from $15.50 to $20 for QSRs and the business community is already experiencing the impacts.
The subject took center stage earlier this month at a Restaurant Finance & Development Conference session. Panelist Luke Fryer, CEO and founder of employment management software company Harri, said the scale of the increase and the speed at which it was implemented made the raise especially difficult to absorb for the industry.
“Operators had just a few months to prepare for it,” Fryer said. “This kind of increase would usually happen over several years. It’s also important to note the sectorial focus. It was very focused on the QSR sector. Never before has a sector been selected for such a large-scale increase in wages. It applies to a lot of locations and a lot of employees.”
While the increase wasn’t gradual, though, the process of it becoming a reality was a multi-year affair. The $20 minimum wage was established by a 2023 bill signed by California Gov. Gavin Newsom. The legislation, applying to companies with 60 or more locations, was the result of several negotiations between politicians, labor unions and industry representatives.
Harri CEO and founder Luke Fryer
The year before, the California Legislature passed a law known as the FAST Act, which would have raised the minimum wage to $22 with a 3.5 percent increase per year. However, it was met with major pushback from the International Franchise Association and National Restaurant Association. That pushback led to the rescinding of the FAST Act and the passage of the 2023 bill.
While the legislation was praised as a good compromise upon its signing, Fryer said it’s created instability for QSRs in the state.
“We have anecdotal evidence, speaking to operators, where they don’t want to open more businesses,” Fryer said. “They’re closing locations and taking their experience and investing out of state.”
Other panelists involved in the discussion included Cosme Fagundo, a McDonald’s franchisee with 29 units, and James McGehee, chief financial officer and franchisee with Dave’s Hot Chicken. Fagundo said the increase arrived at a tough period, too, with restaurants experiencing the significant impacts of inflation.
“During the pandemic, supermarkets faced tremendous amounts of inflation, which caused a lot of customers to run to us,” Fagundo said. “Now, we’re facing the opposite. Supermarkets have stayed flat and our prices are going up, and we’re facing those pressures. So, the industry also needs to go back and bring customers to their restaurants again, whether it’s delivery or in store.”
Despite the headwinds, Fagundo said his operations in California are pushing forward, though adjustments have been necessary.
“We didn’t cut hours, but we tried to be more efficient with our hours, making sure that our aces are in the right places,” Fagundo said. “That’s part of what we use Harri for, and we’re fortunate to have that in place. It comes down to getting tighter controls.”
McGehee said Dave’s Hot Chicken has also not cut hours, and has looked for other solutions in response.
“We introduced some technologies like kiosks and things of that nature,” McGehee said. “We really didn’t want it to affect the experience. But we’re fortunate that we do have positive traffic right now.”
Dave’s Hot Chicken CFO James McGehee
Another adjustment to offset the challenges have been value meal options, but Fagundo said adding value goes beyond pricing options.
“On the value wars, there’s a market share battle, but there’s always been a market share battle,” Fagundo said. “Has it had a positive impact on traffic? Absolutely. Has it had a great impact on our margins? No, but you can’t make money if people aren’t walking through the doors.
“You can also get value from a bunch of different other areas,” said Fagundo. “How the facility looks, the quality of the food and the consistency of the food. This all adds value to the consumer experience. That’s also true with kiosks, which about 25 percent of our in-store transactions go through. It’s about getting optionality to the guests for a frictionless experience.”
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Looking ahead, the next hurdle Fagundo said he’s undertaking is managing an increase in employee retention, which has its pros and cons.
“The retention has definitely improved,” Fagundo said. “Mine has gone from a 12-month turnover to a 25. We have a lot more people coming in and trying to apply which makes you more selective, and our turnover is getting to a dangerous point. From an organizing perspective, it creates risk. So, it’s very important to focus on long-term employment morale.”
McGehee said this is an issue across industries.
“I have friends who are in citrus farming and they’re saying, ‘You guys are killing my industry, I can’t get people,’” he said. “There is a migration to our industry, but we’re also at very low levels of turnover. Almost too low, so you also have to constantly be evaluating the hourly staff.”