California fast-food franchise owners and consumers feel the impact of the minimum wage increase

California franchise owners and consumers are feeling the brunt of higher costs.

After 30 years in business, McDonald’s franchisee and CEO of Rodrick Foods, Scott Rodrick, had to make the difficult decision not to renew his lease at one of his McDonald’s (MCD) stores in a San Francisco mall.

“The unprecedented changes in California’s economic landscape, coupled with a series of ill-timed legislative mandates, have greatly narrowed the restaurant’s path to extending its mandate for a new term,” Rodrick told Yahoo Finance. He added that an “inflexible landlord who charged rent by the square foot,” high property taxes and mall fees were additional reasons that “made the decision difficult but clear.”

Rodrick still has 17 other McDonald’s stores, but is preparing for new changes in the sector. His father was one of the first to franchise a McDonald’s in the 1960s—a very different time for franchisees compared to now.

“An explosion occurred in California,” Rodrick said, referring to a series of closures of other long-running franchises, including one In-N-Out location in Oakland it is a Arby’s Restaurant in Hollywood which lasted 55 years. “We’ll watch the shockwaves pass slowly over time.”

California minimum wage law goes into effect

One area of ​​concern for California quick-service restaurant owners has been how to respond to the new legislation.

April 1 marked the first day of the new fast food minimum wage lawthat raised the starting pay for restaurant workers in the state to $20 an hour — from $16 previously — for chains that have at least 60 locations across the country.

As franchise operators struggle to maintain profitability, consumers have begun voting with their feet for higher prices. Overall, the cost of dining out increased 4% year over year nationwide last month alone. In California, menu prices at fast food restaurants rose 10.12% between September and April, with the largest increase seen in April following the legislation.

According to the data analysis platform Placer.ai, foot traffic at McDonald’s in California underperformed all U.S. McDonald’s locations by 2.48% in April and May compared to the same period last year. Before that, foot traffic was relatively the same.

Ab Igram, executive director of the Tariq Farid Franchise Institute at Babson College, said that while the closure of one McDonald’s location may not appear to impact the overall health of the entire company, it does make consumers wonder about the “health of the brand.” overall of the company.

The story continues

Additionally, it leaves a lasting impact on the community as workers who have been there for years are relocated and, as Rodrick mentioned in his letter to his clients, clients face disruptions to their routines.

McDonald’s California locations represent 9% of its U.S. restaurant portfolio. The company did not immediately respond to a request for comment on the total number of locations that closed in California after April 1.

McDonald’s executives briefly weighed in on the California wage increase during its latest quarterly report.

“There is certainly labor inflation,” said McDonald’s CEO Chris Kempczinski when asked by an analyst about the company’s current inflation expectations. “A lot of that comes from what happened in California. … Nationally, you can probably see that we’re expecting high single-digit labor inflation.”

McDonald’s isn’t alone in feeling the impact. Other chains like Burger King (QSR), Wendy’s (WEN), Jack in the Box (JACK) and In-N-Out are also seeing lower foot traffic in California.

Chipotle (CMG), which raised prices by 6% to 7%, saw year-over-year trends underperform the national average in April and May, according to Placer.ai.

On a call with investors, Chipotle CFO Jack Hartung said the impact of higher wages “will add almost 1 full point to the company’s total price starting in the second quarter.”

He added, “California restaurant cash flow is below the company average, so this increase will allow us to maintain cash flow. However, it will have a negative impact on the company’s overall restaurant margin by about 20 points. basis”.

Igram believes the true impact will be felt in the coming months.

“I would keep an eye on … what the traffic impact is between brands in California, three months out, six months out, nine months out,” he said.

Meanwhile, some of the law’s critics hope the pressure will make California Gov. Gavin Newsom think again.

“California’s bad policies have real-world consequences,” Tom Manzo, president and founder of the trade group California Business and Industrial Alliance, told Yahoo Finance. “People are losing their jobs, businesses are leaving the state — or in this case, shutting down completely. Lawmakers need to wake up and start supporting our state’s job creators instead of punishing them.”

The group says nearly 10,000 fast food jobs were cut in the state after the legislation was introduced last fall.

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Brooke DiPalma is a senior reporter at Yahoo Finance. Follow her on Twitter at @Brooke DiPalma or send an email to bdipalma@yahoofinance.com.

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