Business

How CA’s Fast-Food Restaurants Are Cutting Costs to Cover the New Wage

Supporters of the legislation say it will help thousands of workers cover basic living expenses. But fast food chains and their franchisees are concerned about the impact rising wages could have on their profits.

“As of today, I’m well in the red,” Michaela Mendelsohn, owner of six El Pollo Loco restaurants in California, told NBC Los Angeles on Monday, the day the new wage was introduced.

“We’re losing money, so we’re going to have to stop the boat from leaking by making modifications,” she said.

Some chains, including McDonald’s and Chipotle, have said California diners should expect higher prices because of the legislation. But franchisees can largely set their own prices, and some are reluctant to scare off customers.

A Los Angeles County McDonald’s franchisee, for example, recently said her food would become “unaffordable” if she raised her prices enough to fully offset the new wage.

As a result, some places are looking for other ways to absorb the higher wages without deterring diners:

1. Lay off workers

Some franchisees lay off workers to reduce their payroll and avoid paying higher wages.

Two Pizza Hut franchisees in California said they plan to abandon in-house delivery to rely on third-party services, which would result in laying off about 1,200 workers. A Round Table Pizza franchisee also filed plans to lay off 70 workers this month.

Alex Johnson, a franchisee of Auntie Anne’s Pretzels and Cinnabon, told The Associated Press that he had laid off his office staff and was asking his parents to help instead.

2. Reduce hours and hire less

But many franchisees say they don’t want to lay off their employees.

Instead, some are reducing work hours and stopping hiring, like Marcus Walberg, owner of several Fatburger restaurants in Los Angeles. “We are very tight in terms of schedules,” he told BI in January.

Other franchisees made similar comments. Mendelsohn, the El Pollo Loco franchisee, told NPR that her preemptive price increases have already deterred some customers. “So really all that’s left is to reduce work hours,” she said. “And I hate saying that.”

“I’m definitely not going to hire anymore,” Brian Hom, owner of two Vitality Bowl restaurants in San Jose, told the Wall Street Journal in March.

3. Removal of social benefits

Walberg told BI in January that he stopped his restaurants’ paid leave program to prepare for the pay raises.

“We can’t afford to do this anymore,” he said.

4. Turn to ordering kiosks

Restaurants are turning to technology and automation to reduce labor costs.

Sharon Zackfia, restaurant analyst at William Blair, previously told BI that she expects digital ordering kiosks — currently a key focus area for some fast-food chains — will spread “even faster” in California. Kiosks allow customers to place orders without having to speak to staff at the counter.

Mendelsohn, the El Pollo Loco franchisee, told CNN she is introducing ordering kiosks and plans to introduce an AI-run drive-thru.

5. Spend less on operations

Beyond labor, restaurants are looking for other ways to save on operating costs.

“Can I turn off my lights? Can I not turn on the air conditioning at the moment? Can I turn it on later?” Kris Stuebner, executive vice president of operations at KFC and Wendy’s franchisee Jem Restaurant Management Corporation, told ABC 30 Action News. “Those are things we’re looking at right now.”

The higher pay is causing some franchisees to also postpone larger changes to their operations, including opening new restaurants.

Scott Rodrick, a McDonald’s franchisee with 18 restaurants in Northern California, told Fox News that he may have to postpone some major investments, such as dining room renovations and purchasing new grills, and that he would have to seriously consider the possibility of opening new restaurants. in the state.

Auntie Anne’s Pretzels and Cinnabon franchisee Alex Johnson told the AP he has no plans to open any more locations in California. “I have to consider selling or even closing my business,” he said. “The profit margin has become too thin.”

Are you a fast food worker excited about the new minimum wage? Or a franchisee or restaurant manager worried about how this will impact your business? Email this reporter at gdean@insider.com.

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