- California fast-food franchisees say they're desperate to find ways to remain profitable.
- Restaurants are trying to offset the state's new $20 minimum wage for fast-food workers.
Fast-food franchisees in California are desperately looking for ways to cut costs as the state's $20 minimum wage for workers at limited-service restaurants kicks in.
Proponents of the legislation say that it will help thousands of workers with basic living costs. But fast-food chains and their franchisees worry about the impact that the wage hike could have on their profits.
"As of today, I am well into the red," Michaela Mendelsohn, who owns six El Pollo Loco restaurants in California, told NBC Los Angeles on Monday, the day the new wage was introduced.
"We are losing money, so we are going to need to stop the boat from leaking by making changes," she said.
Some chains, including McDonald's and Chipotle, have said that diners in California should expect higher prices because of the legislation. But franchisees can largely set their own prices, and some are cautious about scaring off customers.
One McDonald's franchisee in Los Angeles County, for example, recently said her food would become "unaffordable" if she raised her prices enough to offset the new wage fully.
As a result, some locations are looking for other ways to absorb the higher wages without deterring diners:
1. Laying off workers
Some franchisees are laying off workers to cut their payrolls and avoid paying higher wages.
Two Pizza Hut franchisees in California said they planned to scrap in-house delivery to rely on third-party services instead, resulting in around 1,200 workers being laid off. A Round Table Pizza franchisee has also filed plans to lay off 70 delivery drivers this month.
Alex Johnson, an Auntie Anne's Pretzels and Cinnabon franchisee, told The Associated Press that he'd laid off his office staff and was getting his parents to help out instead.
2. Cutting hours and hiring less
But many franchisees say they don't want to lay off their workers.
Instead, some are cutting employees' hours and stopping hiring, like Marcus Walberg, who owns several Fatburger restaurants in Los Angeles. "We're being very tight on schedules," he told BI in January.
Other franchisees have made similar comments. Mendelsohn, the El Pollo Loco franchisee, told NPR that her preemptive price increases had already deterred some customers. "So really what's left is ... to reduce labor hours," she said. "And I hate saying that."
"I'm definitely not going to hire anymore," Brian Hom, the owner of two Vitality Bowl restaurants in San Jose, told The Wall Street Journal in March.
3. Dropping staff benefits
Walberg told BI in January that he'd stopped his restaurants' paid time off program to prepare for the wage increases.
"We just can't afford to do that anymore," he said.
4. Turning to order kiosks
Restaurants are turning to technology and automation to help reduce labor costs.
Sharon Zackfia, a restaurant analyst at William Blair, previously told BI that she expects digital order kiosks — currently a key focus area for some fast-food chains — to spread "even more quickly" in California. Kiosks mean that diners can place orders without having to speak to staff at a counter.
Mendelsohn, the El Pollo Loco franchisee, told CNN that she was introducing order kiosks and was considering bringing in AI-operated drive-thrus.
5. Spending less on operations
Beyond labor, restaurants are looking for other ways to save on their operating costs.
"Can I turn my lights off? Can I not have the air conditioning on right now? Can I turn it on later?" Kris Stuebner, executive VP of operations at KFC and Wendy's franchisee Jem Restaurant Management Corporation, told ABC 30 Action News. "That's things that we're looking at right now."
The higher wage is making some franchisees put off larger changes to their operations, too, including opening new restaurants.
Scott Rodrick, a McDonald's franchisee with 18 restaurants in northern California, told Fox News that he might have to postpone some major investments, like remodeling dining rooms and buying new grills, and would have to seriously consider whether he'd want to open new restaurants in the state.
Alex Johnson, the Auntie Anne's Pretzels and Cinnabon franchisee, told the AP that he wasn't looking at opening any more locations in California. "I have to consider selling and even closing my business," he said. "The profit margin has become too slim."
Are you a fast-food worker excited about the new minimum wage? Or a franchisee or restaurant manager worried about how it will affect your business? Email this reporter at gdean@insider.com.