Minimum Wage Increase Takes Toll on California’s Fast Food Restaurants, Survey Finds

California Gov. Gavin Newsom signs the fast-food bill surrounded by workers at the SEIU Local 721 in Los Angeles on Sept. 28, 2023. (Office of Gov. Gavin Newsom)

Two-thirds of California fast food restaurant operators who responded to an online survey believe their costs will increase at least $100,000 annually per location, according to a report released July 19 by the Employment Policies Institute—a Washington D.C.-based lobby group.

Approximately 26 percent of respondents said they expect costs to increase by more than $200,000 at each location.

In June and July, 182 operators were polled on their thoughts about a new minimum wage law requiring quick service restaurants with at least 60 locations nationwide to pay employees a minimum of $20 per hour. The law took effect April 1.

“Even before the $20 wage went into effect, fast food restaurants made it clear they would not be able to survive,” Rebekah Paxton, research director for the institute, said in a statement emailed to The Epoch Times. “Now after just a few months, the policy has been a disaster, killing jobs and shuttering restaurants.”

The report did not say how many restaurants have closed, but a study published July 10 by restaurant technology firm Snappy found that 897 fast food locations in the state have permanently closed since April 1.

Ms. Paxton said state officials “should be listening to small business owners and their employees instead of trying to sugarcoat the truth.”

Pointing to U.S. Bureau of Labor Statistics data that shows growing employment in the fast food industry since the new minimum wage law took effect, California Gov. Gavin Newsom’s office rejected the survey results and any claims that the higher wage is jeopardizing the industry.

Alex Stack, a spokesperson for the governor’s office, called the survey a “bogus online survey conducted by a DC lobbying firm.”

“Federal government data shows the actual facts here—fast food jobs have increased every month this year, including since California raised the minimum wage for workers,” Mr. Stack told The Epoch Times.

According to its website, the Employment Policies Institute is a nonprofit think tank that studies the impact of minimum wages and other issues that affect entry-level employment. Its founder, attorney Richard Berman, also owns Berman and Company, a public relations firm based in Arlington, Virginia. Both companies have a history of focusing on leisure, hospitality, and restaurant-related issues.

The labor statistics data shows five consecutive months of job growth and an increase of nearly 3,000 jobs in the past year, with about 745,600 employed in the sector, in California, in May.

Mr. Stack said higher wages for employees are proving beneficial for families and the state.

“Simply put, what’s good for workers is good for California,” he said.

The institute, however, said the data cited by the governor’s office is inaccurate because it is not seasonally adjusted and highlighted Federal Reserve data that suggests the industry is losing jobs—down about 6,300 since January and approximately 3,000 since the law took effect.

“Employees are losing their jobs ... restaurants are shutting down or moving out of state ... [and] customers are eating out less,” Ms. Paxton said. “This isn’t good for workers, ... restaurants, or California consumers.”

When questioned about the impact of the higher costs, 98 percent of operators surveyed said they have already raised menu prices.

Believing that some consumers are increasingly more price conscious, 92 percent of the restaurant operators surveyed said they expect the higher prices to reduce foot traffic.

With the goal of reducing costs, 89 percent of survey respondents said they are reducing employee hours. Nearly three-quarters said they are limiting overtime, and 70 percent said they have reduced staff or consolidated positions.

The number of employees at each location is expected to decrease, according to 75 percent of operators, with 25 percent saying staff levels will “significantly decrease.”

Some restaurants have closed California locations in the past months, and nearly three-quarters of operators questioned said the likelihood of shutting down their restaurants has increased.

Regarding future investments, 89 percent of owners said they are not expecting to expand their operations—with 73 percent saying they are “significantly less likely” to develop more locations.

However, 59 percent said they are now more likely to invest in expansion outside of California.

Determining the impact of the law, to date, is challenging, given the short time frame since higher wages were implemented.

But now about three months into the new law, 93 percent of survey respondents said they will be forced to raise menu prices again in the next year, 87 percent will cut hours, and 74 percent will reduce staff.

Some fast-food chains are charging significantly more for the same meal in California compared to locations in other states. Del Taco’s price for a combo meal with two tacos costs $14.79 in the Golden State, compared with $8.79 in Ohio, according to the company’s website.

Executives representing some fast food chains anticipated such challenges earlier this year before the law took effect.

“As we look to 2024 with elevated ... prices and muted consumer confidence, we believe that consumers will continue to be more discriminating with their dollars,” Chris Kempczinski, president and CEO of McDonald’s, said in a February earnings call.

The iconic Big Mac meal is now $13.69 in California, nearly $5 more than in Texas, where the average price is $8.79, according to Grubhub.

Such price discrepancies are “because of the impact … of what we’re going to have to work through in California... and the significant wage increases,” Ian Borden, executive vice president and chief financial officer at McDonald’s, said in the earnings call. “We certainly know consumers are more wary or weary of pricing, and we’re going to continue to be consumer-led in our pricing decisions as we kind of look forward to 2024 and knowing that the environment will continue to be competitive.”

The week after the new law became effective, managers at several fast-food restaurants across the state told The Epoch Times that menu prices would increase, and staff hours would be reduced to maintain profitability.

“We already raised prices, and we’re ... reducing hours and the amount of people working,” said Kevin Cortez, general manager of a Wendy’s location in Northern California.

Some businesses are focusing on improving efficiencies and increasing automation using robots and artificial intelligence to reduce the number of employees needed.

Others, including some Taco Bell and El Pollo Loco locations in Northern California, have installed kiosks in lobbies to take orders, reducing staff needed, and freeing up employees to work in the kitchen and perform other tasks.

The 15-question survey was emailed to a list of quick-service operators in California—including some associated with partners of the surveyor–and researchers reported a margin of error of 7 percent.