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AB 1228 repealed a previously passed – and highly controversial – bill, AB 257, which would have raised the hourly wage to $22, created a Fast Food Council with the authority to set working conditions, and established a joint employer arrangement, would have made the franchisors liable for the liability of franchisees. Violations. And in the process, both the industry and the SEIU each saved millions earmarked for lobbying voters in a November referendum to decide the issue.
“Everyone who looks at this in the industry, now that the emotion has gone out of the negotiations, sees this as the least bad option or the worst good option, depending on which side you're on,” said Matt Haller, President and CEO of the International Franchise Association, a trade group representing franchisors, franchisees and franchise suppliers. In return for concessions and given a very uncertain outcome of the referendum, “we have a very predictable business environment for our members going forward,” he said.
Although they've dodged some major bullets, McDonald's, Chipotle Mexican Grill, Starbucks, Yum! Taco Bell, Shake Shack, El Pollo Loco, In-N-Out Burger and other Brands fast-food chains — which operate nearly 30,000 franchised and company-owned restaurants in California — are still strategizing how to do so Costs can mitigate the certain slump in work.
They also address the likelihood that an energized SEIU will step up its longstanding goal of unionizing fast-food workers, something the industry has largely avoided so far, while cautiously eyeing similar minimum wage laws and union organizing efforts in other states .
The overwhelming and unsurprising response from franchisors is that they plan to raise menu prices, a tactic they have been using lately to cope with inflation, higher interest rates and supply chain costs, as well as previous wage increases driven by the success of nationwide franchising The “Fight for $15” movement began a decade ago. “They're still figuring out how much, but we know everyone is going to raise prices,” said Brian Harbor, industry analyst at Morgan Stanley, noting, however, that franchisees generally get to decide the prices they charge .
When Harbor asked McDonald's executives about possible price increases after 1228 during its third-quarter earnings conference call in October, CEO Chris Kempczinski said, “There will be an impact on the wages of our California franchisees.” “I don't do that.” I think at this point we can say exactly how much…Certainly there will be some of that that will have to be addressed with higher prices.” McDonald's, the largest fast food chain in the world, has 9% of its nearly 13,500 U.S. locations are in California, most of which are franchises.
That sentiment was echoed by Chipotle, which operates about 460 company-owned locations in California. “We have not made a decision to increase prices in California to offset the expected increase in the workforce in California next year,” a company spokesperson said in an email to CNBC, “but our CFO Jack Hartung said yes on the call the third quarter results that we… We study it and assume that we would need to increase prices in the mid to high single digits (i.e. the medium is 4-5-6% and the highest is 7-8- 9%), and that means prices will be that much higher a percentage.”
Other recent earnings calls have drawn similar comments. “We're going to rely on pricing,” Jack in the Box CEO Darin Harris said, expecting menu prices to rise between 6% and 8%. He added that the way consumers are reacting to this latest round of price increases adds uncertainty to the chain's sales forecasts for the coming year.
“Anyone doing business in California subject to this new mandate will do so [raise prices]Haller said, adding that the consensus was in the 10% range. “The question is, how far can you push the price before you turn off its value.” [to customers]?”
Ordering kiosks, drive-thru chatbots and automation
Beyond the price hike, fast-food restaurant operators in California are exploring other measures to offset the wage increase, such as automating certain tasks to increase worker efficiency and productivity and possibly eliminating some jobs entirely. For example, automated drink dispensers and robot burger flippers are being tested across the country. Chipotle, Starbucks and Sweetgreen are experimenting with automated food and drink preparation systems.
Earlier this year, Wendy's began testing generative AI chatbots to take drive-thru orders and is now offering the human-free technology to all of its franchisees, including nearly 300 in California. Carl's Jr., Hardee's, Del Taco, McDonald's and Sonic Drive-In are among those jumping on the chatbot bandwagon.
Self-service kiosks are trending at fast-food restaurants, having been tested for nearly a decade by Panera Bread, McDonald's and Burger King. Yum Brands, the owner of fast-food chains KFC, Taco Bell, Pizza Hut and The Habit, uses them vigorously. “On average, kiosk sales collect 10% more checks than front desk sales and the profit is excellent,” Yum CEO David Gibbs told investors in August.
During El Pollo Loco's earnings call in November, interim president and CEO Maria Hollandsworth reported positive tests at kiosks, “which resulted in a reduction in hours per day at the restaurant level,” she said. She said that in addition to rolling it out across the chain, the company is also “increasing labor efficiency” with new salsa processing equipment and “testing additional initiatives such as automated dishwashers.”
By definition, automation minimizes human input, a reality that the SEIU hopes will not unduly impact fast food workers in California due to AB 1228. “We are confident that companies truly value the value and contributions of their workforce to the customer experience,” said Joseph Bryant, SEIU international vice president. “We are all dealing with the impact of this next wave of technology, powered by AI, and in the end I don’t think anyone thinks that dealing with pads instead of people is a better experience.”
Some workers in California are already feeling the impact of the new law directly. Pizza Hut announced this week that it would lay off 1,200 delivery drivers because of the new minimum wage, a strategy that could benefit delivery companies like DoorDash and Uber.
Fast Food Workers and Unionization
Regardless, the time is ripe to accelerate unionization among fast food workers in California and possibly beyond, Bryant said, pointing not only to the passage of 1228 but also the growing support for unions across the country. According to a recent Gallup poll, 67% of Americans support unions, the highest level since the 1960s. “In general, there's a different way of perceiving or appreciating what the labor movement means, what unions do, particularly as the wealth gap in this country continues to widen,” Bryant said.
Conversely, only about 10% of all U.S. workers are unionized, and just under 1% of fast food workers are. The glaring outlier is Starbucks, whose employees at nearly 370 company-owned stores are choosing to unionize. Yet more than 16,000 Starbucks are not unionized. Starbucks recently said it would resume talks with union representatives early next year.
Bryant acknowledged that the mismatch between union support and actual membership is a barrier to organizing fast food workers in California and other states. He hopes AB 1228 could provide some momentum, but he also acknowledges that businesses won't make it easy. “Even if you look at 1228, [they] “We have spent millions to thwart these efforts,” he said.
Haller said he has no doubt the SEIU will capitalize on 1228's outcome. “They continue to target us in California and other states with policy changes to further their political goals, which are to organize workers and gain market share,” he said. Still, he sees their failed efforts to unionize fast-food workers as an endorsement of the franchising model. “We think this is a good thing,” Haller said. “This is not an anti-union comment, but a positive comment about franchising.”
AB 1228 also offers some fast food companies a chance to increase their market share in California. “Long term, we've talked to our franchisees about this being an opportunity for us to gain market share,” McDonald's Kempczinski told analysts. “We believe we are in a better position than our competitors to weather this.”
Other major fast-food restaurants have expressed similar optimism, Harbor said. “We assume that we can better afford to increase wages and have tools or equipment that provide some productivity to offset wage increases,” he said.
Haller agreed with this point of view. “The big companies are better positioned to gain market share, [as are] the large franchisees,” he said, “by purchasing or acquiring underperforming locations or franchisees that may have considered exiting in the coming years.”
On the other hand, Haller said: “We will also see brands that want to develop in California now choosing not to because it will be difficult to find first-time owners who can actually monetize a value-based company because of these cost pressures.”
Although fast-food companies will initially need to invest more in labor and technology in the long run, “the fact that they are committing to raising prices to offset some of this impact has likely assuaged investor concerns,” said Harbour. Additionally, major chains' profits are at or near all-time highs, he said, so AB 1228 “doesn't seem to worry people too much.”