California Restaurants Take a Hit from New Minimum Wage Law

AP Photo/Damian Dovarganes

Last September, California Gov. Gavin Newsom signed a law which raised the minimum wage for fast food workers to $20 per hour. Even before the law took effect in April, California restaurant chains began laying off staff and making plans to raise prices. Other chains began looking into more automation (meaning fewer workers) as a way to control prices.


Today a group called the California Business and Industrial Alliance, which opposes the law, published a full page ad in California's edition of USA Today pointing to some of the impact the law has had on various chain restaurants.

The California Business and Industrial Alliance (CABIA) said nearly 10,000 jobs have been cut across fast food restaurants since Newsom signed California Assembly Bill 1287 into law last year.

To highlight what it says are the unintended consequences of the law, CABIA has taken out an ad in Thursdsay’s statewide edition of USA Today with mock “obituaries” of popular fast food brands...

“California businesses have been under total attack and total assault for years,” CABIA president and founder Tom Manzo told FOX Business. “It’s just another law that puts businesses in further jeopardy.”...

“You can only raise prices so much,” he said. “And you’re seeing it. People are not going to pay $20 for a Big Mac. It’s not going to happen.”

This week, Rubio's Coastal Grill, a chain of fish taco restaurants in the state, announced it was closing 48 stores, about a third of their total locations.

A fast-casual staple in San Diego County since its founding in San Diego 40 years ago, Rubio’s Coastal Grill has abruptly shuttered 48 of its California restaurants — 13 of them in San Diego County.

The decision, which took both customers and employees by surprise, was driven by the rising cost of doing business in California, the company said in an emailed statement. Rubio’s, like other California chains, has been affected by the recent wage increase for fast-food employees, who are now paid $20 an hour as of April 1. That represents a 25 percent hike over the current $16 minimum wage in California.


Yesterday the chain announced it was declaring bankruptcy in an effort to survive.

The filing was done to right-size the company to better thrive in today’s retail environment.

Like the restaurant industry overall, Rubio’s has been negatively affected over the past few years by diminishing in-store traffic attributable to work-from-home practices remaining in place, and by rising food and utility costs that, combined with significant increases to the minimum wage in California, put pressure on a number of its locations.

Clearly, Rubio's had problems that go beyond the minimum wage hike but a San Diego restaurant analyst said the law is still a major factor.

“Rubio’s is an older tired brand. It’s not cool anymore. Chipotle’s is cool, Cava is cool,” Gordon said. “Rubio’s had its day but once it left the publicly traded markets and (current owner) Mill Road Capital took it over, it went into maintenance mode. Ralph Rubio, the founder, continued to consult with them but nothing much happened.”...

“Without a doubt, the governor’s action, the union’s action on this Assembly bill action that dramatically raised the minimum wage to $20 with no phasing in was a dramatic shock to all fast-food restaurants in California,” Gordon said. “We knew it was coming, and the industry opposed it aggressively.”

Because the new law only applied to fast food restaurants with more than 60 locations, the impact hasn't been universal, at least not yet. But as the LA Times reported last month, the state minimum is already at $16 per hour and some cities in California are closing in on $20 per hour. As a result, the entire restaurant industry is struggling.


According to [Ada] Briceño, higher wages don’t necessarily equate to a halt in business; where she said they have seen a crush of new-business permits is in the city of West Hollywood, which two years ago voted to raise its minimum wage, now at $19.08 per hour — the fourth-highest in the country.

“We see that in areas where we have the highest wage increase — for example, West Hollywood — have a boom in business,” she said. “I think that’s really important.”

But multiple West Hollywood restaurateurs said the minimum-wage increase and paid-time-off requirements forced them to limit hours, raise prices or cut staff entirely. Industry veteran Craig Susser operates celebrity hot spot Craig’s in West Hollywood. He recently told The Times that in order to financially offset the increase in minimum wage, he had to reduce the number of servers from 12 to nine, and sometimes to eight.

There are only a few options here. More automation may be an option for some fast food restaurants. In other cases it's a choice between raising prices or laying off employees or giving the same number of employees fewer hours. Raising prices has already happened at a lot of the fast food chains. But how much higher can they go without seeing a lot of their customers pull back? There's some evidence that is already happening.

A recent LendingTree survey of 2,025 Americans between the ages of 18 and 78 revealed that a significant number of people were starting to cut back on their fast food cravings because of ever-increasing prices, and more than three-quarters of respondents (78%) now consider fast food to be a luxury. 

When asked whether they agreed with the statement, “fast food has gotten more expensive, and I now view it as a luxury,” more than three-quarters of respondents said yes. Additionally, just under two-thirds of survey respondents (65%) said they had been "shocked" by a recent high bill at a fast food restaurant, and that percentage jumped to 72% among parents who had children under the age of 18. 


If fast food becomes a luxury, people will eat less of it. Maybe that will be good for waistlines but it won't be great for the industry and in the long run a lot more workers will be let go.

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