Change in California’s minimum wage laws for fast food workers drives up food prices

North County may increase wages for all restaurant workers over time, and … the robots are coming

NORTH COUNTY — As of April 1, California implemented a new law mandating that fast-food restaurants with 60 or more locations nationwide pay their employees $20 per hour. This surpasses the previous state minimum wage of $16 per hour. This pioneering legislation marks the first of its kind in the nation.

Affected establishments include a range of local fast food chains, including In-N-Out Burger, Carl’s Jr., The Habit, Jack in the Box, McDonald’s, Chipotle, Subway, and Starbucks.

In Atascadero, an In-N-Out Burger manager told Paso Robles Press/Atascadero News that they are not affected because they have always paid above minimum wage.

However, as astute readers might anticipate, how are these fast-food establishments adapting their business models to accommodate the increased labor costs? Surprisingly, they haven’t trimmed down their CEOs’ exorbitant compensation packages. Instead, they’re passing on the expense hikes to consumers.

Many might argue, “That’s just how business operates; it’s fair game.”

According to a statewide study conducted by Kalinowski Equity Research, Chipotle has raised prices by 7.5 percent to fund the new wage costs, as predicted in a February earnings call, when Chipotle CEO Jack Hartung told investors, “To cover the cost of the wage increase, we would need to take a mid-single-digit price increase in California.”

However, most McDonald’s franchises have not increased their prices — at least not yet. As for Starbucks, a manager speaking on condition of anonymity stated that the company has increased prices due to the minimum wage increase and other increases in food costs, but that — interestingly — the company’s rate of increases depended on what region in California a franchise is located in.

Taking the analysis regarding the impact of the new law yet further, according to an article by Jack Kelly in Forbes titled, “California’s New Minimum Wage Law will bring higher pay to fast-food workers, along with unintended job losses,” although the bump in pay is intended to help improve the standard of living for more than a half-million fast food workers in California, “there may be unintended consequences that could do more harm to those employees, including restaurant closures, job cuts, reduced hours, and increased deployment of automation to bring down expenses.”

In anticipation of the April 1 mandate, affected California restaurant employers started both slashing jobs and reducing employees’ hours, especially pizzerias, according to the Wall Street Journal, which also noted that other establishments reduced or entirely deleted their employees who delivered food, opting instead to use delivery services, which is another way to pass the buck on to the consumer.

“Nasdaq reports that California businesses are expected to increase their prices at an anticipated rate of about 10 percent,” The Forbes article stated. “If higher prices deter customers from eating at these establishments, that could lead to additional closures and job losses.”

Of course, savvy consumers also should be on the lookout for “shrinkflation,” which is the practice by companies of reducing the size or quantity of a product while keeping the same price, another strategy used in the food industry to cut costs.

However, all of these analyses must be addressed in the context of our ever-burgeoning automation and use of artificial intelligence in the restaurant sector.

The robots are coming

The increase in minimum wage in the fast food sector in California may incentivize companies to hasten their automation efforts, many economists and market strategists opine. Companies have already started to implement software to automate kitchen operations, the Forbes article reported, adding that Robotics integrator RobotLAB launched a franchising program last year to help businesses implement robotics solutions into their operations.

Chipotle has been working with Vebu Labs, based in El Segundo, on a robot that aids in the preparation of avocados, called the Autocado. It is also testing a chip-making robot from Miso Robotics, according to a CNBC report.

Kiosks are another way to lower employment-related costs and, according to Restaurant Business, they are expected to become far more common in California.

Whatever strategies are forthcoming in the local restaurant sector to restructure business operations in response to the new minimum wage law, it is important to know that AB 1228 also established a Fast Food Council, which is empowered to make future increases to the minimum wage for fast food restaurant employees and to adopt other minimum standards for fast food restaurants statewide. Undoubtedly, there will be more news to follow in that regard.

Featured Image provided by In-N-Out