McDonald’s franchisees in California are on the brink of collapse: Here’s why

The $20 minimum wage nightmare: How California’s law is crushing McDonald’s franchisees

The facade of a McDonald's location

The Golden Arches might be losing their shine in the Golden State. The new $20 minimum wage per hour for all fast-food restaurant employees in California is turning into a nightmare for McDonald’s franchisees. Facing skyrocketing labor costs, franchisees are forced to make drastic cuts to stay competitive, threatening the very survival of their businesses. In this article, we’ll explore the devastating impact of California’s $20 minimum wage law on McDonald’s franchisees and the creative solutions they’re employing to stay in the game.

What is Califonia’s new minimum wage for fast-food restaurant employees?

California’s new minimum wage for fast-food restaurant employees is $20 per hour, which took effect on April 1, 2024. This rate applies to employees of fast-food restaurants that are part of a national chain with at least 60 locations across the state. The law, enacted through AB 1228 and Labor Code Section 1475 (LC 1475), aims to improve the working conditions and wages of fast food workers in California. The new minimum wage is a significant increase from the current statewide minimum wage of $16 per hour, which remains in effect for other industries.

A group of McDonald's store staff
A group of McDonald’s store staff

How are McDonald’s franchisees in California coping with the new $20 minimum wage?

McDonald’s franchisees in California are employing various strategies to cope with the new $20 minimum wage for fast-food workers. These include:

Price Increases

Franchisees are raising menu prices to offset the higher labor costs. Scott Rodrick, who owns 18 McDonald’s locations in Northern California, has increased prices by 5% to 7% since January in anticipation of the wage hike.

“My strategy was to do it in short steps over a longer period of time than do it as dramatically as overnight,” Rodrick told Business Insider. “I’ve been paying very, very close attention to the competition in my space. The appetite that my customers have for price increases is not unlimited.”

Reduced Hours and Capital Expenditures

Some franchisees are considering cutting store hours and postponing non-essential capital expenditures like renovations to save money. Rodrick is reconsidering operating hours and delaying plans to buy new grills and rooftop HVACs.

“In my organization, I have to make some harder choices around capital expenditures,” Rodrick told the news outlet. “So for example, if I have to replace an HVAC [a ventilation or AC unit] on the roof, I might push that off to 2025 or 2026.”

He continued: “If I have to do a dining room remodel, I might have to engage with my franchisor to allow me a less broad scope or push that CapEx down the road, and even on day-to-day operations, instead of the landscaper coming in every week to take care of the outside shrubs, perhaps it’s every other week.”

When asked if he was considering adjusting his store hours to absorb the impacts of the new wage, Rodrick said that he has two options: increase them to boost revenue or decrease them to cut operating costs.

Delivery Operations Expansion

Franchisees are focusing on expanding delivery operations to increase revenue without relying solely on in-store sales.

Employee Engagement

McDonald’s is developing a new scheduling system to improve communication and traffic projections, aiming to make workers more engaged and efficient.

Potential Layoffs

Although layoffs are a last resort for McDonald’s franchisees like Rodrick, the California Policy Research Center estimates that the $20 minimum wage has already led to the loss of around 9,500 fast-food jobs in the state. And that won’t stop there, as the long-term impact of the new wage on the fast-food industry in California remains to be seen.

McDonald's crew members behind the counter
McDonald’s crew members behind the counter

Were there criticisms on the $20 wage long before it became a law?

There were significant criticisms on the $20 minimum wage for fast-food workers in California even before it became law.

Business groups and franchisees strongly opposed the initial proposed rate of $22 per hour, raising $71.8 million to fight the law, with $50 million coming from loans by large corporations.

Critics also argued the then bill would replace workers with self-checkouts and “robot cooks” and that nearly everyone would be worse off: higher prices, fewer jobs, fewer eating options as places close, and fewer small businesses.

Republican lawmakers actually sought to shut down the law, with Rep. Doug LaMalfa claiming it would affect nearly every job with similar negative results.

Moreover, there were concerns about exemptions in the law that benefited specific businesses, like the initial exemption for Panera Bread, which raised questions about fairness and transparency.

Some also think the wage hike is unfairly targeting the fast-food industry and a fair starting wage should apply to all industries, not just fast food. In his interview with Business Insider, Rodrick argued, “Whether you work at my drive-thru, whether you work at the bookstore down the street or the gas station next door, a fair starting wage for one should be a fair starting wage for all.”

Source: Business Insider
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