Shake Shack has announced its plans to close six of its California locations nearly five months after the state’s new $20 minimum wage law took effect.
Shake Shack Closures in California
As detailed in a filing with the Securities and Exchange Commission on Tuesday, Shake Shack is set to close nine locations, attributing the decision to a routine review of its company-operated units.
Among the locations slated for closure, five are in the Los Angeles area and one is in Oakland, reducing the total number of Shake Shacks in California to 37. In addition to the California closures, two locations in Texas are shutting down, and one store in Ohio.
Although the announcement of the California closures comes after the state’s minimum wage for fast-food workers increased to $20 per hour on April 1st, Shake Shack didn’t specifically mention it as the reason for the closures. The company, however, did cite “changes in the trade area” as a partial reason for the shutdown.
“These Shacks are not projected to provide acceptable returns in the foreseeable future,” the filing said of the locations that are set to cease operations.
This marks the first instance in which Shake Shack is closing restaurants for reasons unrelated to construction, a spokesperson informed trade publication Restaurant Business, which first broke the news.
Shake Shack plans to close all the above-mentioned nine locations by September 25th.
Employees at the affected locations will have the opportunity to transfer to other Shake Shack restaurants. Those who choose not to transfer will receive 60 days of pay.
Despite the closures, the company, which currently operates 330 locations in the U.S. and over 180 internationally, stated that the move is intended to optimize growth and will not affect its plans to open new stores in the future.
Shake Shack’s Future Plans
Earlier this month, Shake Shack CEO Rob Lynch expressed his desire to broaden the brand’s appeal. He emphasized that the restaurant should not cater exclusively to “only the highest-income burger eaters.” Instead, Lynch envisions Shake Shack becoming “a Friday night staple for the family”. To achieve this, Lynch believes that expanding the company’s drive-thru locations is crucial to drop its image as an urban, walk-in restaurant.
Lynch assumed the role of CEO in May after holding leadership positions at Papa John’s, Arby’s, and Taco Bell. Despite the impending store closures, Shake Shack, under the leadership of Lynch, saw a 4% increase in same-store sales in the second quarter of the year, mainly because of its higher prices. Although customer traffic dipped slightly by less than 1% during the same period, the chain’s shares have surged by 43% this year.
Califonia’s New Minimum Wage for Fast-Food Restaurant Employees
California’s new minimum wage for fast-food restaurant employees, which took effect on April 1st, is $20 per hour. 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.
According to The New York Post, since California implemented the new $20 minimum wage for fast-food workers in April, nearly 10,000 jobs have been eliminated as struggling franchises attempt to cut labor costs and raise prices to remain viable.
Major chains such as McDonald’s, Burger King, and even the budget-friendly In-N-Out Burger have increased their menu prices to offset the higher wage costs. Many establishments have also reduced employee hours and accelerated their shift toward automation.
Long before Shake Shack announced the abovementioned store closures, Rubio’s California Grill became the first major chain to succumb to the financial pressures of the new law. Rubio’s California Grill closed 48 of its nearly 134 locations by the end of May. The San Diego-based company attributed these closures to the “rising cost of doing business” in the state and subsequently filed for bankruptcy in June.
Interestingly, California’s fast-food workers are once again calling for a minimum wage increase, just four months after their last $4 raise. Earlier this month, the workers argued that the previous hike was insufficient to meet the rising cost of living in the state, especially after many workers reported that their working hours had been cut following the recent wage increase.