With California’s recent minimum wage increase to $20/hour for fast-food dining establishments that have at least 60 locations nationally, there are concerns about how restaurants are going to cope. Will there now be a mass exodus of restaurant chains leaving California? What is the ultimate solution?
“The reality is that many QSR, fast-casual and sit-down brands are hesitant about expansion in California,” said Blake Kaplan, managing director of JLL Los Angeles, who has ample experience with the restaurant real estate scene in The Golden State. Citing one particular example, Kaplan noted that Portillo’s opened two stores in California, but ultimately decided that growth did not make sense in that market. “Its sales were strong in the state, but with increased occupancy costs, labor costs, expenses for litigation, taxes and permitting, etc., it made the most sense for Portillo’s to have a heavy growth strategy in other markets instead.”
The smaller fast-food establishments — those which have fewer than 60 locations and are therefore exempt from instituting the $20 minimum wage — may actually still feel pressure to raise the rates they pay their employees in California. “You can’t change the labor costs,” said Kaplan. He continued, “The mom-and-pop restaurant owners that are paying $15 to $17 for an employee are going to be in a position where they need to step up and pay what the chain restaurants are paying to retain employees.”
The minimum wage increase will also have an effect on which real estate sites the restaurant brands will want to occupy and negotiate for. “The one thing the restaurants have control over is the occupancy cost (rent), but to be in an A+ quality property they will need to be bulletproof and know their numbers,” said Kaplan. He added, “There is incredible demand for second-generation restaurant spaces, but it comes down to the exclusives within the center and the quality of real estate.”
The restaurant chains that are in a great position to continue growing their presence in California regardless of the minimum wage hike include CAVA, Dave’s Hot Chicken, Bushfire Kitchen, Mendocino Farms, sweetgreen, Jersey Mike’s, The Habit Burger Grill, Chipotle, Starbucks and Better Buzz Coffee. “The density, spending power and food scene make California impossible to ignore, as sales volumes in many Californian cities are some of the top-performing markets for many groups,” Kaplan said.
In order to offset the high minimum wage rate, one of the main solutions that many restaurant owners are utilizing is to increase automation capabilities. “We saw McDonald’s adapt to the automated kiosks years ago as they were focused on cutting back the labor cost in the front of the house,” Kaplan revealed. He maintained, “We are now seeing many other restaurant brands take this initiative on automation, and even testing the back of the house as well.”
