California franchise owners and consumers are feeling the pain of rising costs.
After 30 years in business, McDonald’s franchisee and Roderick Foods CEO Scott Roderick had to make the difficult decision to not renew the lease on a McDonald’s (MCD) restaurant in a San Francisco mall.
“Unprecedented changes in California’s economic climate, combined with a number of poorly timed legislative mandates, have significantly narrowed the path for restaurants to extend their status for a new term,” Rodrik told Yahoo Finance, adding that “landlords clinging to per-square-foot rents,” high property taxes and mall fees also “made the decision difficult but clear.”
A copy of the letter Scott Rodrick posted on the restaurant’s front door, in which he wrote to Yahoo Finance, “It was a really horrible feeling.” (Courtesy of Scott Rodrick/Yahoo Finance)
Rodrick still owns 17 McDonald’s restaurants, but he’s bracing for more changes in the industry: His father was one of the first to open McDonald’s franchises in the 1960s, when it was a much different time for franchisees.
“There’s been an explosion in California,” Rodrick said, referring to the recent closures of other longtime franchises including In-N-Out in Oakland and Arby’s in Hollywood after 55 years. “We’re going to watch the shock waves slowly pass over time.”
California’s minimum wage law goes into effect
One concern for California fast food restaurant owners is how to respond to the new law.
April 1 marked the first day that California’s new fast-food minimum wage law went into effect, raising the starting hourly wage for restaurant workers in the state at chains with at least 60 locations nationwide from $16 to $20 an hour.
Consumers are beginning to protest against price increases as franchise owners struggle to remain profitable. Overall, the cost of eating out rose 4% last month alone compared to a year ago. In California, fast-food menu prices rose 10.12% between September and April, with the biggest increase occurring in April after the bill was passed.
According to data analytics platform Placer.ai, customer traffic at McDonald’s restaurants in California was 2.48% lower than the national average in April and May compared to the same period last year, after traffic remained roughly steady prior to that.
Abu Igram, executive director of the Tariq Farid Franchise Institute at Babson College, said that while the closure of one McDonald’s restaurant may not seem like it will affect the company’s overall situation, it will raise questions for consumers about the company’s overall “brand health.”
The story continues
Additionally, it has left a lasting impact on the local community as employees who have worked there for years are being relocated and, as Rodrik said in a letter to patrons, customers are experiencing disruptions to their daily lives.
McDonald’s California locations make up 9% of the company’s U.S. restaurant portfolio. The company did not immediately respond to a request for comment on the total number of restaurants it has closed in California since April 1.
McDonald’s executives briefly mentioned California’s wage hike in their latest quarterly report.
“We do have labor inflation,” McDonald’s CEO Chris Kempczinski said when asked by analysts about the company’s current inflation expectations. “A lot of that is driven by what’s happened in California. At the national level, you’ll see we’re probably expecting labor inflation in the high single digits.”
McDonald’s isn’t the only chain affected: Other chains like Burger King (QSR), Wendy’s (WEN), Jack in the Box (JACK), and In-N-Out have also seen declines in customer traffic in California.
Chipotle (CMG), which raised prices by 6% to 7%, saw its year-over-year trends trail the national average in April and May, according to Placer.ai.
The impact of the wage increase “will be roughly one percentage point accretive to enterprise-wide pricing starting in the second quarter,” Chipotle Chief Financial Officer Jack Hartung said on an investor call.
He added, “Cash flow at our California restaurants is below company average, so this increase will help preserve that cash flow, but will have a negative impact of approximately 20 basis points on restaurant-level margins across the company.”
A McDonald’s on Highway 66 in Azusa, California, on Monday, April 1, 2024. (Robert Gautier/Los Angeles Times via Getty Images) (Robert Gautier via Getty Images)
Igram believes the real impact will be felt in the coming months.
“We’ll be watching to see how this impacts traffic across brands in California over the next three, six, nine months,” he said.
Meanwhile, some critics of the law are hoping the pressure will force California Governor Gavin Newsom to reconsider.
“California’s bad policies are having real-world consequences,” Tom Manzo, president and founder of the trade group California Business and Industry Federation, told Yahoo Finance. “People are losing their jobs and businesses are leaving the state — or, in this case, closing down altogether. Lawmakers need to wake up and start supporting the state’s job creators instead of punishing them.”
The group claims that about 10,000 fast-food jobs have been cut in the state since the bill was introduced last fall.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter.Brooke DiPalma Or email me at bdipalma@yahoofinance.com
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