In California, AB 1228—which will raise the minimum wage for quick-service employees with 60-plus units to $20 an hour starting in April—is triggering several reactions from restaurants across the state. Since the current minimum wage is $16 an hour, that’s a 25 percent rise. 

It will likely lead to most concepts lifting prices to keep pace with rising labor costs. But it also could yield several benefits, including helping restaurants recruit more staff and boost morale.

Therefore, AB1228 is going to shake up California’s fast-food industry, which recently came out of the pandemic and is already contending with rising food expenses.

The law will affect over 500,000 fast-food workers across the state. The Service Employees International Union (seiu), which represents them, issued a statement that said AB1228 will lead to “fairer wages, healthier working conditions, and better training.” It also has components of paid sick leave and paid vacations.

Mary Jane Riva, CEO of Pizza Factory, which has 109 locations, all franchised except for one, with 72 based in California, acknowledges that when the law passed, franchisees “were panicked. How are we going to pay for that? How can we keep our guests coming in when we’re going to have to raise prices?” they wondered.

Yet when they simmered down, most came to realize that Pizza Factory was a “legacy brand and have relationships with our customers” that won’t be denied because of a price increase, she says. 

A one-topping pepperoni pizza at Pizza Factory usually costs around $18, and Riva expects that prices will rise about 10 percent in 2024 to $20 a pizza. So with four beverages, a family of four can sit down and dine together at dinner for $30 (before tax and tip), under the new price structure.  

Franchisees will have to make adjustments, she suggests. They’ll need to monitor staff hours, emphasize cross-training so employees can handle multiple roles, and put more of an emphasis on productivity for every worker. Also, operators will have to rely more on online ordering to relieve employees of taking phone orders and ensure the culture of each eatery stays welcoming and inviting to increase guest frequency.

Mike Whatley, the National Restaurant Association’s vice president of state affairs and grassroots advocacy, says AB 1228 will present a “serious challenge for the industry. Twenty dollars an hour is big money, and some restaurants will be reducing staff, leaning in more on automation technology, and some may close.”

To keep revenue flowing, some price hikes will be passed along to the customer, Whatley says, but restaurants will look at how many employees are needed on every shift, where technology can be employed, and explore whether smaller footprints work and drive-thrus can cut staffing.

The law, he adds, touches all employees across the board—kitchen staff, order takers, counter staff, and, where applicable, servers.

What works in West Hollywood may not work in the rural areas of California, where paying $20 an hour is more likely to cause closures, Whatley expects.

Chains are in a tricky position, explains Michael Halen, a Bloomberg Intelligence senior restaurant analyst, because same-store sales have been moderating, traffic has been declining, and most franchisees have grappled with single-digit net margins. “If they want to stay profitable, they’re going to have to raise prices,” he notes.

Halen adds that three chains with large California presences, Starbucks, Chipotle, and Jack in the Box, have been at the forefront of testing automated technology that can help reduce employee costs.  But there’s not a whole lot of wiggle room, so if they want to stay profitable they’re likely going to have to cut spending.

This new law presents issues for most larger restaurant chains in California because the “margins for restaurant businesses are thin to begin with. They’re going to have to look at increasing prices and optimizing the use of labor or reduce labor count,” explains Perse Faily, CEO of Tillster, a San Diego-based restaurant e-commerce platform and a partner at private equity firm Sid R. Bass Associates.

Restaurants will need to scrutinize where their labor can be used more efficiently, she says, such as encouraging guests to use kiosks instead of having staff take orders. That way employees can be used to prepare the food or get it out in a timelier way, satisfying customers, Faily says.

Hope Neiman, CMO of Tillster, says if orders are taken digitally, which intensifies their speed, order volumes will rise and revenue will spike. Average restaurant orders digitally are 25 percent higher because the technology offers more personalized upselling. “Do you want a chocolate chip cookie with that order as you did the last time?” it can say.

Another way restaurants can offset their higher labor costs is to engage with guests to bring them in six times a year, instead of four times.  Loyalty programs that offer coupons and incentives that encourage more spending on digital ordering can boost revenue and compensate for higher labor costs, Neiman says.

Faily notes that many customers, but not all, prefer ordering digitally because the machine never makes a mistake. She also says restaurant employees must emphasize hospitality and make a connection with guests to encourage return visits.

The legislation covers businesses that own 60 or more units, but Riva expects all establishments and restaurants, from mom-and-pop eateries to sit-down restaurants to smaller chains, will feel the impact of this AB 1228. “Everyone will be affected. You can’t pay someone $15 an hour if they can walk up the street and get $20 an hour,” she says.

And what started in California, by far the largest state in the union with nearly 40 million people, will cascade to other states. It’s already being discussed in New York and will reverberate from state to state, says Riva, who’s been CEO for 11 years. Bloomberg’s Halen says minimum wage laws will likely not be invoked in red states such as Texas and Florida but could take hold in New York, Illinois, Washington, and Oregon.

Riva says increased paychecks will make life easier for restaurant staff, however, prices will rise across the board for food and other necessities and cut into the larger salary checks that workers reap.

She believes most Pizza Factory customers can absorb the likely 10 percent price uptick in 2024, but it’s reached the limit where prices can’t rise without customers balking or limiting their family pizza outings.

Riva says the looming wage hike in 2024, “all comes down to strategizing. We need to devise a plan to ensure profitability, and make the guest, the employee, and the franchisee adjust to this new wave and making sure we’re hitting all of our goals.”

Faily predicts that starting in April, “the first 12 months will be a challenge for restaurant operations and margins will be squeezed. But after that, they will adapt by looking at their labor costs and use of technology.” For example, paying higher wages may make it easier to attract more staff and enable eateries to stay open longer hours, which will increase revenue.

The biggest question, Faily says, will be, “Are restaurants ready to pivot to strategies that are more helpful to them,” such as using technology to improve efficiency, mitigate rising costs, and find ways to maintain, if not increase, profitability.”

To wrestle with growing employee costs, Whatley forecasts more automation, including full-on robotics, more tablets, and streamlining menus. He says not just California restaurants are to be impacted, but also the state’s entire economy.