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California's Fast-Food Minimum Wage Hike Is Already Impacting Franchises. Here's What a New Study Revealed. Several chains have raised their prices — or closed locations — in response to the wage increase, which has now led to a noticeable decline in foot traffic.

By Carl Stoffers Edited by Jessica Thomas

Key Takeaways

  • California's new $20 minimum wage for fast-food workers, which went into effect April 1, has led to higher menu prices and a decline in foot traffic.
  • The wage hike has prompted some operators to reconsider expansion in California.
  • Rubio's Coastal Grill closed 48 locations due to rising costs, and two California-based Pizza Hut franchisees laid off delivery workers ahead of the increase.

It's still too early to fully understand the long-term impact, but California's new $20 minimum wage for fast-food workers is beginning to show its effects. Several chains have raised their prices in response to the wage increase, which has now led to a noticeable decline in foot traffic.

Data from Placer.ai reveals that year-over-year visit trends for California's quick-service segment were slightly ahead of national averages in February and March. However, after the wage hike on April 1, national visit trends outpaced California's for seven out of eight weeks in April and May.

Related: Considering franchise ownership? Get started now to find your personalized list of franchises that match your lifestyle, interests and budget.

Minimum wage hike

The Fast Food Franchisor Responsibility Act, which raised the minimum wage for fast-food workers in California to $20, went into effect on April 1 and applies to fast-food restaurants characterized by specific criteria. To fall under this category, a restaurant must operate as a "limited-service restaurant," with minimal-to-no table service, and customers typically order and pay for their food or beverages before consuming them.

The wage increase represents a nuanced compromise between the fast-food industry and labor unions following nearly two years of negotiations marked by confidentiality agreements and strategic concessions. It reflects a significant shift in the landscape of labor rights and economic policy in California and could serve as a benchmark for other states contemplating similar measures.

Related: Find Out Which Brands Have Ranked on the Franchise 500 for Longest, Earning a Spot In our New 'Hall of Fame'

Price increases, layoffs

Since April, several chains have raised their menu prices, while some operators have vowed not to consider the state for expansion. In January, two California-based Pizza Hut franchisees laid off delivery workers ahead of the hike.

Last month, one chain, Rubio's Coastal Grill, closed 48 locations in California due to the high cost of operating in the state.

"Making the decision to close a store is never an easy one," the brand said in a statement. "The closings were brought about by the rising cost of doing business in California. While painful, the store closures are a necessary step in our strategic long-term plan to position Rubio's for success."

The Placer.ai analysis of McDonald's, which has about 9% of its domestic system in California, shows that, while its traffic matched national trends in February and March, it underperformed by almost 250 basis points following the California wage increase.

Read more: Yahoo! Finance

Carl Stoffers

Entrepreneur Staff

Senior Business Editor

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