The impact of California’s impending minimum wage increase on restaurant companies’ bottom lines will vary by brand, but strategies like limiting exposure through franchising could mitigate those risks, a securities analyst recently noted.
After California lawmakers approved an increase in the state’s minimum wage to $10 per hour by 2016, Sara Senatore of Bernstein Research updated a previous research note “to help calibrate the potential impact of the state’s policy” for the eight foodservice companies the firm covers.
The previous note, which came out in March, addressed speculation over a raise in the federal minimum wage — proposed by President Barack Obama in the State of the Union Address — and the implementation of the Patient Protection and Affordable Care Act and the potential effects those initiatives could have on restaurant companies.
In the emailed addendum, Senatore wrote that different restaurant companies would absorb the labor costs resulting from California’s new minimum wage to different extents. She noted that the effects of the increase would be based on how many units are in the Golden State, how much those companies already pay their California-based workers and whether franchisees or the company would have to sign those paychecks.
“While and have comparatively large exposures to the California market, they tend to employ relatively few workers at the minimum wage, limiting the direct negative effect,” Senatore wrote. “The casual diners similarly tend to pay most of their workers more than the minimum wage, an effect of the tipped-wage arrangement.”
In contrast, she noted that quick-service companies such as McDonald’s Corp., Yum! Brands Inc. and The Wendy’s Co. — which employ a large amount of workers at the minimum wage — are more vulnerable to a negative impact. However, she noted, “The diversity of their operations, particularly the global players, helps mitigate the overall impact.”
According to company reports and Bernstein Research estimates, Starbucks Corp., Chipotle Mexican Grill Inc. and Yum have significant percentages of their total unit counts in the state of California, at 22.0 percent, 16.6 percent and 11.0 percent, respectively. McDonald’s also has 9.6 percent of its restaurants located in California.
The next three chains listed by Bernstein have smaller overall unit counts but nonetheless have a large portion of their systems in California, including Brinker International Inc. with 9.5 percent, Bread Co. with 8.2 percent and Darden Restaurants Inc. with 6.7 percent.
With 259 restaurants in California, or 4.5 percent of its system, Wendy’s had the smallest exposure to the state’s high cost of doing business among the restaurants in Bernstein’s coverage universe.
“What matters is your exposure to the state,” Senatore said in an interview, “and within that, your company-operated mix, and within that, to what extent are you paying minimum wage. … Generally, California’s a tough market to make a lot of money, because costs do tend to be higher.”
Relatively higher wages paid already at Starbucks or Chipotle may limit the effect of California’s decision, she said, though that would not necessarily prevent wage inflation from creeping in at those chains.
“There always tends to be upward pressure,” Senatore said. “If you have some minimum-wage employees, they’re now making $10. If you had employees who were already making around $10, they’ll expect the same kind of wage gap to continue.”
The research note published in March found that Wendy’s likely would feel the pressure of a minimum-wage increase as acutely if not more than other quick-service brands like the larger, more heavily franchised McDonald’s and Yum! Brands Inc. However, it did not take into account Wendy’s recent announcement that it would refranchise 425 company-owned locations, including many in California.
A press release from The Cypress Group, an investment-banking outfit Wendy’s has retained to assist in its refranchising transactions, disclosed that 51 locations in Los Angeles and Sacramento, Calif., were part of the 425-unit effort.
“Given that Wendy’s was doing its refranchising disproportionately toward where they’ll see the most increased costs in the West and West Coast, that should be helpful,” Senatore said.
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