California is a weird state. It is the country’s largest economy, with the largest number of restaurants. It is fertile ground for a number of successful restaurant chains, including brands like Taco Bell and In-N-Out.
And yet few places have been as unfriendly an operating environment, particularly if you want to operate a Chick-fil-A drive-thru in Santa Barbara.
Now we have the Fast Act, a bill that would create a council made up of workers and business owners that would set operating standards and, perhaps most importantly, wage rates, which some activists apparently want to push to $22 an hour. The bill elicited a remarkably rare response from McDonald’s, which typically doesn’t make its public opposition to local bills this well known.
The bill “imposes higher costs on one type of restaurant while sparing another,” Joe Erlinger, president of McDonald’s USA, wrote in a system message this week.
To get an idea of how many restaurants would be affected, we decided to look for ourselves, using data from the Technomic Top 500 Chain Restaurant Report.
The bill would impact fast-food chains that operate 100 or more locations nationwide. We analyzed companies with 90 or more locations, arguing that such chains would like to get to 100 and could do so in relatively short order.
Based on that, there are 138 restaurant chains with about 19,000 total restaurants in California. But, much like any piece of data on numbers of restaurants, the data varies and isn’t always in agreement. For instance, the International Franchise Association, using data from FranData, says 148 chains would be affected, operating 16,753 franchised locations.
In addition, the impact is top-heavy. Nearly one-third of the locations that would be affected by the rules represent four different restaurant chains: Subway, Starbucks, McDonald’s and Jack in the Box. The first three are, in order, the largest U.S. chains by unit count. The fourth is based in San Diego and is a big regional chain.
The 10 chains below account for more than half the total locations.
Among large companies, Jack in the Box may be affected the most. About 40% of Jack in the Box’s 2,200 locations are in California. And it just bought the 600-unit Del Taco, where 60% of the restaurants are in the state.
“Obviously we’re paying a lot of attention to it,” Jack in the Box CEO Darin Harris told investors last month, according to a transcript on the financial services site Sentieo. “As it is currently written, it will do more harm than good. But whatever happens, Jack and our franchisees, we will be prepared to handle it accordingly.”
Overall, nineteen chains have at least 99 locations and operate more than half of them in California. That includes the 107-unit Yoshinoya, which is entirely in the state.
It’s worth noting that Harris was the only executive from the industry that had to answer any investor question about the Fast Act. Yet it could have a substantial impact on that group. About 11% of the restaurants in publicly traded fast-food chains are in California.
To be sure, it remains to be seen just what kind of impact this rule could have on fast-food restaurants. Many times, fears of the impact of a rule can be worse than the actual impact and among big chains there is little discernable impact on profitability from higher minimum wages.
While this rule affects fast-food chains and not other types of businesses, it could either make those companies more desirable workplaces by default or it could result in a more level playing field than many expect simply because other restaurants would have to keep pace to get workers. That’s exactly what many operators fear in California, as our Lisa Jennings wrote. And we’ve heard others describe the legislation as a defacto minimum wage increase.
That said, it is a rather targeted piece of legislation. Of the 138 chains we mentioned, fewer than 100 have a substantive presence in California--meaning they have 10 or more units. And, as Erlinger pointed out, there is a weird carve-out for companies that sell bread as a “stand-alone item.”
Already, we’re hearing some restaurant operators taking steps to start selling bread.