Financing

Jack in the Box wades through uncertainty, thanks to California

The burger chain says it expects to counter wage hikes in the state with a combination of price, margin and loyalty. But how will it affect transactions?
Jack in the Box
More than 40% of Jack in the Box locations are in California, which is poised to raise the fast-food wage to $20 an hour next year. | Photo: Shutterstock.

Jack in the Box’s home state is giving the company some headaches. It just doesn’t know how severe they will be yet.

The owner of Jack in the Box and Del Taco is based in San Diego, and about half of the two chains’ locations are in California, which is poised to create a board that will oversee regulations and wage rates for fast-food chain restaurants in the state.

The centerpiece of that effort is expected to be an increase in the minimum wage for those chain restaurants to $20 an hour. That will be a substantial increase in wages for the more than 900 locations Jack in the Box has there, or about 43% of its 2,200 locations.

Del Taco operates 371 restaurants there, or about 63% of the 591 locations it operated at the end of 2022, according to data from Restaurant Business sister company Technomic. The company estimates that wages at its corporate restaurants would increase 10% to 12% next year, largely due to the impact of that law on the California locations.

“We are confident in our ability to manage through this, helped by our unique franchisees’ scale and decades-long experience operating within the state,” CEO Darin Harris told investors on Tuesday, according to a transcript on the financial services site AlphaSense.

He said the company would rely on pricing, margin improvement efforts and the company’s “unique guest loyalty in California, where both brands have been beloved for over 60 years.”

Yet the company is still uncertain about what kind of impact this will really have, particularly when it comes to transactions.

The company expects to raise prices 6% to 8% companywide, largely because of the California wage hikes. But what happens from there is anybody’s guess at this point.

“The reality of it is, I think most in the industry are not exactly sure how it’s going to perform,” Harris said.

The uncertainty is rooted in the uniqueness of the legislation, which only affects one sub-segment of a single industry. The regulations affect limited-service chain restaurants with 50 or more locations. So it doesn’t affect growth restaurant chains or independents or full-service restaurants.

And it doesn’t affect other industries, meaning the fast-food chain restaurants paying these higher wages may not get the benefit of the higher incomes generated when states raise minimum wages.

While large-scale chains have expressed their own confidence in dealing with the higher wages—and McDonald’s said it could build more locations in the state—there are still concerns about the impact the legislation could have on chain finances.

Yum Brands said its California-heavy Habit Burger would take a $10 million operating loss in the fourth quarter, based in part on expected impacts of the legislation, which isn’t even in effect yet.

Raising prices as much as 8% chainwide—implying a larger increase in California—will have an impact on lower-income consumers that are already reeling from two and a half years of inflation.

Both Jack in the Box and Del Taco reported lower-than-expected same-store sales, with Jack in the Box up 3.9% in the company’s fiscal fourth quarter, including 7.6% in pricing.

Del Taco was even worse, with a 1.5% same-store sales decline despite a 6.6% increase in price. The company said that it is doing fine with higher-income consumers. Lower-income diners, however, are a challenge.

“We definitely have seen some softness at Del Taco in the lower-income consumer,” Harris said.

Still, the company said sales are improving overall at Del Taco. Executives also said they expect same-store sales at Jack in the Box to be in the lower single digits in the chain’s 2024 fiscal year.

Harris said the company is focused on ensuring it is reaching its customers “in the right way” this coming year. “With what’s going on in California, it’s really hard to predict what really will happen with sales,” he said. “So, we are focused on how we reach our customers. How we provide them service in the way that we need to.”

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