McDonald's and Chipotle prepare for fast food worker battles in 2024

AB 1228 overrode a previously passed — and highly controversial — bill, AB 257, which would have raised the hourly minimum to $22, created a fast food board with the power to mandate working conditions and imposed a joint employer rule that would make franchisors liable for franchisees. . Violations. In the process, both the industry and SEIU saved millions earmarked to pressure voters in the November ballot referendum to decide on the matter.

“Anyone who looks at this in the industry, now that emotion has been removed from the negotiations, sees this as the least bad option or the worst option, depending on which side you're on,” said Matt Haller, president and CEO. International Franchise Association, a trade group representing franchisors, franchisees and franchise suppliers. In exchange for concessions, and given a very uncertain outcome of the referendum, “we have a very predictable business environment for our members going forward,” he said.

Although they do avoid some of the bigger bullets, McDonald's, Chipotle Mexican Grill, Starbucks, Yum! However, Taco Bell, Shake Shack, El Pollo Loco, In-N-Out Burger and other fast-food chains — which operate nearly 30,000 company-owned restaurants in California — are busy strategizing how to mitigate the certain bump in… Their work. Costs.

They're also grappling with the possibility that the activist SEIU might ramp up its long-standing goal of unionizing fast food workers, something the industry has mostly avoided so far, while at the same time warily keeping an eye on similar minimum wage legislation and unionization. Organizing efforts in other states.

The overwhelming and unsurprising response from franchisees is that they plan to raise menu prices, a tactic they have used recently to deal with inflation, rising interest rates, supply chain costs and previous wage increases stemming from the national government's success. The Fight for $15 movement was launched a decade ago. “They're still figuring out how much, but we know everyone is going to increase prices,” said Brian Harbor, an industry analyst at Morgan Stanley, noting, however, that franchisees generally have discretion in the prices they charge.

In fact, when Harbor asked McDonald's executives, during the company's third-quarter earnings call in October, about potential price increases after 1228, CEO Chris Kempczinski said: “There will be an impact on wages for franchisees in California.” Think, at this point, we can say exactly how much…. Sure, there will be some items in it, which need to be worked on at higher prices. McDonald's, the world's largest fast-food chain, has 9% of its roughly 13,500 U.S. locations in California, most of which are franchises.

Chipotle, which operates about 460 company-owned locations in California, echoed that sentiment. “We have not made a decision to raise rates in California to offset the expected increase in employment in California next year, but our CFO, Jack Hartung, said in the third-quarter earnings call that we are studying them and anticipate that we will need to,” a company spokesperson said in an email to CNBC. Prices increase by medium to high single digits (i.e. medium is 4-5-6% and high is 7-8-9%), meaning prices will be much higher percentage.”

Other recent earnings calls have raised similar remarks. “We will depend on prices,” Jack in the Box CEO Darren Harris said, expecting menu prices to rise by between 6% and 8%. He added that consumers' reaction to this latest round of price hikes increases uncertainty in the chain's sales forecast for next year.

“Everyone who does business in California, subject to this new mandate, will do so [raise prices]“The question is, how far can you take the price until you turn off your value,” Haller said, adding that the consensus is in the 10% range. [to customers]?

Ordering kiosks, chatbots and automation

Besides raising prices, fast food restaurant operators in California are exploring other measures to offset rising wages, such as automating certain tasks as a way to increase worker efficiency and productivity and perhaps eliminating some jobs altogether. For example, robotic beverage dispensers and robotic burger flippers are being tested across the country. Chipotle, Starbucks and Sweetgreen are experimenting with automated food and beverage preparation systems.

Earlier this year, Wendy's began testing AI-generated chatbots to take orders from the drive-thru, and is now offering the human-free technology to all its franchisees, including nearly 300 in California. Other companies that have jumped on the chatbot bandwagon include Carls Jr., Hardee's, Del Taco, McDonald's, and Sonic Drive-In.

Inside fast food restaurants, self-ordering kiosks have become popular after nearly a decade of testing by Panera Bread, McDonald's, and Burger King. Yum Brands, owner of fast-food chains KFC, Taco Bell, Pizza Hut and The Habit, is aggressively stabilizing it. “On average, kiosk sales see 10% higher checks than front counter sales and an excellent revenue stream,” Yum CEO David Gibbs told investors in August.

During El Pollo Loco's November earnings call, interim President and CEO Maria Hollandsworth reported positive tests with the kiosks, “resulting in reduced restaurant-level operating hours per day,” she said. Along with its cross-chain rollout, she said the company is also “enhancing business efficiency” with new salsa processing equipment and is testing “additional initiatives, such as automated dishwashers.”

By definition, automation reduces human input, a fact that SEIU hopes will not overly impact California fast food workers as a result of AB 1228. “We hope companies will truly value the value and contributions of their workforce as part of the customer experience,” said Joseph Bryant, vice president. SEIU International. “We're all thinking about the impact of this next wave of technology, driven by artificial intelligence, and at the end of the day, I don't think anyone thinks that handling pads is a better experience compared to people.”

The impact of the new law is already being felt firsthand by some workers in California, with Pizza Hut saying this week it will be felt 1,200 delivery drivers were laid off As a result of the new minimum wage, a strategy that could benefit delivery companies like DoorDash and Uber.

Fast food workers and unions

Regardless, it's time to accelerate unionization among fast food workers in California and perhaps beyond, Bryant said, noting not only the passage of Resolution 1228 but also growing support for unions across the country. According to a recent Gallup poll, 67% of Americans approve of labor unions, the highest reading since the 1960s. “In general, there's a different kind of perception or appreciation of what the labor movement means, and what labor unions do, especially as the wealth gap in this country continues to widen,” Bryant said.

By contrast, only about 10% of all workers in the United States belong to unions, and only about 1% of fast food workers. A glaring case is Starbucks, whose employees at nearly 370 company-owned stores are choosing to unionize. However, this leaves more than 16,000 Starbucks coffee shops not unionized. Starbucks recently said it wants to resume talks with union representatives early next year.

Bryant acknowledged that the disparity between union support and actual membership is an obstacle to organizing fast food workers in California and other states. He hopes AB 1228 will provide some momentum, but he also acknowledged that companies won't make it easy. “Even considering 1228, [they] Millions were spent to defeat those efforts.”

Haller said he has no doubt that SEIU will benefit from the outcome of Resolution 1228. “They continue to target us in California and in other states with policy changes to achieve their political goals, which are to organize workers and add market share,” he added. However, he views their failed efforts to unionize fast food workers as validation of the franchise model. “We think that's a good thing,” Haller said. “This is not an anti-union comment, it is a positive comment about franchising.”

AB 1228 also presents an opportunity for some fast food companies to increase their market share in California. “Longer term, what we've been talking about with our franchisees is that this is an opportunity for us to gain share,” McDonald's Kempczinski told analysts. “We believe we are better positioned than our competitors to overcome this.”

Other major fast-food restaurants expressed similar optimism, Harbor said. “The thinking is that we can better afford the wage increases and also have tools or equipment that can provide some productivity to offset the wage increases,” he said.

Haller agreed with this point of view. “Big companies are well positioned to gain market share; [as are] “Large franchisees, through buying or acquiring underperforming locations or franchisees who may have been thinking about exiting in the coming years,” he said.

On the flip side, Haller said, “We'll also see brands that wanted to develop in California now choose not to, because it becomes harder to find first-time owners who can actually monetize a value-focused business, with some of these cost pressures.”

In the longer term, although fast food companies will initially have to invest more in labor and technology, “the fact that they are committed to increasing prices to offset some of that impact may have eased investor concerns,” Harbor said. Furthermore, major chains' profits are at or near all-time highs, so AB 1228 doesn't seem to worry people much.