By Tyler Durden
This result shouldn’t surprise anyone. Inflation has driven up operational costs for businesses across the US and shrunk profit margins for major food chains in the past few years. This has led to higher menu prices (like the “$18 Big Mac”) and slowing sales for every major fast food company. Another anchor dragging on the restaurant business in many regions was at least two years of covid stimulus coupled with rent moratoriums, creating aggressive labor shortages and raising wages in upwards of $16 per hour for brand new no-skill employees.
Small chains and mom-and-pop businesses simply can’t compete. Larger chains raised prices but have also been forced to reduce employees and labor costs through automation, but the layoffs are just getting started.
Enter California’s “FAST Recovery Act” passed into law in 2022 and going into effect in April of this year – The legislation requires a particular set of food chains dealing in certain kinds of products outlined in the law to raise their minimum wages (already at $16 an hour on average) to $20 an hour. The income increase is limited to chains that have 60 or more locations in the state of California (meaning, the combined number of locations regardless of who owns them must be higher than 60) Keep in mind that while many of these chains are associated with international corporations, they are owned and run by franchisees; they are still family run businesses.
Mass layoffs are now a guarantee with many restaurants already firing thousands of workers as well as some chains closing multiple locations because the cost of operation will be higher than the benefits.
“Restaurants are struggling to stay above water, and Democrats just threw them an anvil,” California Assembly Republican leader James Gallagher told FOX Business. “We warned Democrats this new mandate would cost jobs. They ignored us, and here we are with the highest unemployment rate in the country poised to get even worse.”
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The “digital options” that many fast food franchises are referring to are automated ordering systems as well as robot workers which are slowly but surely becoming more cost effective than human laborers. At least one fast food location in California is testing a fully robotic restaurant with no human workers.
Layoffs will accelerate along with the normalization of the technology, and the high wages that are crushing profit margins are making the decision easy for business owners. Some chains have reported that they will be forced to cut working crews in half; meaning, those working will be paid $4 an hour more, but they’ll have to work twice as hard per shift. The most probable end result in the next 5 years will be the majority of chain restaurants operating with a tiny crew of humans working alongside increasing automation.
The political left is already accusing the fast food industry in California of “retaliation” for the wage increase which was negotiated in part with restaurant workers unions involved. This is what they asked for, and now it’s happening; for every action there is an equal and opposite reaction.
The problem that is typical among leftists is a lack of understanding when it comes to the basics of business operations. Profit margins can be thin and money can still be made due to sheer scale, but revenues at that level are often calculated in cents or fractions of a cent per sale.
This kind of business model is beyond the comprehension of the average socialist. They simply see workers whose wages are not keeping pace with the high cost of living in California and assume business owners are greedy. Instead of confronting the state government that caused higher prices through extreme regulation and taxation, they want to give that very government even more power to punish businesses that are already under pressure.
Well, get ready for more job losses and get ready for the takeover of fast food robots because these are the only options franchise restaurants have left. They might be able to force business owners to pay $20 an hour for no-skill labor, but they can’t force those business owners to keep hiring.
Furthermore, it’s likely that the FAST Act will trigger yet another tsunami of businesses leaving California for other states with less bureaucracy and a less demanding labor market. Meaning, more jobs for red states and more unemployment for California.
Source: ZeroHedge