Industry News

Operating in California after AB 1228

By Abhinav Kapur
Jul 24, 2024

Operating a restaurant in California three months after AB 1228 - YouTube
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It's been three months since AB 1228 went into effect, raising the minimum wage for multi-unit brands operating in California by 25%.

Since then, operators have dealt with the impact in different ways: cutting staff, kitchen automation, kiosks, or outright exiting the state.

In this 15 minute deep dive with James McGehee, CFO at Dave's Hot Chicken and Partner at Results Thru Strategy, James covered how one of the fastest growing brands in the country has quickly adapted to offset the P&L impact of a higher minimum wage.

We covered:

• How AB 1228 has impacted DHC's business
• How they've adjusted their pricing, COGS, and in-store operations
• How the P&L has changed over the past three months
• What, if any, changes they're seeing in the guest experience

Key Takeaways

Price is the easiest lever, but flow through matters more.

Data from SignalFlare.ai shows that brands have raised prices anywhere from 8-14% within California. But what matters more than price increase is how that flows into average check since that's what you really retain. Dave's specifically increased price by 8.5% over the last 12 months, with an increase in average check of 6.5%.

"It's not how much you increase - it's how much you retain."

Tweak the production side of the restaurant - make it more efficient, without negatively impacting the guest experience.

As we covered in our LinkedIn Live on the consumer value equation with Ian Courtnage, price is generally the easiest - and first - lever a restaurant pulls to offset any changes to their prime costs. While Dave's has done that as well, they've also gone a step further, creatively tweaking several aspects of the "production side" of the restaurant, including cleaning crews, switching from plastic ramekins of sauces to packets, and automating their oil filling and cleaning process.

There are so many small changes brands can implement to improve both the employee experience and the P&L, while maintaining an excellent experience for your guests. All you have to do is look and get a little creative.

Cashflow dollars matter more than margin.

Don't overly focus on the margin percentage. Instead, protect the profit pool, payback period, and return on invested capital. At the end of the day, the dollars that a franchisee can take home matter more than just the margin percentage on the P&L.

This will go national. Get ready.

It's starting in California, will then spread to other major metro areas. The rising minimum wage will impact restaurants across the country. Operators need to start thinking about what levers to pull - outside of pricing - sooner rather than later. Improving the productivity of the business will reap benefits long-term if and when prime costs go up further.

Full transcript: Operating in California three months after AB 1228

Abhinav Kapur: James, pleasure to have you here.

James McGehee: Glad to be here.

AK: Please introduce yourself, the brand, and provide a high-level overview of AB1228. What is it, and how has it impacted the industry?

JM: Yeah, so let me start with myself, then I’ll go into Dave’s, and then we’ll talk about AB1228. I’ve been in the industry since 1993, 31 years, and have done nothing else besides finance, accounting, systems, and support for high-growth groups. Dave’s Hot Chicken started in East Hollywood with four founders and partnered with Bill Phelps, who started two small companies called Wetzel’s Pretzels and Blaze Pizza.

AB1228 was our attempt to right-size the cost of living in California, taking minimum wage from about $16 an hour to $20 an hour, a 25% increase on one of your two prime costs. Within the industry, it’s about a three to four percent impact on the panel.

AK: How does the industry respond to this increase?**
JM: It actually started last year... There’s no saving your way to a higher labor efficiency model to make up for all of it. Everybody had to take price in California. We took price anywhere from eight percent on the low end to twelve to fourteen percent on the high end.

AK: For us, we took an 8.5% menu price increase. We have a partner, Mike Lukianoff over at Signalflare.ai, who helped us do a case study and analyze some of our key competitors.

The way we priced that 8.5% wasn’t to maintain a certain level of cash flow percentage but to maintain the same level of cash flow dollars... That’s correct. At Dave’s, we’re fortunate to have an AUV of about $3 million, and we pay our investments back from a franchisee perspective in two years.

AK: What advice do you have for operators?**
JM: This isn’t just a California issue; it starts in California and spreads to the rest of the nation. Every brand has labor optimization pieces. Look at the tasks people dislike the most and find ways to improve them.

AK: Great parting words. I appreciate you sharing your time with the community. Thanks again.**