California’s fast food regulation isn’t coming at a good time for Habit Burger.
The fast-casual burger chain, which operates about 350 locations, is expected to be hit relatively hard by the law, which will establish a council that will oversee regulations and wage rates for fast-food chains in the state.
Its hallmark will be a $20 minimum wage for such chains expected to hit next April and increase annually with inflation thereafter.
Parent company Yum Brands, which acquired the chain just as the pandemic hit in 2020, said that it expects to take a $10 million operating loss on the chain in the fourth quarter this year, which it blamed specifically on the new law in California.
“We now expect an operating loss at Habit of approximately $10 million, largely driven by restaurant asset impairment charges, which will be higher than we initially expected due to anticipated impacts from the California Assembly bill 1228, previously referred to as the Fast Act,” CFO Chris Turner told analysts.
For Yum, which generates about $400 million in net income every quarter, a $10 million operating loss is a drop in the bucket. But it illustrates the challenges that smaller chains could have as those higher wages take hold.
The company operates a lot of locations in California, at least comparatively. About 40% of the chain’s locations are in the state, according to data from Restaurant Business sister company Technomic.
The act has been expected to take a substantial toll on some big fast-food chains with a lot of restaurants in California. But some of the biggest more or less dismissed concerns about the state. McDonald’s said that it is better equipped to handle the higher wages than most chains and indicated it might add locations in the state.
Chipotle Mexican Grill said the law would likely increase labor costs by up to 3%, which appears to be relatively small after an era in which 10%-plus increases in labor costs and wage rates were commonplace.
But the disclosure on Habit suggests that mid-sized chains with a heavy presence in California may not be so fortunate.
For Habit in particular, the regulations are coming at a tough time. The chain, which Yum acquired to be a major source of growth, has seen sales stumble coming out of the pandemic. Same-store sales fell 5% in the third quarter, the company said on Wednesday.
That was the sixth straight reporting period that the key metric was either flat or negative. Fellow fast-casual burger chain Shake Shack, on the other hand, has been positive for 10 straight periods heading into the third quarter, which it has yet to report. System sales at Habit rose 4% in the third quarter, thanks to 8% unit count growth.
Company executives, however, continue to express confidence in the chain, noting that it is about to launch a value platform under new leadership led by CEO Shannon Hennessy.
“We have tremendous confidence in the long-term prospect of this brand and are encouraged by the improvements that the team is making to deliver success in the future,” CEO David Gibbs said.
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