Four months after California hiked the minimum wage for fast-food workers to $20 an hour, some unexpected beneficiaries are emerging.
No one foresaw what a boon the 25% hike would prove to research companies, who’ve been cranking out impact assessments for stakeholders hoping to prove a point about the wage and the unprecedented way it was set.
The studies vary in their conclusions, but one finding is universal: Rare was the fast-food restaurant that didn’t raise its menu prices to cover the wage increase. And that’s going to benefit franchisors by raising royalties, since higher prices usually translate into higher sales, provided the impact on traffic isn’t too severe.
Yet to be gauged is the impact on full-service places. Those restaurants are required to pay a minimum wage of $16 an hour, not the $20 their quick-service brethren are obliged to offer. The expectation was that sit-down places would nevertheless have to pay the higher rate if they hoped to draw any job applicants.
Not true, according to executives of the Denny’s diner chain.
“We have not experienced a material increase in team wages at our 22 California company restaurants as a result of AB 1228,” said CFO Robert Verostek, referring to the California law that mandated the $20 fast-food wage. “We believe this is in part due to our servers earning well above the AB 1228 minimum wage when factoring in tip income.”
In that respect, it’s been a non-event for the family-dining operation. But the chain has hit on a way to turn the law into what it describes as a significant sales opportunity.
Without the wage pressure quick-service restaurants were feeling, Denny’s saw an opportunity to offer Tex-Mex fast-food staples like burritos at prices QSRs would be hard-pressed to put on a comparable product. Denny’s could afford to charge $11.59 for, say, a delivered premium chicken burrito in the Southern California municipality of Rossmoor. That compares with the everyday to-go chicken burrito Chipotle is selling in the same market for $10.25.
Denny’s is selling the Mexican fare not under its own name but through a virtual concept called Banda Burritos. Youngsters who know Denny’s as the place where their parents eat breakfast may be none the wiser that their burritos are coming from the same kitchens that sling Grand Slams all morning.
The Banda Burritos menu is now being prepared by Denny’s units throughout California because of how the pricing compares to what fast-food places are forced to charge. Verostek said the move has enabled the diner chain to steal market share from fast-food places in California, with the traffic typically lost to QSRs cut in half.
Stores elsewhere are also adopting Banda. As of June 26, the end of Denny’s second quarter, 300 stores had added the virtual brand. Management said they expect the addition to generate incremental sales in those stores.
“This confidence has driven us to accelerate and expand Banda Burrito to a nationwide rollout that is already well underway and expected to be completed by the fall,” said Denny’s CEO Kelli Valade.
Banda is Denny's third virtual concept. The parent chain also sells burgers through the off-premise brand Burger Den and grilled-cheese sandwiches through one called The Meltdown.
During the second quarter ended June 26, weekly off-premise sales averaged $8,000 across all 1,541 stores, or 20% of the $38,000 weekly mean. Management did not break out how much of the off-site business came from Banda.
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