California's high costs, legislation make No. 1 foodservice market look

Nation's Restaurant News, August 23, 1999 by Amy Spector

The spiraling cost of labor in California, driven upwards both by new state legislation and a booming economy that minimizes the number of job seekers, is prompting restaurateurs to look elsewhere for expansion opportunities, operators in the state say.

California's high minimum wage, lack of a tip credit, impending near-doubling of minimum salaries for overtime-exempt employees and potential increases in workers' compensation benefits all make industry members question how many golden opportunities remain in the Golden State.

Last year's change of gubernatorial administration in Sacramento, from Republican Pete Wilson to Democrat Gray Davis, also raises concerns among operators who question how Gov. Davis' pro-union stance will affect the industry. Davis has already made good on campaign promises to lift managers' wages and reverse 2-year-old legislation that did away with California's longtime tradition of daily overtime pay.

The state Legislature recently passed AB 60, "the Knox bill", which mandates overtime after any eight-hour workday instead of only after a 40-hour work week. But John D. Dunlap III, newly elected chief executive of the California Restaurant Association, hopes to ease those concerns, he says, by presenting a nonpartisan restaurant industry image to the Legislature and forging alliances with members on both sides of the political aisle.

According to the CRA, whose annual Western Foodservice & Hospitality Expo convened from Aug. 21-23 at the Los Angeles Convention Center, California's restaurant industry comprises nearly 73,000 restaurants generating 891,000 jobs. The association says California's foodservice sector generated $28 billion in sales last year.

State retail sales figures show eating and drinking places posted $7.7 billion in sales in the third quarter of 1998 alone, a 5.5-percent gain over the year-earlier period but lagging behind the state's overall retail sales, which posted a 6.3-percent gain in that most recent quarter, the latest for which figures were available.

California is one of seven states that does not allow tips to be credited toward employers' minimum-wage obligations. It also is one of eight states, plus the District of Columbia, that requires a higher-than-federal minimum wage. And recently passed legislation, effective next Jan. 1, will require that all exempt workers, even the most junior assistant managers, earn at least twice the minimum wage, raising their minimum annual salaries to nearly $24,000, based on the current state minimum wage of $5.75.

Fast-food operations will feel the pinch of labor-cost increases, according to Ralph Cimmarusti, co-owner of Glendale, Calif.-based Cimm's Inc., a franchisee of Tony Roma's and one of the top five franchisees of Burger King. "We can't make money in California anymore," he says, adding that the company's locations in Texas, Hawaii and Virginia have been more profitable. Cimm's, which Cimmarusti and his brother, Larry, built from what was a single delicatessen in Hollywood 25 years ago, reported sales of $173.9 million for 1998. It currently employs 6,500 to operate its 140 Burger Kings in Southern California, Hawaii, Houston, eastern Virginia and Seattle, and its 10 Tony Roma's restaurants, all in Southern California.

"It's difficult to raise prices with the competitive environment," Cimmarusti says. He suggests California operators will have to scale back employment to maintain a healthy bottom line. Given Cimm's diversity of locations, he says, "It won't affect us too badly. But it's taking away opportunities for [the state's] moms and pops."

Frank Guidara, president and chief executive of the Santa Monica, Calif.-based Wolfgang Puck Food Co., or WPFC, says he views the high cost of labor as affecting not just California but the entire West Coast. "If the choice is between the West Coast and almost anywhere else, we'll go elsewhere," he adds.

Guidara's company operates and licenses 35 restaurants nationwide under four brands: Wolfgang Puck Cafe, Wolfgang Puck Express, Wolfgang Puck To Go and Wolfgang Puck Grand Cafe. He says they expect to generate between $90 and $100 million in sales in 1999. Guidara noted that California, Oregon and Washington all wield the double-edged sword of high minimum-wage rates and no tip credit. The minimum-wage rate for Oregon now is $6.50 and Washington is scheduled to increase to that same level, from its current $5.70, next Jan. 1.

Guidara says WPFC will focus on expanding its Wolfgang Puck Grand Cafe chain, which incorporates a sushi bar, gourmet express counter and cocktail lounge with the company's Puck Cafe format. He says the Grand Cafe is a more economic model, estimating costs at less than $270 per square foot to build as compared to the original Cafe, which costs upwards of $300 per square foot. "We will continue opening smaller cafes but they will be the Express type," he says. "We get good volumes out of California [locations]," Guidara says, "but the Southeast has all the growth," he says.