Fast Food’s Fragile Future: Rising Costs and Minimum Wage Hikes Drive Chains to the Brink

Clear Facts

• Fast food chains and franchisees are faced with crushing economic pressures due to increasing costs, taxation, and minimum wage hikes.
• High-profile chains like Bob Evans, Long John Silver’s, Godfather’s Pizza, and Checkers/Rally’s have fallen into obscurity due to evolving market conditions and stringent regulations.
• The future of the fast-food industry heavily relies on maintaining affordability, which is becoming increasingly challenging, especially with hikes in minimum wage, such as the recent legislation in California which raised the minimum wage for fast food workers to $20 per hour.

Fast food, a quintessentially American innovation, finds its resilience tested as economic strains push the industry to the brink. The pressures faced by these businesses are intense, with rising costs, tax hikes, and minimum wage increases pushing many towards a point of no return.

“I did not see them as one big corporation but as 5,000 separate independent restaurants,” reflects John Schnatter, founder of Papa John’s International, on building his global pizza chain. Schnatter brings attention to the plight of these struggling small businesses, underscoring the need for urgent action.

The stakes are high. The future of fast food will shape generations to come, impacting cultural exports, cityscape, dining costs, and the kind of food that lands on our plates. While some brands will adapt, others risk fading into the annals of history, like Bob Evans and Long John Silver’s, once household names now largely forgotten.

“The very essence of fast food is changing,” observes Schnatter. Fast food, traditionally an affordable choice for middle-class families, has seen prices rising faster than wage growth. Stories of dismayed customers grappling with steep prices for basic meals are becoming more common.

If fast food loses its affordability, it could spell doom for the industry. Chains like McDonald’s and Wendy’s, who have built their niche on cost-competitiveness, will struggle to survive in a market where they can’t compete on price.

This challenge is exacerbated in areas like California, where a staggering $20 per hour minimum wage for fast food workers has been signed into law. “Before the law even took effect, fast food companies in the Golden State cut 10,000 jobs,” Schnatter warns. The knock-on effects were swift and severe, with prices skyrocketing and thousands more jobs lost.

The law forced franchisees to hike prices, with brands like Wendy’s, Chipotle, and Starbucks raising their prices by 8 percent, 7.5 percent, and 7 percent respectively, in just the first month. These drastic increases risk driving away customers. “Everyone wants hardworking food workers to make good earnings, but they can’t do that if they lose their jobs because small businesses can’t afford the mandated minimum wage,” argues Schnatter.

It’s crucial to remember that fast food employees are primarily paid by franchisees, not the corporate entities. Price hikes and job losses, then, are not the work of “profit-hungry corporate overlords” but middle-class franchise owners struggling to keep afloat amid rising costs.

These franchise owners are likely to feel the pinch even more if Congress allows the Tax Cuts and Jobs Act (TCJA) to expire. The TCJA contains provisions designed to assist small businesses. Its expiry could trigger an effective tax increase, jeopardizing the livelihoods of fast food franchisees.

This vulnerable landscape raises concerns for the future of Papa John’s franchisees. Schnatter criticizes the company’s leadership for misinterpreting the temporary COVID business boom as a new normal. In this inflationary economy, businesses face rising costs, supply chain delays, wage hikes, alongside unfilled staff positions, all of which are causing a dip in pizza delivery orders.

“The ones who are hurt the most when fast food companies fail to adapt to changing times will be franchisees, front-line workers, and customers,” warns Schnatter. He calls on executives to make decisions with these stakeholders in mind, and urges elected officials to cease creating obstacles to success like deficit spending, unaffordable minimum wages, and burdensome taxes and regulations.

“Eventually, your competitors and changing market conditions catch up with you,” Schnatter says, highlighting the adverse effects of an administration that is perceived as being anti-business. He expresses hope that national leaders will provide the needed relief for these small businesses to survive and thrive once more.

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