What happened

Shares of Dutch Bros (BROS 3.19%) fell 7.6% on Tuesday after the California legislature passed a bill creating a new wage board that would set minimum starting salaries for fast-food restaurants in the state at as much as $22 per hour.

The drive-thru coffee chain operates over 100 locations in California, about 20% of its stores. Rising labor and commodity costs were already impacting performance, and this initiative presents yet one more hurdle. 

Woman getting coffee at drive-thru window.

Image source: Getty Images.

So what

Under the Fast Food Recovery Act, the state government would create a council tasked with setting minimum standards for wages and working conditions in California's fast food industry. Both workers and businesses would be represented on that board. The bill now goes to Gov. Gavin Newsom's desk; he has not indicated if he intends to sign it into law.

California's minimum wage is currently $15 per hour for employers with more than 25 workers, and it's set to rise to $15.50 per hour on Jan. 1.

Some of the largest fast-food chains adamantly opposed the bill, with McDonald's, Yum! Brands, and others lobbying to defeat it. The Wall Street Journal quoted one legislator who said that McDonald's representatives had told her that if the law was enacted, the burger chain might no longer expand in California or might even leave the state altogether.

Now what

Dutch Bros' recent performance has been hurt by inflation and rising expenses, including labor costs. Fears of a recession are also dragging on its stock, as people can easily reduce the number of coffee runs they make when money gets tight. Dutch Bros says it's seeing lower afternoon and evening traffic at its stores.

Restaurants are already automating many of the processes that employees formerly performed in an effort to reduce their costs. They've also offset their higher costs by raising prices, but that in many cases is dampening consumer demand.

Dutch Bros has also hiked its prices, and it is contemplating prices again in the third quarter. It's raising prices on coffee sold to its franchisees beginning Sept. 1. Coupled with the looming potential wage hikes, its coffee might just become too expensive for many customers to stomach.