What happened
Shares of Dutch Bros (BROS -0.77%) fell 8.6% this week compared to where they closed last Friday, according to data provided by S&P Global Market Intelligence, as the California legislature approved the creation of a new wage- control board for the fast-food industry.
The board would have the right to not only raise the minimum wage paid by quick-serve restaurants, but also set working conditions, too. It's been recommended California hike its minimum wage to as much as $22 per hour.
Image source: Getty Images.
So what
Dutch Bros has almost one-fifth of its drive-thru coffee shops in California. The fast-growing coffee chain has been looking to rapidly expand but, like most retailers, has been hurt by rampant inflation due to excessive government spending, which is raising the cost of commodities and inputs like dairy.
To confront the higher expenses, Dutch Bros has implemented a series of price hikes on its coffee and is considering raising them again in the third quarter. However, it is causing a slowdown in customer traffic, and Dutch Bros is seeing consumers pass an afternoon or evening stop at the chain.
Rising labor costs are already a problem, and hiking the minimum wage would exacerbate the situation. Labor costs surged to $47 million to account for 29.4% of Dutch Bros revenue in the second quarter, up from $29 million, or 28.2% of revenue, a year ago.
However, that marked the first time in four quarters that labor was less than 30% of revenue.
Now what
California governor Gavin Newsom has not indicated whether he would sign the Fast Food Recovery Act into law, which he has until Sept. 30 to do so, although his own finance department opposes the legislation. It says it would create additional expenses for the department.
Not surprisingly, the fast-food industry opposes it because it unfairly targets one industry, raising its costs while other businesses would be exempt. McDonald's representatives have reportedly told legislators if the bill is signed into law, the restaurant will not expand any further in the state and would consider leaving California altogether.
Dutch Bros opened its 600th store in the second quarter and achieved $1 billion in trailing-12-month sales, the first time it crossed that threshold. It maintains there's room in the market for 4,000 stores, but a massive hike in wage rates in California as is being proposed would likely ensure few if any of the new coffee shops Dutch Bros opens would be in that state.
