$20 minimum wage in California leads Carl’s Jr. franchisee to bankruptcy

Bankruptcy Filing by Carl’s Jr. Franchise Operator

The main franchise operator for Carl’s Jr. in California has sought Chapter 11 bankruptcy protection, citing the state’s upcoming $20 minimum wage for fast food workers as a key reason behind its financial struggles.

Friendly Franchisees Corp., through its subsidiary San Gil, explained in a court document that the wage increase scheduled for 2024 represents a “significant increase in operating expenses.” CEO Harshad Darod expressed concerns about the impact on their business.

The new law requires that fast food chains with over 60 locations in California adopt this higher wage.

The company currently runs 59 Carl’s Jr. restaurants statewide—52 in Southern California and seven in the north.

Despite generating what they describe as “substantial revenue,” the franchise has found profitability elusive.

In the first quarter of this year, San Gil reported net sales amounting to $19.9 million, averaging between $6 million to $7 million each month.

Nevertheless, they still faced a net loss of $2 million during the same timeframe, primarily due to elevated ongoing operating costs.

Darod pointed to “lower marketing effectiveness” and a “lack of innovation at the franchisor level” as other factors contributing to their declining performance.

He also mentioned the challenges posed by increased competition in the fast food sector and a high turnover rate among franchisor executives.

All these financial pressures have resulted in the company’s inability to meet its obligations, including rent and royalties related to their franchise agreements.

This predicament has led to defaults on several locations, which raises the risk of contract terminations and puts the future operation of their restaurants in jeopardy.

To manage its operations during the bankruptcy process, San Gil aims to utilize cash collateral for essential expenses like employee salaries, inventory, rent, and insurance.

Interestingly, the wage hikes at the heart of this issue stemmed from a political compromise between labor groups and the restaurant industry, but they have been superseded by proposals for even higher wages in the sector.

Opinions vary about the broader economic implications. Some argue the impact is minimal, while others believe it has led to increased menu prices and reduced working hours.