New Research Shows 20% Increase for California Food Prices with AB 257

WASHINGTON, DC – The International Franchise Association (IFA) today highlighted new research by the UC Riverside Center for Economic Forecast and Development that shows prices at quick-service restaurants will increase up to 20 percent with passage of AB 257, or the “FAST Recovery Act.” The new analysis comes as nearly 100 small business owners from across California will travel to the Capitol in Sacramento to speak out against the detrimental and costly impacts of AB 257.

“Historic inflationary pressures have hit many parts of the economy, putting tremendous stress on low-income households,” said Christopher Thornberg, PhD, Director of the UC Riverside Center for Economic Forecast and Development. “If the FAST Act passes, we can expect a very sharp increase in food costs from the affected restaurants, and that could push these families to the breaking point, given the financial pressures working families already feel from rising rents, gas and other necessities.”

According to the economic analysis, AB 257 effectively creates a new food tax at a time when inflation is reaching record highs and could see prices increase by as much as 20%. The UCR Center’s analysis concludes that restaurant prices would quickly climb—on top of record-high inflation—under AB 257.

“Despite record inflation, franchise brands and owners have avoided increasing prices to deliver on their promise of value for customers,” said International Franchise Association President and CEO Matt Haller. “The FAST Act would be the straw that breaks the camel’s back due to price increases upwards of 40 percent. Behind that, this bill will dismantle the franchise business model and all the opportunities it creates, particularly for underrepresented Californians who will be effectively demoted from owners to corporate employees.”

AB 257 creates an unelected wage and labor council with lawmaking authority for California’s counter service restaurant industry. By creating an unelected wage and labor council run through the state government, the bill passes the cost of bureaucratic red tape onto California’s counter-service diners. The bill also institutes a joint and several liability clause in franchisor contracts with their franchisees, effectively dismantling the franchisee business model in California.

The hallmark of a franchising system is a franchisor who licenses a brand and provides brand standards and guidelines to the franchisee, who is an independent business owner. The franchisee runs his or her business, making employment and operational decisions. The incentives are such that the franchisor is incentivized to license the strongest brand possible to the franchisee and the franchisee is incentivized to comply with all laws in the operation of his or her restaurant. The joint and several liability portion of the bill disrupts these incentives and makes the franchisor liable for things that it does not control, disincentivizing further expansion through franchising.

Beyond the harm that this legislation would cause for hardworking Californians, experts agree that the bill also harms the State of California at the worst possible time. In June, California’s Department of Finance opposed the legislation due to the burdensome cost it would impose on the state which is already struggling to keep up with the business of California’s bureaucracy.  

Nearly 300 corporations have moved their headquarters out of California in the past few years, due to increasingly cumbersome and inefficient hurdles created by the state. This legislation would be a catalyst for another wave.

“AB 257 hurts local small businesses like mine while raising prices for local families and visitors to our state,” said Alex Johnson, owner of 11 Auntie Anne’s and Cinnabon locations in California. “During the highest inflation in 40 years, this bill harms everyone from local businesses and their employees to the millions of Californians who rely on quick-service restaurants each week. This bill is not the way to support a thriving business community.”

“California already has one of the most challenging climates for business, and this bill will make it next to impossible for quick-service operators who operate on razor-thin margins,” said Greg Flynn, who owns a number of quick-service restaurants in California. “The costs associated with the FAST Act will raise prices without improving standards.”

“Even during this time of historic prices, we have resisted price increases on our customers because we know they can’t afford it,” said Jesse Lara, El Pollo Loco franchisee in Southern California. “If AB 257 becomes law, small businesses like mine will face no choice but to raise prices to stay afloat or be forced to shut our doors.”

There are about 34,700 food franchises in California, 69.4% of which are owned by single-unit franchisees. According to data from Oxford Economics, one-third of business owners say they wouldn’t own a business without franchising.

On average, franchises pay 2.2 – 3.4% higher wages than similar nonfranchises. More than 65% of franchise workers are offered health insurance, a greater proportion than among small establishments in general, and approximately 76% of franchise workers are offered vacation, holiday, and sick leave. Franchises also provide unparalleled opportunities for entrepreneurs of color and women. Around 26% of franchises are owned by people of color, compared with 17% of independent businesses generally.

AB 257 passed out of the California Senate Appropriations Committee last week and now awaits a vote on the Senate floor.

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About The International Franchise Association:

Celebrating over 60 years of excellence, education, and advocacy, the International Franchise Association (IFA) is the world’s oldest and largest organization representing franchising worldwide. IFA works through its government relations and public policy, media relations, and educational programs to protect, enhance and promote franchising and the approximately 775,000 franchise establishments that support nearly 8.2 million direct jobs, $787.7 billion of economic output for the U.S. economy, and almost 3 percent of the Gross Domestic Product (GDP). IFA members include franchise companies in over 300 different business format categories, individual franchisees, and companies that support the industry in marketing, law, technology, and business development.