California effect: Chain closes nearly 50 locations citing rising cost of doing business

Rubio’s Coastal Grill is in the midst of closing 48 under performing locations throughout California due to the “rising cost of doing business in the state.” 

It’s following a trend of companies taking similar actions after feeling the stress of having to balance higher labor costs. 

About 13 of the closures were in the San Diego area, 24 were in the Los Angeles area and 11 were in northern California. Rubio’s said it plans to continue to operate 86 restaurants in California, Arizona and Nevada.

The move to close locations in California, while keeping spots open in nearby states, is “further evidence that fast casual restaurants like Rubio’s are struggling in California’s high-cost business environment,” Cato Institute policy analyst Marc Joffe told FOX Business. 

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A spokesperson for the fast casual restaurant chain headquartered in California said the “decision to close a store is never an easy one” but “necessary step” in its strategic long-term plan to position the company for success.  

After legislation went into effect on April 1, increasing the minimum wage for certain fast food restaurants from $16 to $20, which equates to an annual salary of $41,600, several eateries cut jobs, raised menu prices or closed locations in an effort to get ahead of potential financial repercussions. 

AB 1228 was signed into law in September by Gov. Gavin Newsom, who said the state is getting “one step closer to fairer wages, safer and healthier working conditions, and better training by giving hardworking fast-food workers a stronger voice and seat at the table.”

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Joffe argued that the state’s definition of a fast-food restaurant “captures much more than the McDonalds, Wendy’s, and Burger King’s of the world.” 

It’s also worth noting, according to Joffe, the actual cost of hiring a “fast food minimum wage employee” is more than $20 per hour given that employers must also pay federal Social Security and Medicare taxes, as well as state Unemployment Insurance and Employment Training Taxes. 

“Unemployment insurance taxes in California are being raised each year to pay off a loan the state took from the federal government to support its depleted unemployment insurance trust fund,” he said. 

Joffe said that while “most states paid back these federal loans, often with COVID emergency funds, but California failed to do so despite its large surplus back in 2022.” 

Gavin Newsom, governor of California, speaks during the United Nations Climate Action: Race to Zero and Resilience Forum in New York, US, on Wednesday, Sept. 21, 2022.  (Photographer: Michael Nagle/Bloomberg via Getty Images / Getty Images)

Just before the law took effect, Mod Pizza, a pizza chain that has 500 locations nationwide, shuttered some of its California locations, according to reports. 

Fosters Freeze, another fast food joint in the state, closed its location in Lemoore in early April. 

Monica Navarro, former assistant general manager at the Fosters Freeze in Lemoore, said on “The Bottom Line,” she found out when she got to work the restaurant owner closed the doors for good.  

Michael Ojeda, 29, a Pizza Hut driver in Ontario, California, told The Wall Street Journal he received a notice from Pizza Hut franchisee Southern California Pizza in December informing him that his last day of work would be in February.

“Pizza Hut was my career for nearly a decade and with little to no notice it was taken away,” said Ojeda.

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The moves underscore how franchise and restaurant owners are trying to balance higher menu prices and labor costs. 

Prices at Chipotle, McDonald’s and other fast-food giants in California are rising after a minimum wage hike went into effect. 

A McDonald’s store sign is seen on October 30, 2023 in Austin, Texas.  (Photo by Brandon Bell/Getty Images / Getty Images)

However, other heavy hitters in the industry, including Chick-fil-A, Domino’s, Burger King, Pizza Hut, and Jack in the Box also raised prices back in September, The Wall Street Journal reported.

FOX Business’ Jeffrey Clark contributed to this report.