Get ready to up your game. The pressure on franchise owners, already high, is about to get even more intense.
Leading up to the 2014 elections, lawmakers and activists across the country have been in hyper-drive, pushing various minimum wage hikes, sick leave bills and environmental regulations in a bid for votes.
In this edition of “What’s Brewing,” we take a look at how these issues can and will impact Dunkin’ Donuts franchise owners. Long before the November elections, lawmakers in several states increased minimum wages and instituted paid sick leave requirements. Industry observers say franchise owners will be grappling with the consequences of these measures for months and sometimes even years to come.
Moreover, if a wage hike or sick leave mandate hasn’t come to a city or state near you, just wait. This wave of activism in certain town halls and state capitols is showing no signs of abating and probably won’t change regardless of which party controls the United States Senate and House of Representatives, according to Keith Miller, chairman of the Coalition of Franchisee Associations (CFA), of which DDIFO is a founding member.
“It seems to be growing and growing,” Miller says. “If you asked a majority of the public if workers should be getting $15 an hour, if you are like me, you aren’t going to like the answer.”
Ditto for efforts that appease environmentalists. As 2014 draws to a close, many states and municipalities have imposed new mandates on the use of plastic bags and Styrofoam cups and food containers, in addition to stricter bans on food waste.
On the federal level, small business owners are waiting to see the true impact of new mandates connected to the Affordable Care Act, also known as Obamacare. What’s more, an important National Labor Relations Board ruling has primed labor unions to penetrate quick service restaurants.
“If you overregulate an industry, you will have problems,” notes Udo Schlentrich, co-director of the Rosenberg International Franchise Center at the University of New Hampshire. (The center is named for Dunkin’ Donuts founder William Rosenberg, with money from his estate helping establish it.) “Excess laws and regulations are not of great help.”
That said, one bright spot for franchise owners has been the positive momentum behind fair franchising legislation, which aims to protect franchise owners against arbitrary termination and other potential abuses by franchisors. Despite a setback in California, state lawmakers across the country are increasingly taking a good hard look at the issue (see article on page 30).
Bottom line issues
Minimum wage is all the rage right now. While President Barack Obama’s proposal to increase the federal minimum to $10.10 an hour is stalled in Congress, state legislatures have more than made up for it. Minimum wage hikes were proposed in 38 states this year, passing in nine plus the District of Columbia.
Four New England states – Massachusetts, Connecticut, Vermont and Rhode Island – were among those that have passed wage hikes, going along with Minnesota, Michigan, Delaware and Hawaii, according to the National Conference of State Legislatures.
The wage increases will have an impact across the board, not just on those franchise owners paying the minimum.
Franchise owners, who have typically paid a bit more than what is required, may find they have to increase pay to get the better workers, with the increase in the minimum raising the floor on wages that much higher.
In fact, Dunkin’ franchise owners in some states will face not just a one-time boost, but a series of wage hikes as increases are rolled out over the next few years.
In California, lawmakers raised minimum wage to $9 this year with plans to push it to $10 by 2016. Meanwhile, on the other coast, Massachusetts plans to increase the minimum from $8 an hour to $11 an hour by 2017.
A two dollar hike in the minimum wage for a franchise owner with ten workers equates to an increase of $800 a week in labor costs. That leaves the operator with a few hard choices: cut costs, lay off workers or raise prices, according to Jason Stverak, president of the Franklin Center for Government & Public Integrity in Alexandria Virginia.
“In many small businesses the profit margin is already razor-thin, and employers simply cannot afford to take on additional costs,” Stverak says.
Some major U.S. cities are pushing even more radical proposals, with Seattle having OK’d an increase to $15 an hour, and Chicago studying a similar boost.
Paid sick leave is another bottom line issue of importance and momentum is building around proposals that force private companies to grant this benefit to their employees.
California, often a trend setter for the nation in policy and politics, not only raised the minimum wage, but will also now require employers to provide three paid sick days a year. Massachusetts voters weighed in on the issue at the polls this November as well.
The California law kicks into action next July. Both states are following the lead of Connecticut, which started mandating sick leave back in 2011.
“What we will see is that these politicians who are waiving the labor union flags are going to be responsible for price increases in parts of the country where people can’t afford to pay $10 for a hamburger or $3 for a donut,” contends Ben Litalien, founder and principal of FranchiseWell LLV, a consulting firm.
The growing environmental movement is taking direct aim at quick service restaurants that routinely use Styrofoam cups or food containers. As many as 100 cities, towns and counties across the country banned Styrofoam containers, according to the National Resources Defense Council. Washington, D.C. recently became the latest city to ban the containers, joining New York, San Francisco, Minneapolis, Portland, Seattle and San Jose.
The anti-Styrofoam push has forced many Dunkin’ Donuts franchise owners to start using a polypropylene Styrofoam cup alternative. In a recent interview with Bloomberg News, Dunkin’ Brands Chief Supply Chain Officer Scott Murphy said Dunkin’ will probably make a decision on a new hot coffee cup next year and begin a nationwide introduction in 2016.
A different kind of ban is already impacting business owners in Chicago and California. Inexpensive, handy plastic take-out bags are no longer available. Alderman passed a Chicago bag ban in the spring, followed by California’s first-ever statewide ban on plastic bags over the summer. In New York, activists are pushing for a 10 cent charge for the use of a plastic bag.
“It’s all a cumulative effect,” says the CFA’s Miller. “Maybe they are good things – maybe we need to quit having the bags and all this, but at what cost? Who is going to pay for it all? We are in an environment where consumers are very cautious and our costs just keep going up,” he says.
Another kind of crack-down, this one on food waste, could also have major implications for Dunkin’ Donuts franchise owners and other restaurant operators.
Connecticut was first to pass a food waste ban in 2011. The regulation requires any business that generates more than two tons of food waste a week to recycle that waste rather than send the scraps to a landfill.
Vermont passed its own law in 2012, which gradually tightens restrictions so that by 2020 no food waste will be accepted at any landfills, right down to the leftovers thrown out at home. A food waste ban in Massachusetts, similar to Connecticut’s, kicked off in October.
Federal Restrictions to Note
Restaurants across the country have been bracing for menu labeling requirements stemming from the Affordable Care Act, which are expected to require calorie counts. But, the final regulatory edict has been delayed for years, leaving franchise owners in limbo. The U.S. Food and Drug Administration is scheduled to release final regulations by the end of 2014.
In the meantime, cities and states have increasingly taken matters into their own hands, with a patchwork of requirements being issued by New York City, Massachusetts, Maine and other states.
“Each of these franchisees will now be tasked with complying with the mandate—paying for new signage, removing profit-generating advertisements to make room for the calorie data, updating menus every time recipes change, and accommodating inspectors,” says Stverak of the Franklin Center. “At the end of the day, it will lead to more work for business owners and less choices for customers.”
The other important component of the Affordable Care Act, beginning Jan. 1, 2016, is the launch of the employer mandate requiring a business to provide coverage if it has 50 or more workers.
On the labor front, the National Labor Relations Board’s recent ruling that franchisors can be considered “joint employers” along with franchise owners when it comes to workplace conditions, is also generating great concern. The ruling, which centered on a McDonald’s case, could provide labor unions greater opportunities to organize workers at quick service chains, observers warn.
“Every franchisor in the U.S. is vulnerable if the NLRB actually adopts a new policy on joint employer liability,” argues William Sentell, an attorney and franchise law expert at Pugh Accardo in New Orleans. “Franchisors in the retail food sector, including Dunkin’, have more cause for concern, given their reliance on the mobile workforce and their razor thin profit margins.”
With a new slate of lawmakers coming on the job in Washington and in state capitols across the nation in 2015, we will keep a close eye on these issues and other developments so franchisees have a clear sense of how laws, mandates and regulations will impact the bottom line.