Did California just kill the fast-food industry in the state? Governor Gavin Newsom signed a bill that creates a new board to oversee and set wages and working conditions in quick-serve restaurants, and the minimum wage in California could soar as high as $22 an hour beginning next year.
Starbucks (SBUX -0.86%) is one of the largest chains in California with over 3,000 locations representing nearly one-fifth of all of the coffee shops it operates in the U.S. Because the new law only applies to fast-food restaurants, and only those with at least 100 restaurants around the country, Starbucks could feel the impact of exorbitant labor expenses more than others.
The coffee shop is already struggling to manage inflation and rising labor costs, which caused operating margins to contract 350 basis points last quarter. Now faced with the potential for a monumental increase in those expenses, investors are right to question whether Starbucks stock is a buy.
California's Fast Food Accountability and Standards Recovery Act, or Fast Act, creates a government panel with members appointed by the governor and legislature and will include equal numbers of worker, union, and business representatives. It is charged with managing workplace conditions for hours worked, health, and safety, and will also set the minimum wage for the restaurant industry next year.
Under the law, the board can...
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