El Pollo Loco 2016 Annual Report Download - page 23

Wehaveasubstantialnumberofhourlyemployeeswhoarepaidwageratesatorbasedontheapplicablefederal,state,orlocalminimumwage,andincreasesin
theminimumwagewillincreaseourlaborcostsandthelaborcostsofourfranchisees.SinceJanuary1,2016,theStateofCalifornia(wheremostofourrestaurants
arelocated)hashadaminimumwageof$10.00perhour.FromJanuary1,2008,toJune30,2014,ithadbeen$8.00perhourandfromJuly1,2014toDecember
31,2015,ithadbeen$9.00perhour.Thefederalminimumwagehasbeen$7.25perhoursinceJuly24,2009.
OnJune10,2015,theCounciloftheCityofLosAngelespassedanordinance,whichonJune13,2015,wasapprovedbythemayor,raisingtheminimumwageon
thefollowingschedule:(i)fromJuly1,2016,$10.50,(ii)fromJuly1,2017,$12.00,(iii)fromJuly1,2018,$13.25,(iv)fromJuly1,2019,$14.25,(v)fromJuly1,
2020,$15.00,and(vi)fromJuly1,2022,indexedtoinflation.OnSeptember29,2015,theBoardofSupervisorsoftheCountyofLosAngelesadoptedan
ordinanceestablishingacountywideminimumwagecoveringunincorporatedareasofthecountyfollowingthesameschedule.OthercitiesintheCountyofLos
Angeleshavefollowedandmaycontinuetofollow.Forexample,onJanuary19,2016,theCityCounciloftheCityofLongBeachapprovedaplantoraisethe
minimumwageonthefollowingschedule:(i)fromJanuary1,2017,$10.50,(ii)fromJanuary1,2018,$12.00,and(iii)fromJanuary1,2019,$13.00.Thereafter,
pursuanttofurtherstudy,theminimumwagefortheCityofLongBeachcouldriseto$14.00in2020and$15.00in2021.
In2015,approximately80%ofourrevenuecamefromcompany-operatedandfranchisedrestaurantsinthegreaterLosAngelesarea,including12%fromtheCity
ofLosAngeles,43%fromotherincorporatedcitiesintheCountyofLosAngeles,and1%fromunincorporatedareasoftheCountyofLosAngeles.Those
restaurantsthatarenotdirectlycoveredbytheseordinancesmaybecoveredbyfutureordinances,mayfacecompetitiveorpoliticalpressurestomatchthesewage
levels,ormaysufferfromanyregionaleconomicdistresscausedbytheseordinances.
Federally-mandated,state-mandated,orlocally-mandatedminimumwagesmaybefurtherraisedinthefuture.Wemaybeunabletoincreaseourmenupricesin
ordertopassfutureincreasedlaborcostsontoourcustomers,inwhichcaseourmarginswouldbenegativelyaffected.Also,reducedmarginsoffranchiseescould
makeitmoredifficulttosellfranchises.Andifmenupriceswereincreasedbyusandourfranchiseestocoverincreasedlaborcosts,thehigherpricescould
adverselyaffectsalesandtherebyreduceourmarginsandtheroyaltiesthatwereceivefromfranchisees.
Inaddition,oursuccessdependsinpartuponourandourfranchisees’abilitytoattract,motivate,andretainasufficientnumberofwell-qualifiedrestaurant
operators,managementpersonnel,andotheremployees.Qualifiedindividualsneededtofillthesepositionscanbeinshortsupplyinsomegeographicareas.In
addition,limitedservicerestaurantshavetraditionallyexperiencedrelativelyhighemployeeturnoverrates.Althoughwehavenotyetexperiencedanysignificant
problemsinrecruitingorretainingemployees,ourandourfranchisees’inabilitytorecruitandretainqualifiedindividualscoulddelayplannedopeningsofnew
restaurantsorresultinhigheremployeeturnoverinexistingrestaurants,whichcouldincreaseourandourfranchisees’laborcostsandhaveamaterialadverse
effectonourbusiness,financialcondition,resultsofoperations,andcashflows.Ifweorourfranchiseesareunabletorecruitandretainsufficientlyqualified
individuals,ourbusinessandourgrowthcouldbeadverselyaffected.Competitionforqualifiedemployeescouldrequireusorourfranchiseestopayhigherwages,
whichcouldalsoresultinhigherlaborcosts.
We are locked into long-term and non-cancelable leases, and may be unable to renew leases at the ends of their terms.
Manyofourrestaurantleasesarenon-cancelableandtypicallyhaveinitialtermsofupto20yearsanduptothreerenewaltermsoffiveyearsthatwemayexercise
atouroption.Evenifweclosearestaurant,wemayremaincommittedtoperformourobligationsundertheapplicablelease,whichcouldinclude,amongother
things,paymentofthebaserentforthebalanceoftheleaseterm.Inaddition,inconnectionwithleasesforrestaurantsthatwewillcontinuetooperate,wemay,at
theendoftheleasetermandanyrenewalperiodforarestaurant,beunabletorenewtheleasewithoutsubstantialadditionalcost,ifatall.Asaresult,wemayclose
orrelocatetherestaurant,whichcouldsubjectustoconstructionandothercostsandrisks.Additionally,therevenueandprofit,ifany,generatedatarelocated
restaurantmightnotequaltherevenueandprofitgeneratedatitspriorlocation.
We and our franchisees are subject to extensive government regulations that could result in claims leading to increased costs and restrict our ability to operate
or sell franchises.
Weandourfranchiseesaresubjecttoextensivegovernmentregulationsatthefederal,state,andlocallevels,including,butnotlimitedto,regulationsrelatingto
preparationandsaleoffood,zoningandbuildingcodes,franchising,landuse,andemployee,health,sanitation,andsafetymatters.Weandourfranchiseesare
requiredtoobtainandmaintainawidevarietyofgovernmentlicenses,permits,andapprovals.Difficultyorfailureinobtainingtheseinthefuturecouldresultin
delayingorcancelingtheopeningofnewrestaurants.Localauthoritiesmaysuspendordenyrenewalofourgovernmentlicensesiftheydeterminethatour
operationsdonotmeettheirstandardsforinitialgrantorrenewal.Thisriskwillincreaseifthereisamajorchangeinthelicensingrequirementsaffectingourtypes
ofrestaurants.
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