In response to the forthcoming increase in California’s minimum wage for fast-food workers to $20 per hour, McDonald’s and Chipotle Mexican Grill have revealed their plans to raise menu prices in the state in the coming year. While McDonald’s has yet to finalize the extent of the price hike, Chipotle expects to implement a “mid-to-high single-digit” percentage increase in prices but has not reached a final decision, according to Chief Financial Officer Jack Hartung.
For over two years, restaurants have been steadily increasing menu prices in reaction to the escalation of ingredient and labor costs. In September, the U.S. Bureau of Labor Statistics reported a 6% rise in prices for food consumed away from home compared to the same period the previous year.
Although consumers have become accustomed to higher meal costs, some have adjusted their dining habits to accommodate their budgets, dining out less frequently. McDonald’s disclosed on Monday that individuals earning less than $45,000 have been visiting its restaurants less frequently, contributing to a decrease in U.S. foot traffic during the current quarter.
In September, the restaurant industry and labor organizations concluded a lengthy and costly dispute over a bill aimed at establishing a 10-person council to oversee fast-food chains in California, setting guidelines for working conditions and wages. Instead, a compromise was reached, resulting in a nine-person council with the authority to set the minimum pay rate for the fast-food industry in the state until 2029. Starting on April 1, fast-food chains with a minimum of 60 nationwide locations will be required to pay their workers at least $20 per hour. From 2025 to 2029, the appointed council will have the ability to annually increase the minimum wage by the lesser of 3.5% or the annual change in the consumer price index.
For Chipotle, this new pay floor will necessitate an approximate 18% wage increase. Currently, the chain’s average wage in the state is $17 per hour, as confirmed by Hartung.
As wages rise, Chipotle patrons in California, home to roughly 15% of the chain’s restaurants and its headquarters, can expect to pay significantly more for their burritos and bowls. Chipotle has already increased prices four times since June 2021, with the most recent 3% hike occurring in October.
In McDonald’s case, price adjustments will be just one approach to counteract the heightened labor expenses. The company will also explore ways to enhance productivity in order to reduce costs at the restaurant level, according to CEO Chris Kempczinski.
Unlike Chipotle, which predominantly owns its locations, the majority of McDonald’s restaurants in California are operated by franchisees who have the discretion to set prices. However, the chain provides guidance on pricing strategies. Just under 10% of McDonald’s U.S. restaurants are situated in California.
McDonald’s anticipates that franchisees in the state will face immediate challenges due to the wage increase.
“In the short term, there will certainly be a hit to franchisee cash flow in California,” Kempczinski stated during the company’s conference call, acknowledging that the extent of the impact remains uncertain.
The National Owners Association, an independent advocacy group representing over 1,000 McDonald’s U.S. franchisees, estimated in a September memo that the bill would cost each restaurant in the state $250,000 annually. At that time, McDonald’s refrained from commenting on the NOA’s estimates.
Nevertheless, McDonald’s believes that higher wages could ultimately benefit its business in the long term.
“We believe we’re in a better position than our competitors to weather this, so let’s use this as an opportunity to actually accelerate our growth in California,” Kempczinski remarked.