Fast food restaurants Chipotle and McDonald’s in Chinatown in Washington, DC
Jeff Greenberg | Universal Image Group | Getty Images
McDonald’s And Chipotle Mexican Grill will raise their menu prices in California next year to offset the state minimum wage increase for fast-food workers, executives said as both chains reported quarterly earnings in recent days.
McDonald’s has not yet decided how much it will raise prices in California if worker wages rise to $20 an hour, CEO Chris Kempczinski said Monday. Chipotle expects it will raise prices in the state by a “mid- to high-single digit” percentage but has not yet made a “final decision,” Chief Financial Officer Jack Hartung told analysts on the company’s conference call Thursday.
Restaurants have been raising menu prices for more than two years in response to rising ingredient and labor costs. According to the U.S. Bureau of Labor Statistics, out-of-home food prices rose 6% in September compared to a year ago.
Although diners are already used to paying more for their meals, some eat out less often to watch their budget. McDonald’s executives said Monday that consumers making less than $45,000 have been visiting less often, contributing to a dip in U.S. traffic this quarter.
In September, the restaurant industry and unions ended a costly, months-long battle over a bill that would have created a 10-member board that would govern California’s fast-food chains by setting guidelines for working conditions and wages.
Instead, the two sides struck a compromise: a nine-member board with sole power to set the wage floor for the state’s fast-food industry through 2029. Chains with at least 60 locations across the country will have to pay their employees. at least $20 per hour, starting April 1. Between 2025 and 2029, the appointed council will have the authority to increase the minimum hourly wage annually by the lesser of 3.5% or the annual change in the consumer price index.
For Chipotle, the new wage floor means it will increase wages by about 18%. Hartung said the chain’s average wage in the state is currently $17 an hour.
As wages rise, Chipotle customers will pay much more for their burritos and bowls in California, where about 15% of Chipotle restaurants and the company’s headquarters are located.
Since June 2021, the chain has already increased prices four times. The most recent price increase of 3% occurred earlier in October.
At McDonald’s, price increases will be just one way to offset higher labor costs. The chain will also likely look at ways to improve productivity to reduce costs at the restaurant level, Kempczinski said Monday.
Unlike Chipotle, which owns the vast majority of its locations, most McDonald’s locations in California are run by franchisees. They have the freedom to determine prices, although the chain does advise on the best strategy. Just under 10% of McDonald’s U.S. restaurants are in California.
The hamburger chain expects that entrepreneurs there will feel the pain of the wage increase in the short term.
“There will certainly be a short-term hit to the cash flow of franchisees in California,” Kempczinski said on the company’s conference call, adding that it is unclear at this point how big the hit will be.
The National Owners Association, an independent advocacy group of more than 1,000 McDonald’s franchisees in the U.S., predicted the bill will cost every restaurant in the state $250,000 annually, according to a September memo seen by CNBC. McDonald’s, which has faced backlash from franchisees for its role in the compromise negotiations, declined to comment on NOA’s estimates at the time.
In the long run, McDonald’s thinks the higher wages could be a boon to its business.
“We believe we are better positioned than our competitors to weather this, so let’s use this as an opportunity to truly accelerate our growth in California,” Kempczinski said.
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