It’s probably still way too early to understand the full impact of California’s minimum wage increase to $20 an hour on April 1. But for now, we do know several chains have raised their prices in response to that 25% increase and, so far, those increases have led to lower foot traffic.
According to new data from Placer.ai, year-over-year visit trends for the state’s quick-service segment were trending slightly ahead of national averages in February and March. Once the minimum wage increase went into effect in April, however, the nationwide visit trend year-over-year exceeded California’s average for seven out of the eight weeks throughout April and May. Further, during every week except April 1 and April 29, California’s traffic had turned negative or flat after a mostly positive February and March.
Placer.ai also looked specifically at McDonald’s, which counted about 9% of its domestic system in California as of the end of 2023. The traffic analytics firm found that the chain was about equal to national traffic trends in February and March but underperformed by almost 250 basis points after the wage increase went into effect. Placer.ai notes that QSR burger chains in general have been hit the hardest by the minimum wage increase in California. In addition to McDonald’s, other chains affected include Burger King, with visits down -3.86%; Wendy’s, with visits down -3.24%; Jack in the Box, with visits down -0.8%; and In-N-Out Burger, with visits down -2.59%.
During McDonald’s Q1 earnings call, CEO Chris Kempczinski said the company is expecting high single-digit labor inflation at the national level, “much of that from the bleed over of what California introduced.” Still, the QSR burger category is certainly not alone in raising prices to manage the higher costs. Chipotle executives noted during the company’s Q1 earnings call that prices are up 6 to 7% in California, adding almost a full point to total company pricing in Q2. Domino’s also reported a high-single-digit increase in California to “protect franchisee profitability.”
Higher prices correlating with lower traffic levels should not come as a surprise. Menu prices across the board remain elevated year-over-year, which has led to an industry-wide traffic dip of -2.1% in May, down from -1.6% year-over-year in April, according to Revenue Management Solutions data. It has also led to a perception shift among consumers, 78% of whom now think of fast food as a “luxury,” according to recent Lending Tree data. As such, several brands have adjusted their strategy to be more value focused and that value is defined differently depending on market. A $5 meal deal in Omaha, for instance, is likely to be a $6 meal deal in San Diego.
Because of California’s higher input costs, and higher pricing to offset those costs, some concepts are avoiding expansion in the state. Higher labor costs have also been cited by other concepts as the main driver behind their struggles. Rubio’s, for instance, recently shuttered 48 locations in California and filed for Chapter 11 bankruptcy shortly thereafter, noting that “the closings were brought about by the rising cost of doing business in California.” In January, two California-based Pizza Hut franchisees laid off delivery workers ahead of the hike.
That said, despite early reports of closures and traffic declines, don’t count California out just yet. Some brands are capitalizing on the opportunity to grow in the state. As Shannon Hennessy, CEO of The Habit Burger Grill, said during a recent interview, the minimum wage increase is a big disruption, but “we’ve been through a lot of disruptions throughout the past couple of years … This is a moment where strong concepts can win. It’s an opportunity, in addition to the challenge.”
Blake Kaplan, managing director on JLL’s national restaurant team, has seen real estate activity continue if not accelerate in California since AB 1228 went into effect.
“The reality is there have been a lot of brands wanting to engage in California for many years, and with inventory at an all-time low, and costs high, we’re starting to see a lot of stale brands move out and new brands or brands with high revenue projections starting to have more of an opportunity,” Kaplan said during a recent interview. “It’s become a bit of a feeding frenzy of closures making room for other brands to move in. In the next year or so, we’ll see more polished brands take over vacancies. There is still a lot of competition here despite economics.”
Contact Alicia Kelso at [email protected]
