Maxim Group analyst says restaurants would have to raise prices nationally
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With lawmakers poised to make California the first state with a $15 per hour minimum wage by 2022, restaurant chains nationally may be forced to raise menu prices up to 1.4 percent annually over the next five or six years to offset labor costs, a Wall Street analyst predicted Tuesday.
California Gov. Jerry Brown on Monday announced a landmark agreement between lawmakers and union leaders to phase in an increase the state’s minimum wage to $15 per hour by 2022, and then tie it to inflation. Brown called the increase a matter of economic justice that would lift thousands of California families out of poverty.
In New York, meanwhile, a $15 per hour wage is being phased in for workers at large quick-service restaurant chains. Gov. Andrew Cuomo has proposed a broader $15 per hour minimum wage that would be phased in for New York City in 2019 and across the state by 2021.
In a report Tuesday, Stephen Anderson, senior equity research analyst for New York-based Maxim Group, said the likely result over the next five or six years will be higher menu prices and increased use of technology in restaurants.
“We believe it is highly likely that restaurants will pass along the wage hike to customers, at least initially,” said Anderson in a report. “Over time, we can expect restaurant companies to invest more in technology, i.e. ordering kiosks at counters and tables, online/mobile ordering, staff management software, to offset these higher labor costs.”
In an August report, Anderson estimated that menu price increases of 40 to 90 basis points, or 0.4 percent to 0.9 percent, would be necessary to offset the effect of what he estimated would average out to a 25-cent per hour increase in wages nationwide, taking into account various minimum wage hikes.
The news out of California prompted Anderson to revisit that estimate.
If the minimum wage increases to $15 per hour in California, that, combined with the increases for some fast-food workers in New York State, will likely result in menu-price increases of 60 basis points to 140 basis points, or 0.6 percent to 1.4 percent, each year over the five or six years of the phase in, Anderson estimated.
That estimate assumes increases on average of $1 per hour in California and New York, along with a 25-cent per hour increase elsewhere in the U.S., though he noted that 17 states have maintained the $7.25 per hour federal minimum wage since 2009 and are unlikely to raise the statewide minimum wage.
Anderson also warned investors to exercise caution on restaurant chains that have a large percentage of units in California, including El Pollo Loco, The Habit Restaurants, Del Taco, Jack in the Box, BJ’s Restaurants, Denny’s, The Cheesecake Factory and Red Robin Gourmet Burgers.
Still, Anderson said menu price increases may not be an issue until late 2017 or 2018, given that restaurant chains have enjoyed stabilization and some deflation in commodity costs.
In addition to wage hikes, the restaurant industry is facing other government mandates that are expected to raise labor costs.
Last week, another Wall Street analyst predicted that new overtime regulations pending on the federal level could cause some restaurant chains to increase menu prices more than 5 percent.
Contact Lisa Jennings at [email protected]
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