In light of California’s new $20 minimum wage bill for fast-food workers, which went into effect on April 1, restaurant chains and franchisees are already taking action, in some cases by raising prices by as much as 7-8% for select menu items in the state.
Analysts Eric Gonzalez of Keybanc and Mark Kalinowski scraped data and researched pricing trends over the past couple of months at major restaurant chains to determine how much menu prices have been impacted by surge in labor costs in the state. All eyes are on companies like Chipotle and Starbucks especially, as these brands do not franchise (which is historically an industry anomaly).
According to Kalinowski’s research (which sampled 25 Chipotle restaurants in California), the price of a Chipotle chicken burrito went up 8.3% from February to April, while the cost of a steak burrito increased by 7%. This research is in line with Gonzalez’s analysis, which suggests that pricing at most Chipotle’s 476 stores in California increased by 7-8%. Gonzalez said that Chipotle is actually an unusual case because the company has undervalued its menu prices in the state to compete with the proliferation of other burrito options in California.
“Chipotle is unique because they’re one of the few brands that has had positive traffic, and they have pricing power because the Chipotle chicken burrito going for under $10 is a great deal,” Gonzalez said, adding that the burrito is actually $10.27 at most stores now. “People probably could not find a similarly priced alternative…. So, they’re in the unique position where they can actually offset the cost of the labor.”
Chipotle confirmed the new pricing strategy in California with NRN, with a company spokesperson stating that the company has “implemented a statewide price increase in light of new legislation in California” like other restaurants in the quick-service category.
Starbucks has similarly reported steady traffic growth in most of the company’s recent quarters, and also took significant pricing in the leadup to the new California minimum wage. According to Kalinowski’s research, Starbucks prices at a sample size of 20 California states increased by about 7% on average from February to April. One menu item (a venti iced caramel macchiato) now costs 8.4% more than it did two months ago, while on the other end of the scale, a venti caffe latte costs about 5.5% more than it used to.
More than one-third of menu items at company-owned Starbucks stores have not notably changed price and the average increase for those that did was less than a dollar.
Starbucks confirmed with NRN that it took these price increases along with “a variety of [other] levers” including technology-driven store efficiencies to “offset the investment in [their] partners.”
“A lot of what any particular restaurant can do depends on the strength of the concept,” Mark Kalinowski told NRN. “Concepts with great unit economics such as McDonald's, Chipotle, and Chick-fil-A have nice advantages in that regard. That doesn't mean this new law isn't a net negative for the owners of these restaurants, but simply that all else being equal, they are better off fighting against the higher labor costs than concepts with relatively weaker unit economics.”
Franchising restaurants are, of course, a different story than Chipotle and Starbucks, operationally. Parent companies cannot dictate the pricing choices of their franchisees, and it appears that many of them have chosen to take much more moderate pricing increases in comparison, like Taco Bell, which was reported at about 3%, McDonald’s, which took negligible pricing over the past couple of months, and Burger King, whose franchisees took a 2% price hike on average.
The only anomaly here is Wendy’s, whose franchisees chose to increase prices by about 8%, according to Kalinowski’s research sample size, with the percentage change of a classic chicken sandwich combo reaching double-digits since February. A spokesperson for Wendy’s did not respond to media inquiry in time for publication of this story.
Whether California-based franchisees lean heavily into raising prices like Wendy’s franchisees seem to have, or whether they take a “wait and see” approach like McDonald’s franchisees, there is no easy solution for offsetting these new labor costs, especially for smaller brands that don’t have the same fiscal backing as McDonald’s or Starbucks.
“I own two Vitality Bowls restaurants in San Jose, and the new minimum wage is a big cost hit for my family’s small business,” franchisee Brian Hom told NRN. “We’ve cut worker hours and I’m not replacing people who have left. I raised prices April 1, but I’m really concerned because I’ve seen a drop-off in customer transactions since the beginning of the year due to customers cutting back due to inflation. I’m worried we might not make it.”
Although the new California law currently only affects employees at fast-food chains with more than 60 locations, there is a significant difference between a small business owner who owns two units of the 130-storeVitality Bowls concept, and a regional McDonald’s franchisee that might own hundreds of stores. Kalinowski suggests that franchisees diversify their holdings geographically, while for parent companies, refranchising might be a more attractive option.
“A large franchisee with restaurants in 20+ states will have an easier go of it than a small franchisee with one to three restaurants, all in California,” he said. “If you can find somebody willing to buy all of your California restaurants, and you want to buy some other restaurants in a business-friendly state with lower tax rates, that isn't the worst approach in the world, either.”
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