California's recent minimum wage law requiring large fast-food chains with more than 60 nationwide locations to pay $20 an hour has sparked significant repercussions throughout the state's restaurant industry. While aimed at increasing compensation for fast-food workers, the law's broader implications are reshaping dynamics across all eateries, from small diners to upscale establishments.
The legislation, intended to boost wages for fast-food employees, inadvertently creates a domino effect that reverberates through the entire restaurant landscape. With competing businesses vying for the same pool of workers, wage rates are poised to rise across the board. This shift compels all restaurants, irrespective of size or cuisine, to confront a critical decision: either pass the increased costs to consumers through higher prices or seek internal efficiencies to absorb the additional expenses.
The timing of this wage law coincides with a period of acute inflation, particularly noticeable in the "Food Away from Home" sector. According to data from the Federal Reserve Bank of St. Louis, the Food Away from Home Consumer Price Index (CPI) surged by 25.4% since February 2020, exacerbating the financial strain on consumers. The new minimum wage law comes at a time when prices are already elevated, and further increases will affect consumer spending.
Restaurant transactions have been under significant pressure over the past year, as evidenced by declining sales and foot traffic. Consumers, grappling with heightened prices, are signaling their reluctance to continue dining out, with transactions flat to declining across the entire industry for the last 6-plus months. Further price hikes could exacerbate this trend, potentially leading to even steeper declines in restaurant patronage.
In response to these challenges, California's restaurants find themselves in a scramble to mitigate costs without resorting to passing the burden onto consumers. Will they be able to? For the large chains, probably not quickly enough. It’s notable that large chains like Chipotle have — through its Cultivate Next fund — invested in kitchen automation like the Autocado and Hyphen makeline. These equipment changes will take time to have impact. For the independents, who lack the resources to invest in capital-intense automation, they will probably not be able to reduce costs much if at all.
As of April 3, two days after the minimum wage law went into effect, Chipotle had increased prices across its California stores. According to Eric Gonzalez at KeyBanc, based on their proprietary scrape of Chipotle’s digital menu, the company increased prices in each of its 476 locations in California. The magnitude of the increase varied widely by location, but proteins increased as much as $1.95. Price increases were higher for delivery fulfillment than for pickup.
As prices spiral upward for Food Away from Home, and consumers reduce their frequency of restaurant meals even though they love the convenience and experience, a space for disruption opens up. As we discuss in detail in Chapter 7 of “Delivering the Digital Restaurant: The Path to Digital Maturity,” “Disrupt Yourself,” restaurant industry history is full of business model disruptions. And there hasn’t been a major disruption since Chipotle ignited the fast casual movement.
True Digitally Native Restaurants will use technology to reshape the value equation for consumers. They will hit the price point of fast casual and deliver more and better food for the money in a more convenient way. “[As] has been the pattern in the restaurant industry for the last one hundred years, this new category will outgrow the others because it brings more value to the consumer,” we wrote in 2023. As prices go up in other categories, it becomes even easier for the new restaurant model to beat.
In the meantime, existing restaurants have to deal with the cost increases they face. California's wage law targeting fast-food giants has catalyzed a seismic shift in the entire restaurant industry, prompting businesses of all sizes to reassess their operations and adapt to the changing economic realities. Whether through price adjustments, operational efficiencies, or innovative delivery solutions, restaurants must navigate these challenges strategically to remain viable in an increasingly competitive market.
For pizza establishments, the situation is particularly dire. Traditionally reliant on in-house delivery personnel, rising costs have rendered this model unsustainable. Pizza places are trying to incentivize customers to opt for pickup over delivery, eliminating the need for drivers. Many businesses are turning to third-party delivery platforms like Uber and DoorDash, albeit at the expense of increased complexity, reduced quality, and even higher expenses for consumers. Several Pizza Hut franchises in California have gone as far as laying off their in-house delivery fleets and using outsourced options.
For those who aren’t ready to fully disrupt the industry and move to a new model, and who can’t invest in major equipment overhauls, better software can improve productivity. Software innovation in the restaurant industry over the last 10 years has improved labor costs, inventory management, pricing, and delivery.
The best software adjusts restaurant operations, not just tracking and managing what is happening in the restaurant, but shaping it. Think of how a labor scheduling tool, like 7Shifts, doesn’t just track who works when, but helps managers ensure the right number of people are working at each time. Think of how an inventory management tool like Cogswell doesn’t just count boxes but helps keep restaurants with just enough inventory and prep for each cycle. Think of how pricing first became localized to geography with tools like RMS and then localized to channel and time through tools like Juicer.
Delivery, too, is changing because of software. Empower Delivery makes it possible for a restaurant to have its own dedicated on-demand delivery fleet. In this case, the software is not just keeping track of where the orders are, but is creating a third path for restaurants between in-house drivers and outsourced delivery.
The saying is, “As California goes, so goes the nation.” While it is unlikely to see such a targeted law (type of restaurant, size of chain) pass nationwide, labor costs will continue to increase. Restaurants who want to stay competitive will rethink their business models, lean on software, and adopt automation with a clear payback.
About the Authors
Meredith Sandland and Carl Orsbourn are co-authors of “Delivering the Digital Restaurant: Your Roadmap to the Future of Food” and “Delivering the Digital Restaurant: The Path to Digital Maturity.” After each spent 20-plus years in corporate strategy and retail food, Meredith and Carl concluded that food in America was changing. They left their corporate jobs in search of innovation that would transform the restaurant industry. Ghost kitchens, virtual brands, digital marketing, the gig economy and lean operations are at the heart of the future they envision. Meredith is the CEO of Empower Delivery, software that powers delivery-centric kitchens. Carl is the co-founder of Juicer and an advisor to restaurant groups and technology solutions. Subscribe to their newsletter and podcast at deliveringthedigitalrestaurant.com.