- California's minimum wage for fast-food workers is set to increase to $20 per hour in April.
- Many fast-food chains plan to raise menu item prices to compensate for the extra labor cost.
- McDonald's predicts that the increase will contribute to wage inflation.
If you live in California, your go-to fast-food order is likely going to get more expensive.
That's because the minimum wage is set to increase to $20 an hour in April for fast-food workers in California, thanks to a deal negotiated by labor unions and the restaurant industry back in October.
To compensate for the extra cost of labor, restaurants like McDonald's, Chipotle, and Jack In the Box plan to raise menu prices at their California stores.
The new pay rate marks a 25% increase from the state-wide $16 minimum. Restaurants qualify for the increase if they have 60 or more locations around the country.
In an October earnings call, McDonald's CEO Chris Kempczinski said that menu prices would increase in California, but didn't say which items or by how much. Kempczinski said in the call that the company would be using the wage increase as an opportunity to gain on its competitors.
McDonald's has already raised menu prices by 20% over the last two years and has started to lose some low-income customers as a result. Pricing may vary and remains at the discretion of each individual franchise.
The new wage requirement is estimated to cost an extra $250,000 annually per restaurant, according to The National Owners Association, a group that represents over 1,000 McDonald's franchisees, The Wall Street Journal reported. McDonald's currently has 1,224 locations in California, which makes up about 9% of its restaurants in the US.
In McDonald's latest earnings call on Monday, Kempczinski predicted that wage inflation would enter the mid to higher single-digit range, in part due to the impact of the wage increase in California.
Chipotle similarly announced that it will also be raising prices by 5% to 9% to cover the new pay requirement, according to a Wall Street Journal report. This will be the fifth time the company has raised menu prices in the last two years.
The last increase came in October 2023, in which the price for protein items rose by 30 cents at one location. Chipotle has about 476 restaurants in California, which makes up 14% of its national locations. Prior to that, Chipotle raised prices in August 2022, leading customers at some locations to pay a dollar or more extra for menu items.
While 30 cents or a dollar may not sound like a lot on its own, Jeff Hanscom, vice president of the International Franchise Association, told Business Insider that many customers look to these restaurants as a source of affordable food. By raising prices, these brands risk pushing their customers away as well as potential franchise owners who want to open restaurants in the state, Hanscom said.
Raising menu prices is just one method for restaurants looking to cut costs amid higher wages. Pizza Hut cut its in-house delivery program, eliminating 1,200 delivery workers to prepare for the pay increase. Other franchises in California, like Fatburger, have implemented hiring freezes and cut employee hours.
"Ultimately what you're left with is less affordable food, less options, and less jobs," Hanscom said.
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