Chipotle and McDonald’s to Increase Menu Prices in California to Offset Minimum Wage Hike
Chipotle Mexican Grill and McDonald’s, two popular fast-food chains, have announced plans to raise their menu prices in California next year. The price hikes are an attempt to offset the state’s minimum wage increase for fast-food workers. The executives of both chains revealed their plans as they reported quarterly earnings in recent days.
While McDonald’s has not yet decided on the exact amount of the price increase in California, CEO Chris Kempczinski stated that it would be necessary as workers’ wages rise to $20 an hour. On the other hand, Chipotle expects to raise prices by a “mid-to-high single-digit” percentage in the state. However, the final decision has not been made, according to Chief Financial Officer Jack Hartung.
The decision to raise prices comes as the restaurant industry faces rising ingredient and labor costs. In response to these challenges, food prices away from home have increased by 6% in September compared to the previous year, according to the U.S. Bureau of Labor Statistics.
While diners have become accustomed to higher meal prices, some have been cutting back on eating out to manage their budgets. McDonald’s executives revealed that consumers making less than $45,000 a year have been visiting their restaurants less frequently, resulting in a decrease in U.S. traffic for the chain this quarter.
The wage hike in California has been the result of a compromise reached between the restaurant industry and labor groups. The initial proposal of a 10-person council governing fast-food chains was replaced with a nine-person council that will only have the power to set the pay floor for the fast-food industry until 2029. Starting from April 1, 2022, fast-food chains with at least 60 nationwide locations will be required to pay their workers a minimum of $20 per hour. Between 2025 and 2029, the council will be able to raise the hourly minimum wage annually by either the lower of 3.5% or the change in the consumer price index.
For Chipotle, the wage increase will result in an approximately 18% hike in wages. Currently, the average wage for the chain’s employees in California is $17 per hour. As a result, Chipotle customers can expect to pay significantly more for their burritos and bowls in the state, which is home to approximately 15% of the chain’s restaurants.
Chipotle has already implemented four price increases since June 2021, with the most recent increase of 3% taking place earlier this month. Meanwhile, McDonald’s plans to offset the higher labor costs through not only price increases but also improvements in productivity to reduce restaurant-level expenses.
Unlike Chipotle, which owns the majority of its locations, most of McDonald’s California restaurants are operated by franchisees. These franchisees have the freedom to set prices, although the chain provides guidance on the best strategy. Less than 10% of McDonald’s U.S. restaurants are located in California. The franchisees in California are expected to face short-term financial challenges as a result of the wage hike.
In the long term, however, McDonald’s looks at the higher wages as an opportunity to expand its business. CEO Chris Kempczinski stated, “We believe we’re in a better position than our competitors to weather this, so let’s use this as an opportunity to actually accelerate our growth in California.”
The National Owners Association (NOA), an independent advocacy group representing over 1,000 McDonald’s franchisees in the U.S., projected that the wage increase would cost each restaurant in California approximately $250,000 annually. While McDonald’s faced criticism from franchisees for its involvement in the compromise’s negotiations, the company declined to comment on the NOA’s estimates at the time.
Overall, as fast-food chains in California prepare for higher minimum wages, Chipotle and McDonald’s are taking steps to adjust their prices accordingly. While these price increases may impact consumers in the short term, the chains believe that they can navigate these challenges and continue to thrive in the long run.