The decision is a response to the state’s forthcoming minimum wage hike for fast-food workers, which will see employees earning a minimum of $20 per hour starting on April 1, CNBC reported Monday (Oct. 30), citing executives’ comments made during recent quarterly earnings calls.
McDonald’s CEO Chris Kempczinski said Monday that the exact amount by which McDonald’s will raise prices has yet to be determined, according to the report. Chipotle expects to raise its prices by a “mid-to-high single-digit” percentage in the state, Chief Financial Officer Jack Hartung said Thursday (Oct. 26).
Chipotle’s increase comes as it prepares for an approximately 18% rise in wages resulting from the new pay floor, the report said.
Rising ingredient and labor costs have been a challenge for the restaurant industry in recent years, leading to previous menu price hikes, per the report. In September, food prices away from home were up 6% compared to the previous year, according to the U.S. Bureau of Labor Statistics.
While customers have become accustomed to paying more for their meals, some have been cutting back on dining out to manage their budgets, according to the report. McDonald’s executives have observed that consumers making under $45,000 have been visiting their restaurants less frequently.
As a response to the higher labor costs, McDonald’s plans to explore ways to improve productivity and reduce restaurant-level expenses, in addition to raising prices, the report said.
Unlike Chipotle, which owns most of its locations, the majority of McDonald’s California restaurants are operated by franchisees, per the report. While franchisees have the freedom to set prices, McDonald’s offers guidance on the best pricing strategies. It is expected that franchisees in California will experience a temporary reduction in cash flow due to the wage hike.
The National Owners Association, an independent advocacy group of McDonald’s U.S. franchisees, estimates that the minimum wage increase will cost each California restaurant approximately $250,000 annually, according to the report. However, McDonald’s believes that in the long term, the higher wages could actually benefit their business and help accelerate growth in California.
California Gov. Gavin Newsom signed into law the bill that raises the minimum wage for fast-food workers in September. The legislation emerged as part of a compromise between fast-food companies and labor unions.