Countdown to $20: Fast-Food Chains Adjust Strategies as Wages Soar in California

A franchise owner of a Southern California fast-food chain is indicating that menu prices will increase as the minimum wage for fast-food employees is set to rise to $20 an hour in April under a new California law.

Marcus Walberg, whose family operates four Fatburger restaurants in Los Angeles, recently informed Business Insider that raising prices and implementing other adjustments is inevitable to adapt to the upcoming wage hike. Walberg expressed concern, noting that customers are already complaining about high prices.

McDonald’s and Chipotle Mexican Grill executives have already hinted at impending menu price hikes. McDonald’s CEO, Chris Kempczinski, mentioned in a November conference call that the company anticipates a “mid-to-high single-digit” percentage increase in prices.

Last month, two major Pizza Hut franchise operators in California announced layoffs of all in-house delivery drivers due to the new law, affecting hundreds of locations and impacting over 1,200 drivers in various counties.

In response to the wage increase, Walberg is also making other changes at his Fatburger locations, including reducing employee hours and eliminating paid vacation time. He describes the business environment in California as more strained than he can recall.

California’s current minimum wage is $16 per hour, and the increase to $20 follows the passage of Assembly Bill 1228, aimed at assisting fast-food workers in coping with the rising cost of living and inflation.

Financial planner Justin Rush acknowledges that higher minimum wages can have various effects on consumers, businesses, and the economy. Rush notes that businesses may increase product or service prices to offset higher labor costs or invest in automation to reduce reliance on low-wage workers.

Rush also recognizes the potential for increased economic growth if fast-food workers experience higher income, leading to more disposable income and boosted consumer spending, particularly in industries catering to lower-income consumers.

In the third fiscal quarter of 2023, Chipotle reported an 11% year-over-year revenue increase, while McDonald’s revenue soared by 14%. Both chains have consistently raised menu prices recently.

Consumer reporter David Lazarus believes that the minimum wage hike is overdue, emphasizing that the fast-food industry has historically relied on low-paid workers for profits. Lazarus suggests that, instead of drastic measures like cutting jobs or benefits, fast-food chains should align product prices with operating costs, prioritizing the interests of customers.

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