Franchises Had Warned of FAST Act’s Consequences for Consumers
To counteract next year’s higher minimum wage for California fast-food workers, McDonald’s and Chipotle Mexican Grill are poised to increase menu prices. Most of the Golden State’s 500,000 fast-food workers will earn $20 per hour or more starting next April 1 under the FAST Act, which was signed into law on Labor Day of this year.
Franchisors, along with the International Franchise Association and several other trade organizations, had battled the pending legislation and warned that it would force fast-food restaurants to raise their prices. The new law applies to nearly all California fast-food restaurant brands with 60 or more locations nationwide.
California is home to about 1,300 McDonald’s restaurants, which amounts to 10% of the chain’s businesses, USA Today said. Most of those restaurants are franchise operations. The National Owners Association, an advocacy group composed of 1,000-plus McDonald’s franchisees in the United States, projected the FAST Act will cost each of its California locations about $250,000 per year, according to a September memo viewed by CNBC.
Price Hikes Still Being Determined
CEO Chris Kempczinski said McDonald’s hasn’t determined how much its menu prices will increase, according to reports on USAToday.com and CNBC.com. Quoting Chipotle Chief Financial Officer Jack Hartung, the newspaper said Chipotle has projected price hikes of a “mid-to-high single-digit” percentage in California but added that nothing is set in stone yet.
Even before the FAST Act, consumers saw higher prices at restaurants during the past year because of rising costs of labor and ingredients. The Consumer Price Index indicates that food-away-from-home prices increased 0.4 % in September 2023 and was 6% higher than September 2022, according to the Economic Research Service of the U.S. Department of Agriculture.
Ian Borden, McDonald’s chief financial officer, said the fast-food giant increased its domestic prices in the third quarter at a lower rate, according to USA Today, which also stated that McDonald’s domestic prices will go up a bit over 10% for all of 2023. Earlier this week, McDonald’s executives disclosed that consumers earning less than $45,000 per year have cut back on their visits, CNBC reported.
Other Moves by McDonald’s
Kempczinski recently said that in addition to raising prices, McDonald’s also will try to offset California’s new minimum wage by trimming restaurant costs and boosting productivity. But he conceded that “there will certainly be a hit in the short-term to franchisee cash flow in California, [but it is] tough to know exactly what that hit will be because of some of the mitigation efforts,” according to USA Today.
Kempczinski is hopeful of a long-term silver lining, CNBC reported. “We believe we’re in a better position than our competitors to weather this,” he said, “so let’s use this as an opportunity to actually accelerate our growth in California.”
McDonald’s Chief Financial Officer Ian Borden said the company increased prices in U.S. in the third quarter at a lower rate. McDonald’s expects its U.S. prices will increase just over 10% for the full year, Borden added. Chipotle, which is not a franchise, has raised prices four times in the past 24 months, including a 3% bump this month, the newspaper reported.
Other Details of California Law
As part of the fast-food restaurant regulations under the new law, a nine-person council is authorized to raise the hourly minimum wage of fast-food restaurant workers each year through 2029. The council is made up of two representatives of the fast-food restaurant industry, two franchisees or restaurant owners, two restaurant employees, two advocates for fast-food restaurant employees, and a member of the public who is affiliated with neither employers nor employees. That ninth unaffiliated member will serve as chairman of the council.
The council can change the wages of nearly all fast-food employees by 3.5% or the annual change in the consumer price index, whichever is lower, CNBC noted. Only restaurants that bake their own bread are exempt from the new law, the USA Today report pointed out. Panera, for example, will be exempt.