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McDonald's
McDonald's will be among the brands taking price to offset higher wages.
CALIFORNIA WAGE HIKE BRINGS FAST-FOOD INDUSTRY TO CROSSROADS
Price hikes will require transparency and communication from operators.
Jan 16 2024
Story
McDonald's
McDonald's will be among the brands taking price to offset higher wages.
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The quick-service landscape has already begun to show effects of California’s
upcoming fast-food wage law that plans to bring the minimum rate to $20 per
hour. Perhaps the biggest news recently being Pizza Hut franchisees PacPizza and
Southern California Pizza Co. potentially removing north of 1,000 delivery
driver jobs. The franchisees shared in a WARN Act notice they were eliminating
first-party delivery services and, in turn, slicing drivers from the payroll.
That would amount to more than 1,200 jobs, including 841 in SoCal alone. This
would go into effect in February in areas such as L.A., Sacramento, and Palm
Springs.
More common of late have been promises from large-chain executives to take
additional price to counter the legislation. Chipotle and McDonald’s hinted at
such moves in November, with the latter’s CEO, Chris Kempczinski, telling
analysts on an earnings calls franchisee cash flow in California would
“certainly” take a hit. The state houses some 1,300 McDonald’s, along with more
than 230 franchisees and over 70,000 hourly employees and managers. The company
is open in 90 percent of the state’s counties, including 300-plus in Los Angeles
County. Only counting McDonald’s presence in the Golden State, it would be among
the top 30 biggest quick-service chains in America. Roughly 15 percent of
Chipotle’s footprint is in California, too.
As a refresher, California’s AB 1228 will introduce a Fast Food Council designed
to monitor the quick-service segment. In addition to minimum wage for restaurant
employees rising to $20 per hour—above the $16 per hour beginning in January for
other businesses—the Council could annually increase pay by 3.5 percent or
according to changes in the Consumer Price Index, whichever is lower. The law is
expected to impact more than 500,000 fast-food workers in the state. AB 1228
only covers chains with 60 units or more in the U.S., but higher wages at bigger
companies will likely have a secondary effect on smaller concepts and
independent restaurants that can’t afford the same level of labor costs.
Simon-Kucher recently conducted a survey of 1,000 consumers to shed light on
Californians’ expectations and attitudes toward the planned wage increase, as
well as their anticipation of price changes in the sector.
Broadly, the group noted, there’s been a looming deadline to increase labor
wages for quick-service employees for years.
“Growth will be dependent on how restaurants react, as many are overindexed
given the state’s population,” the company said. “Our analysis reveals a pivotal
crossroads for quick-service restaurants.”
Findings:
Seventy percent of Californians in the survey said they were aware or understood
the details of the policy change.
So, while chains are hyper aware of the upcoming wage increase to $20 per hour,
California consumers don’t appear to be.
Ninety-one percent of Californians noted they expect restaurants to pass costs
through at least to some extent.
In other terms, once consumers understand the planned wage increase, they expect
prices to increase to cover costs.
“The crux lies in crafting the right communication strategy,” says Philip Daus,
partner at Simon-Kucher. “Mitigating the impact of price increases is not just
about numbers; it’s about connecting with consumers transparently and
articulating the value behind the adjustments. Effective communication is the
linchpin for navigating these changes successfully.”
Expectation of price increase was highest among some of the most frequent
quick-service consumers—25– to 44-year-olds (75 percent eat at counter-service
restaurants more than once per month), with median expected meal increase at $4
instead of $3.
There will be room to increase prices as a result of this bill, the survey
found. When asked about their expectation for a $10 combo meal, California
consumers said they expect the price of a $10 meal to increase by a median of
$3.
“It’s essential to recognize that the stated price increase expectation of $3,
equivalent to 30 percent, may be an overstatement,” says Dave Clement, also a
partner at Simon-Kucher. “History tells us that price increases exceeding the 10
percent threshold often trigger consumer backlash. Striking a delicate balance
between covering costs and respecting consumer sentiment is critical.”
Sixty-one percent of California consumers added they were favorable to the wage
increases, while 15 percent were indifferent and 24 percent against.
Simon-Kucher said this point shows most consumers are in favor of the bill once
they understand what it is—quick-service brands can leverage this fact by
communicating price increases allow better wages for workers.
Fifty-one percent of consumers in the survey noted they expect to visit
quick-service restaurants fewer times because of the legislation change (due to
it being more expensive). Of those who plan to decrease visits, 91 percent said
they will cook more at home.
This response varied by location: in San Francisco, only 23 percent would
decrease visits versus 37 percent in Los Angeles and 52 percent in San Diego.
“The quick-service restaurant response to the wage increase does not need to be
a ‘peanut butter spread’ increase strategy across the whole of California,” Daus
says. “To lessen the blow, brands should differentiate prices across locations
while taking purchasing occasions, income levels of consumer segments and other
criteria in consideration that drive willingness-to-pay.”
Thirty-eight percent of California consumers will look to promotions, the survey
found, with more frequent quick-service restaurant consumers placing an even
higher importance on promotions (43 percent-plus for diners who order from
quick-serves at least once a week).
With all this in mind, promotions become more pivotal in winning the occasion
over competitors and staying home for quick-service consumers in a post-increase
world, Simon-Kucher said. “Mitigating customer churn in the face of price
increases, promotions emerge as a powerful tool,” Clement adds. “However, it
will be critical to manage them tightly to prevent margin erosion. Take, for
example, buy-one-get-one promotions on premium products – while aiming to retain
loyalty, such strategies can inadvertently increase price sensitivity,
potentially proving counterproductive in their most loyal segments and
challenging overall profitability.”
Twenty-eight percent of consumers said they expect to order less expensive
entrees, meaning a range of menu entrée prices can give customers the option to
choose a more affordable meal and stay at your chain, even with price increases,
Simon-Kucher suggested. “Loyalty programs stand out as a cornerstone for
preventing churn and fostering customer retention,” Daus says. “These programs
not only nurture brand allegiance but also empower businesses to make targeted
offers, strategically catering to the most price-sensitive customer segments. In
a world where customer relationships are paramount, loyalty programs are the
linchpin for sustainable success and resilience against market fluctuations.”
Employee Management, Fast Casual, Fast Food, Finance, Legal, Story
Danny Klein Editorial Director, QSR/FSR
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