(The Center Square) – California fast food prices and automation are set to skyrocket in response to the state’s coming fast food minimum wage increase to $20 per hour. Chipotle says it would raise its prices in the mid-to-high single digits. While McDonald’s did not specify how much it would be raising its prices, it did say it did believe the wage increases would help it gain market share due to its stronger ability to “weather” this change.
“Labor costs at these chains are going to go up nearly 20%. The average right now is $16 to $17 per hour, so a change at that magnitude is going to impact menu prices,” said Peter Fenelio, Director of Industry Engagement for the California Restaurant Association in an interview with The Center Square. “We really don’t know how this is going to percolate through the industry but it’s certainly possible that full-service restaurants will face wage pressure. It’s a major shift in wage policy.”
According to the National Owners Association, the increase in wages will cost each fast food restaurant in the state an average of $250,000 per year. The raise to $20 per hour under AB 1228 was part of a compromise to mitigate AB 247, a bill signed by Newsom last year that created a $22 fast food minimum wage and a Fast Food Council with far greater powers that drove the fast food industry to qualify an opposing ballot measure to repeal it. Unions, not wanting to spend millions opposing a popular ballot measure to repeal AB 247, decided to reach a compromise with fast food companies to be able to redirect funds to other ballot measures and elections. Notably, franchisees were not included in the negotiations.
In its original form, AB 1228 would have also imposed joint liability on a fast food franchisor for its franchisee’s violations of any laws and regulations, a move that would have driven franchises under corporate management and likely brought an end to the franchise business model, under which franchisees buy rights to operate restaurants from franchisors. This section was later removed, and the bill was quickly passed just before the end of the legislative session.
“It’s not a perfect outcome but it was significantly better than the alternative for the industry and menu prices had wages increase across the sector increased to $22 per hour,” Fenelio said.
National Federation of Independent Business State Director John Kabateck thinks this wage increase will drive automation and the shutting down of stores with lower profit margins, which are often in economically disadvantaged areas.
“My prediction is these businesses will not shut down but will be operated more by automation, and [operators] will scale back their number of stores. Many stores, especially in disadvantaged areas, may find it difficult to survive, so they’ll throw up their hands and focus on other stores they operate,” Kabateck told The Center Square.
According to the National Restaurant Association, 62% of operators say they can’t hire enough staff to meet demand, while 80% say they have a hard time filling open positions. As a result, fast food operators including Chipotle, Starbucks, and Sweetgreen are adopting advanced robots to reduce the need for workers, with the goal of offsetting both worker scarcity and rising wages.
