California recently raised its minimum wage for fast-food workers to $20, and franchisees have raised their prices to offset that fear of sending some diners into the arms of fast-casual dining chains like Chili’s and Applebee’s.
These chains are not subject to the new minimum wage and therefore should not increase their prices as much. This could potentially reduce the price difference between fast food restaurants and casual dining restaurants.
The $20 wage applies to workers at limited-service restaurant chains — those where diners typically don’t get table service and don’t pay for their food before eating it — with at least 60 locations nationwide .
California fast-food restaurants have raised their prices to compensate for the wage, which is 25% higher than the state’s general minimum wage.
Although the legislation was signed into law on April 1, some restaurants have gradually increased their prices to avoid the shock of dramatically increasing prices from one day to the next.
Shane Paul, owner of seven Jack in the Box restaurants in San Diego, told BI he has raised prices at his restaurants by about 10% or 11% over the past six to 12 months in anticipation of the hike salaries. In previous years, he typically raised prices about 3.5 to 4 percent, he said.
Transactions at his restaurants “are already trending down,” he said.
Paul speculated that some diners might instead go to casual restaurants like Chili’s or Applebee’s, which he said offered deals allowing diners to have a sit-down meal for “a dollar or two more than us.”
Applebee’s is a casual dining restaurant chain. Scott Olson/Getty Images
Harsh Ghai, who said he owns about 180 Burger King, Taco Bell and Popeyes restaurants in California, expressed similar concerns.
He told BI that his price increases are already impacting restaurant sales and that he expects more diners to turn to grocery stores, Chili’s and Applebee’s instead.
“We’re going to start competing with them,” Ghai said, speaking of casual dining.
In a typical year, Ghai’s restaurants raise their prices between 2 and 3 percent, he said. But over the past 12 months, it has raised prices between 8 and 10 percent, largely simply to reflect food inflation, he said. He cannot raise prices further to absorb the rising wages because customers would not return, he explained.
Scott Rodrick, owner of 18 McDonald’s in Northern California, told BI he is “deeply concerned” that the new minimum wage “closes the competitiveness gap” between different types of restaurants.
Rodrick said he raised prices at his restaurants between 5% and 7% over the three months of 2024.
Executives at Kura Sushi, a Japanese chain with about 60 locations in the United States, told analysts in early April that they believed the $20 wage would increase their value proposition as other chains continued to increase the costs.
CEO Hajime Uba noted that Kura Sushi’s prices are getting closer and closer to those of fast food.
Diners typically visit fast-food and casual restaurants for different occasions, Brian Vaccaro, restaurant analyst at Raymond James, told BI.
Table service restaurants typically attract diners who want to “relax and rewind” with family and friends. In contrast, people typically go to limited-service restaurants for speed and convenience, he said.
Wages could soar across the entire restaurant industry
Analysts say it’s difficult to predict exactly how diners’ habits will change in response to rising prices at fast-food chains. People might buy more groceries, choose fast food deals, or change restaurants.
Still, some analysts expect other employers in the state — like full-service restaurants and retailers — to start paying their workers more in order to stay competitive, which could ultimately mean that other restaurants will also increase the prices of their menus.
Sal Vitalie, owner of Garden Club, a restaurant in South San Francisco, told BI he will “absolutely” have to raise his wages to compete with local fast-food chains.
Still, in some cases, Vaccaro noted that servers at mid-priced full-service restaurant chains are likely already making $30 or more an hour, including tips, so price hikes may well be a long way off. .
“If casual dining restaurants can hold prices down and don’t face upward work pressure, they could see some benefits as the gap between casual dining dining and limited service prices narrows,” Sharon said Zackfia, restaurant analyst at William Blair, to BI via email.
“But limited service will remain cheaper, and the key principles of speed and convenience will remain a positive factor for demand for limited service for customers on the go,” she said.
Are you a fast food worker excited about the new minimum wage? Or a franchisee or restaurant manager worried about how this will impact your business? Email this reporter at gdean@insider.com.
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