- California's minimum wage for workers at limited-service restaurants is going up to $20 an hour in April.
- Restaurants plan to raise prices to offset the labor costs, but the amount will vary considerably.
- People may eat less fast food, restaurants will promote value menus, and workers in other industries could get paid more.
Fast-food workers in California are getting higher paychecks.
From April 1, limited-service restaurant workers in the Golden State who work for chains with more than 60 locations nationwide will get a minimum wage of $20 an hour under AB 1228, signed by Gov. Gavin Newsom in September.
It's not just a one-off pay rise – a fast-food council will be able to increase the minimum wage by up to 3.5% a year, depending on inflation.
The change is a big one, and it could have ripples across not just California, but the whole of the US fast food sector. Here's what might happen.
Burgers, tacos, and pizzas will get more expensive
Diners should expect to pay more as fast-food restaurants put menu prices up to offset higher wages. Chains including McDonald's, Chipotle, and Jack in the Box have all said they'll increase prices.
"I would expect the vast, vast majority of limited-service restaurants to raise prices in California," Sharon Zackfia, an analyst at William Blair, told Business Insider.
Restaurant analysts told BI that they expect prices could go up anywhere between the mid-single-digits and the low-double-digits.
"Unfortunately the consumer's going to have to bear it," Andy Barish, an analyst at Jefferies, said.
Diners have already faced dramatic price increases during the pandemic. Restaurants typically raise prices by around 2% a year, but some put prices up by more than 10% in 2022 amid soaring labor and commodity inflation, Sara Senatore, a Bank of America analyst, said.
The impacts will vary between restaurants
Price increases will vary by chain, location, and franchisee. Smaller chains, or ones that operate mainly in California, may have bigger price increases because they don't have as many restaurants outside the state to absorb the impact.
"This is an opportunity for us to gain share, because this is an impact that's going to hit all of our competitors," McDonald's CEO Chris Kempczinski told investors in October. "We believe we're in a better position than our competitors to weather this."
For fast-food chains paying workers the state's current minimum wage — $16 as of January — the new $20 wage represents a hefty 25% bump in labor costs. But restaurants already paying workers higher wages will feel less of an impact from the new legislation.
Fast-food chains in bustling urban areas are likely to already pay considerably above California's $16-an-hour minimum to stay competitive, meaning suburban restaurants may feel the impact of the legislation more. And some cities and counties in California have minimum wages of $18 an hour and higher, anyway.
It's not just workers currently earning less than $20 an hour who'll get a pay rise: some supervisory workers will be given raises to ensure they're still getting more than the restaurant's lowest-paid workers.
People might eat less fast food
As fast food becomes more expensive, people could dine out less or place smaller orders.
Jon Tower, an analyst at Citi, said the higher prices could be hard for some diners to accept. "There's a very good chance that this just translates into weaker footfall" and more people choosing to cook at home instead, he said.
"It's really tough to tell where consumers are going to trade," Barish said.
Zackfia pointed out there'll be less of a price difference between limited-service and full-service restaurants.
Low-paid retail workers can expect a raise
The $20 minimum wage only applies to limited-service restaurant workers at chains with at least 60 locations.
However, higher wages at McDonald's, Subway, and Burger King will likely prompt other employers to offer higher pay so they can compete for labor.
If limited-service restaurants are raising their wages, "everybody is going to have to adopt because it's a free market," Danilo Gargiulo, a Bernstein analyst, said. "So at the end of the day, everybody will have to do it."
This could include workers at independent restaurants, full-service restaurants, and grocery stores.
As other restaurants raise their wages, they may also have to adjust their menu prices.
The Cheesecake Factory, for example, told investors in November that the legislation could have a "ripple effect" on wages. The Cheesecake Factory, in response, may have to raise its prices, too, CFO Matt Clark noted.
People will have more money to dine out
As fast-food workers' wages increase, they'll actually have more disposable income to spend dining out.
"Given how large the industry is with respect to employment in California, a good chunk of the consumer base is actually going to be getting a raise," Tower said. Fast-food restaurants "might end up seeing slightly higher demand," he said.
Almost 550,000 people worked as cooks or counter workers in California's fast-food industry as of May 2022, according to data from the Bureau of Labor Statistics. It's unclear how many of these work for companies that will be covered by AB 1228.
Expect more value deals and order kiosks
Tower said he expected fast-food chains to focus on their value deals in California to attract customers amid higher menu prices.
Zackfia said she thought digital order kiosks, which restaurants are rolling out to save on labor costs and improve order accuracy, would spread "even more quickly" in California.
Are you a fast-food worker excited about the new minimum wage? Or a franchisee wondering how it will affect your business? Email this reporter at gdean@insider.com.
