Apparently, when a bunch of restaurants are required to raise wages by 25% overnight they charge higher prices. And customers come in less often as a result.
That is becoming increasingly clear in California, where the state started requiring fast-food chain restaurants to pay workers at least $20 per hour beginning on April 1. The result has been higher prices at those restaurants—and a corresponding drop in traffic.
The latest evidence for this comes from Revenue Management Solutions (RMS), which has released new data tracking prices and traffic at fast-food restaurants in the U.S. and in California.
Their data shows that restaurants there are charging higher prices than average are getting fewer customers than average. But the numbers also show that life isn’t exactly thrilling on the traffic front elsewhere in the U.S.
According to RMS, prices at quick-service restaurants are up 7.5% year over year in June in California, compared with 3.1% nationwide.
California prices had largely followed the national average since 2022, according to RMS, but began diverging earlier this year as restaurants in the state prepared to adapt to the higher wage rates.
Meanwhile, customers in California are ordering fewer items. Quantity-per-transaction was down 0.6% in the state in June. By comparison, quantity-per-transaction increased 1.3% nationwide. That shows customers in California are managing their spending by ordering fewer items.
And they are also managing their spending by visiting less often, though this is where the national numbers are not great, either.
Traffic at quick-service restaurants declined 5.9% in California in June, the lowest rate since the pandemic.
The numbers aren’t exactly reassuring in the rest of the U.S., where traffic to quick-service restaurants declined 3.6% in June.
The traffic numbers show the challenges at chains like McDonald’s, which just reported a 0.7% decline in domestic same-store sales, one driven entirely by weak traffic. Those numbers explain why fast-food chains have undertaken a value war that can be expected to last months.
Still, California presents unique challenges. Higher wage rates eat into profitability and that makes it more difficult to offer the type of value available elsewhere in the country, making restaurants there less able to fix their traffic challenges. As it is, some chains have carve-outs on value offers for their California restaurants.
“We’ve got the wage pressures, particularly from California,” McDonald’s CFO Ian Borden said on Monday. “That’s certainly a headwind we’re working through.”
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