California restaurant operators raise prices, look for solutions and try to remain optimistic

Restaurant companies have raised prices to offset the $20 wage. But how much depends on the concept. And brands like McDonald’s are also working to get customers excited about coming in.
From left: Jim Bitticks, SG Ellison, Michael Halen, Kerri Harper-Howie and Lisa Jennings. | Photo by W. Scott Miller Photography

Restaurant operators in California have spent months testing and implementing strategies to increase prices and develop efficiencies to offset the $20 fast-food wage the state implemented on April 1.

But it’s still too early to tell exactly what the true impact from the new law will be, at least according to a panel of operators at the Restaurant Leadership Conference on Wednesday, moderated by Restaurant Business Executive Editor Lisa Jennings. How much of an impact the law will have likely will depend on the brand and its customers.

At McDonald’s, where operators have been raising prices for months, the company has formed a task force to develop strategies to deal with the law’s impact. Those efforts include spending $15 million on advertising and other efforts in the state, which Bloomberg reported earlier this week.

The goal is to get customers excited about coming in, which also means the return of bagel breakfast sandwiches in the state, which the company hasn’t had on the menu since 2020.

“We have realized that we are unable to solve our way out of this challenge just with price,” said Kerri Harper-Howie, a 21-unit McDonald’s franchisee in Los Angeles County. “We can’t do it. Our customers are price sensitive.”

Diversified Restaurant Group operates about 200 of its 360 locations, most of which are Taco Bells, in California. SG Ellison, CEO of the operator, agreed that the company can’t simply rely on pricing, citing the economy.

“We’ve taken a cautious approach on menu pricing,” Ellison said. “We’re not looking to say pricing is going to solve this problem for us today. The macros for the consumer are tight today.”

To be sure, operators are definitely raising prices in California to offset the higher labor costs that have come with the $20 wage.

The wage is part of a law, known as AB 1228, that created a council to regulate and set wages for fast-food chain restaurants. The result was a sharp, immediate increase in wages by about 25%, a minimum that other businesses and even other restaurants like independents or full-service concepts will not have to abide by.

It’s not just regular workers. More experienced employees and even managers will get raises, too. “There will be a ripple effect,” said Jim Bitticks, president of Dave’s Hot Chicken.

That has created an uncertainty among operators that they will lose customers by increasing prices, because the balance of the dining public will not be getting the same wage increase that restaurants will be paying.

“Minimum wage increases are good for sales,” said Michael Halen, analyst with Bloomberg Intelligence. “People have more money to spend and you can pass along price increases. But it’s harder in this scenario because it’s not statewide.”

It also comes amid a backdrop of mounting concern about fast-food prices in general, not just in California. Traffic at a wide array of chains has been in decline, as higher menu prices have led to a reduction in traffic at many concepts.

Chains with strong sales and business models and plenty of demand, particularly among consumers who have more earnings, will likely weather the storm more easily.

Dave’s Hot Chicken raised prices in two waves, first in November and again in February, for a total of 9%.

“We didn’t see much degradation at all,” Bitticks said. “We feel pretty good about it.”

Brands have looked at other methods for dealing with price hikes. McDonald’s has sped up the implementation of a workforce management program to help managers and crew with scheduling, switching shifts and other issues.

But the company’s task force is also helping operators in different parts of the state work together on other concrete solutions. “We have been working together, trying to come up with a plan that we can scale and execute on a statewide basis,” Harper-Howie said. “It’s going to be up to us as franchisees to figure it out and get through it. We have been very lucky to get support, guidance and leadership from the organization.”

Kiosks are another potential solution. Dave’s Hot Chicken considered it, but that effort sped up when the California situation took hold.

The kiosks are not big labor savers. But they do increase sales. “Check average went up by 15% when people use the kiosk,” Bitticks said. “It’s an indirect price increase.” The company also added large-sized drinks, which he called a “self-selected price increase.”

Yet the operators also expressed at least some optimism about the state and its restaurants.

“I was born an optimist,” Ellison said. “I would not be in this business if I wasn’t. I bought restaurants in California the last three years at a large scale, knowing these laws were on the table.”

“California is a huge economy,” he added. “It’s not ideal by any means. We have a lot of levers we can pull. But we will be OK at the end of the day.”

Turnover could be one potential benefit. “There’s a correlation between wage inflation and reduced turnover,” Bitticks said. “We do see improvements in turnover.” And that could save on the cost of replacing workers, which is not insignificant. “If you do see reduced turnover, it will be money well spent,” he said.

Harper-Howie, meanwhile, called California “one of the best markets to be in.” And then she said that people in other states should not rest easy, because what happens in the state probably doesn’t stay there.

“Anyone out here who feels safe, be ready for it, because it’s coming,” she said.

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