Just more than a year ago, sensing that inflation would push more customers to lower-priced meals, Del Taco introduced a new value menu, offering 20 items for $2 or less.
The menu is a lot smaller now. Reviews of menus in multiple locations shows a value menu of 10 items priced at $2 or less.
This may seem like a bad time to ditch a menu geared toward value customers. Traffic has been down throughout the industry, including the 600-unit Del Taco. Lower-income customers are dining out less and social media has spent a lot of time fretting about fast-food prices.
But the industry largely feels it has little choice but to limit any real value push. For that you can blame California.
On Monday, the state’s $20 fast-food wage became law, resulting in an instant, 25% increase in wage rates. While restaurants are likely to eat some margins, price hikes are a near certainty.
At the very least, the issue has made it a challenge for brands to market broadscale value, because it’s difficult to market any price points when a large portion of the population probably can’t access it.
To wit: Jack in the Box earlier this year came out with a $5 Jack Pack bundled meal. In Los Angeles, the price for that meal was $6.
Subway last year told franchisees that they would have to accept digital offers, given the problem that happens when customers can’t access discounts a brand is promising. Reaction from California Subway operators was swift. With their wage rates about to pop 25%, how can they afford to do that?
To be sure, there is little taste throughout the industry for any real value push, regardless of what’s going on in California. Many are still working to recover profit margins lost when inflation spiked in 2021 and 2022. The fast-food sector is using its mobile apps for most of its value offers. Broad value marketing is limited.
At McDonald’s, the 123 Dollar Menu has become more like the 2, 3, 3.50 Dollar Menu. That is hardly limited to California. The higher-priced value menu is a phenomenon roughly everywhere.
Indeed, as we examined prices at Little Caesars, we saw that the price for a Classic Pepperoni pizza cost $7.49 in my neighborhood. At several locations we looked at in Los Angeles, the price was $6.99. Wage rates are far higher in California than they are in suburban Minneapolis.
Prices are typically set locally, particularly in franchise brands. And there are circumstances other than wage rates that influence those prices.
Still, restaurant companies with a heavy concentration of locations in California face challenges marketing to those lower-income customers looking for discounts or value. Which brings us back to Del Taco. More than half the chain’s locations are in California.
The company, which is owned by Jack in the Box, has long targeted the value diner. The brand and its franchisees have thus treaded carefully in that direction.
Yet it has shifted its focus this year. “Our brand insights have demonstrated that we win on value versus the competition, and have an opportunity to go beyond just low price points and offer more food for the money,” Jack in the Box CEO Darin Harris told analysts in February.
Both his company’s brands also have taken less price than many of their rivals historically. That has changed this year, too. “We do think with what’s happening with AB 1228 coming up,” Harris said, referring to the fast-food law in California, “we do have room to take anywhere from 2% to 3% additional price heading into April.”