One of the biggest benefits of eating at McDonald’s is its consistency. A Big Mac is the same Big Mac in Seattle or New York or Birmingham, Ala.
How much you pay for that Big Mac is not so consistent.
A Restaurant Business analysis of prices in all 50 states found that the chain’s franchisees charged customers a wide variety of prices for Big Macs and Cheeseburgers.
Customers may pay anywhere from $3.75 for a Big Mac in Austin, Texas, to $6.39 in Seattle. For Cheeseburgers, the variation was even greater, from $1 in places like Chicago and Houston to $2.29 in New York City.
While many factors play a role in the pricing differential, one big one is labor. How much a city or state’s minimum wage is correlates to the prices set for these burgers: Customers in cities where the minimum hourly wage is $14 or more pay 26% more for a Big Mac, and 30% more for a Cheeseburger, than they do in states at the federal hourly wage level of $7.25.
“The average store uses 1,000 to 1,100 of labor a week,” said Jim Lewis, a former McDonald’s franchisee out of New York, who is now a consultant. “If you take the minimum wage up $2, that’s $2,000 more a week in expense for the individual restaurant. You have to raise prices significantly to cover those things, and most restaurants end up cutting some hours.”
McDonald’s prices and the minimum wage
McDonald’s is hardly the only chain raising prices. Fast-food restaurants in particular have taken advantage of a market in which it has been the only game in town, raising prices more than 6% over the past year, double the inflation rate of full-service restaurants.
But we looked at McDonald’s prices because it is big and ubiquitous—its restaurants are in every state. The Big Mac is a consistent and well-known product. The chain’s app also makes the research relatively simple.
Plenty of factors go into menu pricing, generally. The price of food can influence prices, for instance, though in a chain those costs usually are the same as they are everywhere.
Juan Martinez, the principal at the consulting firm Profitality, said the biggest factors behind pricing at the local level are labor and real estate.
Cities where the minimum wage is highest—including New York City, Seattle and San Francisco—have high real-estate costs that can also influence prices in those markets.
McDonald’s is different. The company controls the real estate used by its franchisees and charges them based on a percentage of their sales. That can take real estate costs out of the equation to a degree. Yet Lewis noted that high-volume markets can drive up how much a franchisee pays for real estate, which can influence how much franchisees charge for their Big Macs.
Labor can cost 24% to 30% of a franchisee’s revenues, Lewis said. The wide regional and local differences in wage rates can frequently lead franchisees to raise prices.
“Hourly wage is going to do it,” Martinez said. “It’s driven by market conditions and it’s driven by governmental conditions.” He noted driving around Minneapolis years ago to see signs that Burger King was hiring at $13 an hour—though the minimum was much lower.
Hover over each state for prices.
Prices by state
Market conditions play a major role regardless of the minimum wage. Many franchisees we’ve spoken with have said they pay wage rates considerably higher than local minimums—driven largely by heavy competition for labor.
Despite low unemployment, many restaurants struggle to find workers. “Competition is fierce,” Martinez said. The higher wages, in turn, drive up prices.
Market conditions also influence prices. For instance, we found similar prices at McDonald’s locations in Fargo, N.D., where the hourly minimum is $7.25, and in Moorhead just across the border in Minnesota, where the minimum wage is $11. The same was true in Minneapolis, where the minimum is $13.25, and nearby suburbs that are at $11.
Yet the correlation between minimum wage and the price of a Big Mac and cheeseburger was clear. “Somewhere along the way, this $15 an hour has to be covered,” Martinez said. “It’s not going to be covered completely internally. It’s just impossible. Otherwise you have to close your doors.”
That said, the minimum wage is the minimum wage, which makes it a level playing field. Higher minimum wages may also increase buying power, thereby increasing sales—something some franchisees have noted.
Regardless, McDonald’s as a company has appeared less concerned with rising minimum wages.
“As long as it’s done in a staged way and in a way that is equitable for everybody, McDonald’s will do just fine with that,” CEO Chris Kempczinski said in January.
Big difference in Big Mac, Cheeseburger prices
One reason they’re just fine with it has been those prices increases and consumers’ apparent willingness to pay them.
McDonald’s franchisees have full control of their prices and use Deloitte to recommend pricing on a local level, Lewis said, based on a restaurant’s costs. Prices can also be dictated based on whether a restaurant wants to drive more customers toward meal deals. For instance, a franchisee may charge a higher price for a Big Mac in a bid to get more people to order the full meal.
The company in recent years has shifted away from a transactions-at-all-costs strategy into one that is OK with operators charging $5 for a Big Mac. The higher prices don’t appear to be hurting the chain’s same-store sales, which have increased consistently in recent years even as transactions have declined.
“There was a false transaction-driving mentality that we believed we had to be the low-cost provider,” Lewis said. “We still need to be one of the low-cost providers. But there’s always room to go higher than what we were.
“The reality is people like McDonald’s. If you like a Big Mac, you like a Big Mac. You’re not going to pay $10 for it. But you may pay $4 rather than $3.”
The chain’s shift away from the Dollar Menu years ago also gave franchisees some freedom to increase prices. Lewis said franchisees were too concerned about raising prices for bigger items like the Big Mac because they were worried it would drive more customers to the Dollar Menu. “It gave everyone a little more room to move the whole menu,” he said.
And that can lead to a steep difference in price. So a cheeseburger is $1.39 in Baltimore and $1.99 in Wilmington, Del. A Big Mac may be $3.79 in Montgomery, Ala., or $4.59 in Augusta, Ga.
The big concern, over the long term, is whether these higher prices keep customers away from a brand long known for low prices. “There’s a price we’re going to reach that will stop customers from coming,” Lewis said. “I don’t think we’ve reached that.”
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