As California's minimum wage increases from $16 to $20, effective April 1, a ripple effect is sweeping through the fast-food industry, with giants like Chipotle (NASDAQ: CMG), McDonald's (NYSE: MCD) and Starbucks (NASDAQ: SBUX) poised to implement price hikes.
While the wage hike is intended to uplift and empower workers, it poses a challenge for businesses, which must grapple with increased costs. These expenses are passed on to consumers through higher product prices.
Under the new mandate, fast-food chains operating 60 or more outlets nationwide must adhere to the $20 hourly wage threshold, driving up operational expenses.
Consequently, with a 25% pay increase, businesses find themselves at a crossroads, compelled to either adjust pricing, streamline their workforce or curtail employee hours.
"We know we have to take something at a significant increase when you talk about a 20%-ish increase in wages," Chipotle Mexican Grill Chief Financial Officer Jack Hartung said about the California law during an earnings call last month.
McDonald's, which had already initiated a 10% price hike nationwide in 2023, faces a similar quandary, with CEO Chris Kempczinski conceding uncertainty over the extent of forthcoming price adjustments during the company's earnings call.
"I don't think at this point we can say exactly how much of that is going to work its way in through pricing," Kempczinski said. "Certainly, there's going to be some element of that that does need to be worked through with higher pricing."
In the past decade, the prices of McDonald's food have doubled, with a McChicken sandwich now priced at $2.99, compared to its $1 price tag 10 years ago. Once synonymous with quick and affordable meals, fast food has now become costly, reshaping consumer expectations.
Other fast food restaurants face the same dilemma, with Pizza Hut and Jack-in-the-Box also signaling adjustments in response to escalating labor costs.
In response to rising labor costs, many companies are exploring the use of robotics or artificial intelligence (AI) to streamline operations. Chipotle, for instance, has been testing a robotic solution to assist with guacamole preparation through its partnership with Vebu Labs.
"Our purpose as a robotic company is to leverage automation technology to give workers more flexibility in their day-to-day work," said Buck Jordan, CEO of Vebu. "Autocado has the potential to work alongside Chipotle crew members to create the same, delicious guacamole that Chipotle fans love but more efficiently than ever before."
As wage increases become more frequent across states, many companies likely will heavily invest in integrating more robotic operations or AI to streamline processes.
For consumers, the wage hike adds to an already challenging landscape, with prices of everyday essentials on the rise amid broader inflationary pressures.