The Blubber

McDonald’s, $MCD, and Chipotle are increasing menu prices after California raises fast-food minimum wage, per CNBC.

McDonald’s and Chipotle Mexican Grill are preparing to raise menu prices in California in response to the state's upcoming minimum wage increase for fast-food workers. The wage will be raised to $20 an hour, but specific pricing adjustments have not been finalized.

McDonald’s CEO, Chris Kempczinski, stated on Monday that the company hasn't determined the extent of the price hikes in California. Chipotle is considering an increase in the "mid-to-high single-digit" percentage range but hasn't made a final decision, according to Chief Financial Officer Jack Hartung during a recent conference call with analysts.

Over the past two years, restaurants have been steadily raising menu prices to offset the rising costs of ingredients and labor. In September, food away from home had seen a 6% price increase compared to the previous year, as reported by the U.S. Bureau of Labor Statistics.

However, the cumulative effect of price increases has led some diners, particularly those with budgets under $45,000, to reduce their restaurant visits, leading to a decline in U.S. traffic for McDonald’s this quarter.

In September, the restaurant industry and labor groups reached a compromise regarding a bill that aimed to govern fast-food chains in California. Instead of the proposed 10-person council, a nine-person council was established with the authority to set the minimum wage floor for the state's fast-food industry through 2029. Chains with at least 60 nationwide locations will be required to pay their employees at least $20 an hour starting April 1. Between 2025 and 2029, the council can raise the hourly minimum wage annually based on the lower of either 3.5% or the annual change in the consumer price index.

For Chipotle, this means an increase in wages of approximately 18%, given that the current average wage in the state is $17 an hour. Consequently, customers will face higher prices for their orders. California is home to roughly 15% of Chipotle’s restaurants and the company's headquarters. The chain has already raised prices four times since June 2021, with the most recent increase of 3% in October.

McDonald's, on the other hand, will use various methods to offset the increased labor costs, with price hikes being just one of them. The company will also explore ways to improve productivity and reduce restaurant-level expenses, according to Kempczinski. While McDonald's provides guidance, most of its California locations are operated by franchisees, who have the discretion to set prices. California accounts for less than 10% of McDonald's U.S. restaurants.