Fast food companies aren't laughing about April 1st this year.
In California, this day marks the beginning of a new obstacle. Fast food chains with at least 60 locations nationwide will be required to raise the minimum wage for restaurant workers from $16 an hour to $20 an hour when the FAST Act goes into effect.
The industry will have to fight to maintain profitability as persistent food inflation, value-conscious consumers and slowing growth trends leave few options.
“Cost-wise, that means restaurants will either have to absorb the wage increases or pass them on to consumers in the form of higher prices,” Citi analyst John Tower said on the call. Ta. .
Companies with strong brands, value propositions, or diverse geographic locations are likely to weather this storm better. Rising labor costs — 22 states will raise their minimum wages on January 1, while Oregon, Nevada and Florida also plan to increase their minimum wages later this year — are driving up the price of restaurant meals. This is a contributing factor.
According to the latest CPI data, the cost of groceries rose 1% in February compared to the same month last year, while the cost of eating out rose 4.5%.
The widening gap between eating out and eating in, coupled with the number of price increases companies have already implemented since the pandemic, limits how much menu prices can increase before stimulating demand.
Chains with loyal fans have an easier time convincing customers to pay extra. Chipotle (CMG) Chief Financial Officer Jack Hartung told Yahoo Finance that the company plans to raise prices in California to mid-to-high single digits, but has the authority to adjust the menu. multiple analysts have pointed out.
BTIG's Peter Saleh said, “I think the brands that offer a lot of value and have a lot of traffic are in the best position,” while many burger menus cost between $12 and $13. He noted that a Chipotle chicken bowl costs an average of $9 nationwide.
“They've built quite a bit of momentum in the business in terms of traffic,” Tower said. One of the reasons consumers are going to Chipotle's more often is because of the “rich value offered on each entrée compared to what's available at other stores.”
Wingstop (WING) CEO Michael Skipworth told Yahoo Finance Live that California franchisees will likely see price increases in the mid-single digits; It's also advantageous. Tower said the chicken wing chain is increasing brand awareness while keeping menu growth lower than its competitors.
And chicken is cheaper than beef and has less inflation. Ground beef prices have increased 33% since 2020 and 7% over the past year.
McDonald's (MCD), Wendy's (Wen), or Burger King (QSR), its large scale is a plus, as it can cover hits from California with the rest of its domestic and international business. However, as prices rise, companies may have to compete more aggressively with discounts and promotions.
Wedbush analyst Nick Setian said Domino's Pizza (DPZ) could be a winner with unbeatable low price pizza deals. The company's stock price has increased more than 50% in the past 12 months.
One company that could struggle is Jack In the Box (JACK). Approximately 43% of Del Taco restaurants and 60% of subsidiary Del Taco locations are located in California. Tower said the company's diners are local brands that skew revenue and compete with multinational burger chains with more resources.
Mr Setian said “there will be a huge hit to margins” for the business. The company's stock price fell 18% in 2024.
An uncertain future for the industry
“I think people underestimate how difficult a situation restaurants are in, and have been for years. So restaurants are actually a very troubled industry, and more and more… It’s just hanging the anchor,” Setian said.
Saleh said profit margins are down “about 100 basis points across the industry” compared to before the pandemic. Even though foot traffic has increased above 2019 levels, the price hikes haven't fully covered the restaurants' soaring costs.
Prices at quick-service burger chains have already increased by 30% since 2019, and there are now caps on how much companies can charge, especially at chains that serve low-income customers.
“No one will be able to take on all the pricing to offset California's impact,” Setian said, predicting that food companies will see revenue and profit pressure as a result.
But Michael Reich, a professor at the University of California, Berkeley, said restaurants would only have to pay an extra $0.08 for a $5 Big Mac to pay for the wage increase.
“I don't think that will deter most consumers,” he told Yahoo Finance Live. “I think restaurants will be able to navigate this situation better, given these real facts rather than fear.” .
Companies with franchise models may benefit if stores can raise prices without affecting demand. Companies like McDonald's take a cut of franchisees' profits, and higher menu prices generally result in higher overall profits.
Are layoffs looming? It doesn't apply to everyone.
Alex Johnson, a second-generation franchisee who owns Auntie Anne's and Cinnabon franchises in California, has decided to lay off some of his employees, arguing that the wage increase will cost him an additional $470,000 a year. Selected.
He told Yahoo Finance that his stores have seen “down sales and foot traffic” so far this year, adding that “this is the worst time to raise prices.” He is also considering selling his stores in the state.
Some believe the job losses won't be widespread, as restaurants are returning to pre-pandemic staffing levels.
“We don't know exactly how they're reducing their workforce unless they're implementing some kind of technology somewhere else that can reduce hours,” Saleh said.
The law could also bring a new wave of raises to other industries as companies compete with fast-food chains for talent.
Joseph Bryant, a member of the California Fast Food Council, argued that higher wages could lead to more jobs and higher profits.
“Threats of price increases and layoffs are the same scare tactics we heard when wages were scheduled to rise to $15 an hour. These warnings have little basis in fact. , the fast food industry continues to thrive and be profitable. The top nine publicly traded fast food companies alone will generate nearly $25 billion in profits in 2023.”
While wages have increased in the state since 2015, Bryant said, “California's fast food restaurants added 142,000 jobs” during the same period.
Further automation is also likely as rising labor costs justify investments in technology and robotics.
Alternatively, individual operators may decide to fold. “I don't think anyone is going to go bankrupt tomorrow, but a lot of stores are going to close,” Setian said.
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Brooke DiPalma is a senior reporter at Yahoo Finance. Follow her on Twitter @brooke di palma Or email bdipalma@yahoofinance.com.
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