- Some diners could be put off eating out when fast-food prices in California go up in the spring.
- The state is raising the minimum wage for fast-food workers to $20 an hour, prompting restaurants to hike menu prices.
California is putting up the minimum wage for fast-food workers to $20 an hour on April 1 — and it could make restaurant prices so unpalatable that people buy more groceries to cook at home instead.
Fast-food workers in the Golden State won't just get a one-off raise – the new legislation includes setting up a fast-food council that will be able to increase the minimum wage by up to 3.5% a year, depending on inflation.
The state's current general minimum wage is $16 an hour, compared to the federal minimum wage of $7.25.
Fast-food joints are planning to hike menu prices to offset this.
Jon Tower, an analyst at Citi covering restaurants, told Business Insider on Thursday that the higher prices could be hard for some diners to stomach. Restaurant prices could go up by anywhere between 5% and the low-double-digits, he said.
"That's tough to absorb for the consumer and there's a very good chance that this just translates into weaker footfall," Tower said.
Jack in the Box CEO Darin Harris said Wednesday that it was "really hard to predict what really will happen with sales" after wages go up.
The new prices at Californian fast-food restaurants could make cooking at home more attractive. Tower said that groceries will become even better value compared to fast-food joints.
"If consumers continue to have to rationalize their budgets, there's going to be a traffic slippage in that market for the restaurant industry toward the grocery channel," he said.
The average price in US cities for food "at home" – bought from grocery stores and other retailers – rose just 1.2% from January 2023 to January 2024, according to the Bureau of Labor Statistics' consumer price index. During the same time period, the cost of meals at limited-service restaurants, which includes fast-food chains, rose 5.8%.
Restaurants hiked prices dramatically during the pandemic amid soaring wage inflation and supply-chain chaos. Some diners say that fast food no longer represents good value.
Tower said that he expected fast-food chains to focus on their value deals in California after the wage legislation kicks in to keep customers coming back.
Other industries could put wages up, too
California's minimum wage went up to $16 an hour in January, and some individual cities and counties have set it even higher. But the new statewide legislation, AB 1228, will only create a $20 minimum wage for fast-food workers.
However, the new wage will make the fast-food industry more attractive – and is likely to prompt other employers to push wages up so they can compete for labor.
Harris, the Jack in the Box CEO, said Wednesday that the legislation "will certainly affect labor competition within the entire restaurant and retail industry in California."
The Cheesecake Factory, as a full-service restaurant, won't be affected by the legislation. But CFO Matt Clark told investors in November that there could be a "ripple effect."
"If we have to address that as part of our overall inflation basket, we will certainly have to consider that with respect to pricing decisions," he said.
Clark noted that "many" urban quick-service restaurants in California already pay workers around $20 an hour. The legislation will mainly affect wages at restaurants in the suburbs, but the Cheesecake Factory has fewer locations there, he said.
Tower noted that the new minimum wage will put more money into workers' pockets – which could, in turn, be spent on fast food.
"Given how large the industry is with respect to employment in California, a good chunk of the consumer base is actually going to be getting a raise because of this when you think about hourly," Tower said. Fast-food restaurants "might end up seeing slightly higher demand," he said.