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Rising Labor Costs Hurt Fast Food Operators

Flipping the Script Retaining workers has long been one of the biggest challenges for fast-food franchisees. Now, the landscape for fast-food wages is changing in a way that will pose new challenges for restaurant operators. Labor costs are continuing to rise. The minimum-wage increase which took effect April 1 for fast-food workers in California is […]

April 9, 2024
Rising Labor Costs Hurt Fast Food Operators

Flipping the Script

Retaining workers has long been one of the biggest challenges for fast-food franchisees. Now, the landscape for fast-food wages is changing in a way that will pose new challenges for restaurant operators.

Labor costs are continuing to rise. The minimum-wage increase which took effect April 1 for fast-food workers in California is no April Fools’ joke. Employees’ wages have risen by 25% to $20 an hour, based on an agreement reached by fast-food franchisors, the Service Employees International Union, and Gov. Gavin Newsom.

The California agreement covers quick-service restaurants with more than 60 locations nationwide, including McDonald’s, Chipotle Mexican Grill, Starbucks, Yum Brands’ Taco Bell, In-N-Out Burger, and other franchisors. These companies are expected to raise menu prices by about 5% or more as a result. Restaurant operators will be watching to see whether labor organizers’ campaigns to increase fast-food wages spread to other states.

Also, restaurant operators’ post-pandemic increases in menu prices are taking a toll. At first, customers ignored the increases, but a recent survey of 1,000 restaurant customers found nearly 60% thought prices had risen too much, according to the Restaurant Finance Monitor, an industry publication. As a result, most fast-food restaurants have been posting declines in year-over-year same-store traffic each month since early 2023. Low-income customers in particular are relying more on convenience stores and discounters such as the dollar stores for snacks. Among the hardest hit are the quick-service and pizza chains that compete for low-income customers.

Successful operators will focus this year on getting back to the basics of building customer counts. These include compelling marketing, appealing promotions, clean restaurants with open dining rooms, and well-trained, friendly employees. If fast-food operators succeed in these efforts, they should be able to attain about the same customer traffic levels as last year, according to the Restaurant Finance Monitor.

Restaurant operators also will have to find creative ways to broaden their demographic appeal, according to the National Restaurant Association. Co-branding, or adding a second restaurant brand to a single facility, is one way to offer diners a wider range of choices. Examples include two restaurants sharing a physical location, as Dunkin Donuts and Baskin Robbins do. Other companies will appeal to younger consumers by sponsoring a youth sports team or treating participants to an occasional free meal. These and other strategies can help keep a restaurant brand fresh in consumers’ minds and get them excited again about eating out!

West Coast Franchise Law

If you have any questions about franchising, please contact the experienced franchise and business law attorneys at West Coast Franchise Law today at (206) 903-0401 to discuss your situation. Nate Riordan is a 2023 Franchise and Bankruptcy Super Lawyer with over 20 years expertise helping clients achieve their business goals.