Soon, consumers will need to pay higher prices as fast food companies in California are expected to raise prices to offset increasing labor costs. A new law in California forces companies like Chipotle Mexican Grill to increase the prices of fast food items to compensate for rising labor costs. It is prominently featured in BNN news today.
Minimum wages are set to rise
As per the newly enacted law in California, fast food workers will receive minimum hourly wages of $20 with effect from April 2024, an increase of $4.50 from the existing wages. Fast food chains with a presence in at least 60 locations across the nation will need to implement new wages. In January 2024, the minimum wage in the state will rise to $16 an hour. Jack Hartung, Chief Financial Officer of Chipotle Mexican, said the company is paying an hourly pay of $17 to $18 for workers in high teens.
The labor costs of Chipotle have been rising significantly in the past few years. For the quarter ending September 2023, the company paid $616.3 million to workers across the world. It is an increase of 10.5% YoY. Compared to 2020, the company has increased the wages of its workers by more than 50%. According to a statement from Hartung, the overall labor costs of Chipotle will increase by 2.5 to 3.0% in 2024. The company operates around 15% of the 3,300 restaurants in California.
Chipotle expects to increase menu prices in California to offset the increasing costs. However, it is still assessing the impact of the law enacted in California. According to Hartung, the menu prices in California are expected to rise by mid- to high single-digits. It would follow an increase of 3% in October.
No change in the opening of new restaurants
The company has not announced any plans to halt the planned inauguration of new restaurants in California. It may reconsider its decision if it receives a reaction from customers to an upward revision in prices. Commenting on the new law, Hartung said every restaurant operating in California needs an increase in wages. So, the company will maintain the value gap.
Analysts are keeping an eye on the spending of consumers amid the dwindling of pandemic-era savings, increasing interest rates, and surging inflation. The spending spree of Chipotle’s customers is still intact. The restaurant sales of Chipotle have surged by 5% for the quarter ending in September. However, it needs to be watched closely to see how the wage increase will affect the financials of other restaurant chains in California. According to BNN News, an hourly increase in wages to $20 may hit the hiring of workers.
According to David Palmer, an analyst for restaurants, the companies cannot lower the count of workers. So, the pay of workers has to go up. However, Chipotle has an advantage by maintaining its menu prices below those of its peers and can increase the prices to a level where it can offset the rising costs of labor. The students are resuming loan payments. So, their wallets are under pressure. So, the company should be sensitive to these facts. However, it said the consumers have so far accepted the price increases.