California fast food restaurants are charging higher prices and attracting fewer customers
Chains like McDonald’s are losing customers in California. | Photo courtesy of McDonald’s.
Apparently, when a number of restaurants are forced to raise wages by 25% overnight, they charge higher prices. And customers come less often.
This is becoming increasingly evident in California, where the state began requiring fast-food chains to pay their workers at least $20 an hour starting April 1. The result has been higher prices at those restaurants and a corresponding drop in patronage.
The latest evidence comes from Revenue Management Solutions (RMS), which has released new data tracking prices and traffic at fast food restaurants in the United States and California.
Their data shows that restaurants that charge higher-than-average prices attract fewer customers than average. But the numbers also show that life isn’t exactly exciting traffic-wise elsewhere in the United States.
Prices at quick-service restaurants rose 7.5% year over year in June in California, compared with 3.1% nationally, according to RMS.
Prices in California have largely tracked the national average since 2022, according to RMS, but began to diverge earlier this year as restaurants across the state prepared to adjust to higher wage rates.
Meanwhile, California customers are ordering fewer items. The quantity per transaction decreased 0.6% in the state in June. By comparison, the quantity per transaction increased 1.3% nationally. This shows that California customers are managing their spending by ordering fewer items.
They also manage their expenses by visiting places less often, although this is where the national figures are not very good either.
Traffic at quick-service restaurants fell 5.9% in California in June, the lowest rate since the pandemic.
The numbers aren’t exactly reassuring in the rest of the United States, where fast-food restaurant traffic fell 3.6% in June.
The footfall figures show the difficulties faced by chains such as McDonald’s, which has just announced a 0.7% drop in domestic sales, entirely due to weak footfall. The figures explain why fast food chains have embarked on a price war that is expected to last for months.
California, however, presents unique challenges. Higher wages reduce profitability, making it harder to offer the kind of value available elsewhere in the country, making restaurants in the region less able to solve their traffic problems. As it stands, some chains have value-packed exceptions for their California restaurants.
“We’re experiencing wage pressures, particularly in California,” McDonald’s Chief Financial Officer Ian Borden said Monday. “That’s a hurdle we have to overcome.”
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Jonathan Maze, Restaurant Editor, is a longtime industry journalist who writes about restaurant finance, mergers and acquisitions and the economy, with a focus on quick-service restaurants.
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