Research From Consumer Retail Team

Store managers in California representing YUM! Brands Inc.’s Taco Bell, Pizza Hut and KFC banners foresee steep menu price hikes early next year as a result of the state’s new mandatory fast-food minimum wage, which is set to increase to $20 per hour in April. Managers expect customer reaction to higher pricing will likely pressure sales growth for all three brands within the state. “We’re definitely going to raise our prices [to offset the wage hike], by as much as 10%,” a Pizza Hut manager said. “All of our past price increases have negatively affected transaction volume and mix, so I think it’s pretty obvious that we can expect more of the same.”

Menu Price Hikes: All 15 managers said they will raise pricing in 2024 because of the increase in wages. “We will absolutely raise prices because of the wage increase,” a Taco Bell manager said. “The last time the state minimum wage went up — to $16.90 per hour — our menu prices were adjusted up by 5%–10%. I would expect at least that much in this case. Most fast-food companies in this state, and many consumers, are well aware of this and prepared for the changes in 2024.” Fourteen of 15 managers expect the menu price hikes to cause customer pushback (including five who forecast “significant” pushback). “We’ve already seen customers pushing back on our current prices by trading down,” a KFC manager said. “We are expecting that some customers will not return after we take the additional pricing [in April].” However, some managers said the backlash could be temporary. “Yes, we will see a dip in traffic and ticket averages at first, as we always do when menu pricing goes up,” a Taco Bell manager said. “People will trade down or stay at home for a while. It will take a few months maximum for us to bounce back, but we will.”

Impact on Staffing: Ten of 14 managers said the wage hike will also result in a reduction in staffing during 2024. “We have not received any official notice of layoffs yet, but we’ve heard rumors that part of the [mitigation] strategy will be downsizing staff,” another Taco Bell manager said. Two managers said they will cut work hours from existing employees. “We are presuming that our transaction volumes will suffer after we raise prices, so we will have to at least cut back on hours, if not total staffing,” a Pizza Hut manager said. While several managers expressed concern over customer service levels if and when staffing is reduced, two said staffing quality may improve following the wage hike. “We are still in the process of working on staffing budgets right now,” a KFC manager said. “We don’t intend to change staffing levels. However, the difference will be that we will be looking for a higher caliber of applicant when we hire. We’ve already begun to evaluate current employees to make sure they are worth the increased wage.”

More Automation: Eight of 11 managers said the wage increase will result in more in-store automation during 2024, including expanded deployment of ordering kiosks and the use of artificial intelligence. “We have very little automated features at this point in our store, but we are fully expecting ownership to move in that direction in reaction to the wage increase,” a KFC manager said. Three managers said they are plan to implement more in-store order kiosks in 2024. “We have one kiosk in store and are going to get at least a couple more,” another KFC manager said. Four managers said technology innovations intended to minimize labor are highly likely in 2024 and beyond. “There is no reason why more automation and technology won’t be at least talked about, if not immediately implemented,” another KFC manager said. “It just makes good fiscal sense to stop hiring actual humans who will get that $20 per hour wage, especially if that wage hurts profit margins.”

Labor Budgets: All 13 managers said their labor budgets will need to increase in 2024 as a result of the wage hike, including seven who estimated labor budgets would range from 11%–15% (three managers), 6%–10% (three) and 1%–5% (one). “Our labor budget is in the high 30s [as a percentage of sales], so it’s a very significant expense already,” a Pizza Hut manager said. “We will have to be very proactive to keep it from going up more than 10%.” A Taco Bell manager said the wage increase would lift labor costs throughout their organization. “We have not set up specific budgets yet, but with the minimum going up to $20 per hour that means that supervisor and manager rates will have to go even higher as well,” the manager said.

Quick Service Industry Effects: Two restaurant trade-group executives said similar wage hike legislation has been discussed within other state legislatures. “I know there has been some discussion about this in other states, like New York,” one said. The source said much of the push on higher wages in fast food and the establishment of Fast-Food Councils has been initiated by organized labor. “It’s a strategy by organizations like the Service Employees International Union [SEIU],” the source said. “AB 1228 includes a [nine-member] Fast-Food Council that can recommend workplace standards related to things like pay rates, working conditions, safety and training — so it’s a way to gain a foothold in the quick service industry, with the ultimate goal of unionizing labor and adding more workers to their memberships.”

An executive also characterized the scope of AB 1228, which applies to chains with more than 60 locations nationwide, as “arbitrary” and said the law will create undue hardship on some quick service chains. “The chains I think will be hurt most are the ones that will have some 60–100 locations,” the source said. “Look at Roberto’s Taco Shop versus Alberto’s Taco Shops in Southern California. Both chains have essentially identical menus and identical price points. Roberto’s has over 60 locations. Alberto’s has about 48. Roberto’s will have to meet the new wage requirement, Alberto’s will not. Now, all of the sudden, Roberto’s menu pricing is going to have to go up, whereas Alberto’s has more flexibility to keep prices stable if they want.”

ADDITIONAL QUOTES
“The $20 per hour rate is currently higher that what we currently pay most of our employees at this location, which is around $17–$18 per hour.” Taco Bell store manager 

“Most of our employees are currently making $16.90–$19 per hour. I myself make close to $20 per hour, which is on the high end of current wages, and even I am going to get a raise [in April].” Pizza Hut store manager

“The $20 per hour rate is probably three to four dollars above the current pay for 90% of our employees.” Taco Bell store manager

“This [wage increase] is going to hit us hard at this location. We’re already short on staff as it is, and this won’t make things any easier. We will have to [operate with] even fewer staff on hand.” Pizza Hut store manager 

“It’s nearly impossible for anyone to claim that the [wage increase] is not going to put stress on our margins and cause some sort of price increase, [and price increases are] generally not well received by our customer base.” Taco Bell store manager

“Sales will dip as they always do when menu price increases first hit our stores, but we usually bounce back. There is never not a market for good fast food in our area.” Taco Bell store manager

“Yes, we do expect some customer pushback [when we increase menu pricing to offset the April wage hike]. Even with current prices, we have seen more customers [yy] trade down because getting a combo can be expensive.” KFC store manager

“We are going to have to downsize our staff and reprioritize scheduling [due to the wage hike].” KFC store manager

“My team will be very happy with their wage increase, but we will have to show our customers that we deserve and are willing to work for the higher wage.” Taco Bell store manager