How to Navigate Minimum Wage Increases: A Guide For Restaurants

Come Jan. 1, 2024, no fewer than 22 states will raise their minimum wage. Among them, California is notable for a couple of reasons:

  • As of Jan. 1, 2024, the state’s minimum wage for all employers will be $16.
  • Then, in April, the minimum wage for fast-food employees in California will climb again to $20.

After three years of industry-wide price increases (up 40% since 2019, according to RMS research) and flatlining net sales for quick service restaurants (QSRs), California offers valuable lessons for any brand facing wage increases.

RMS QSR Price Index Observations for California vs. US

In the beginning of 2023, California restaurants took fewer price increases than average US restaurants, primarily due to significant increases in 2021 and 2022. This sets the stage for what RMS analysts found after pulling data from the RMS Competitor Intelligence Solution.

When comparing QSR data for the US versus California, RMS found that since May 2023:

  • Sales in California grew less than sales across the US overall.
  • Average check growth and basket size were comparable, indicating that diners in California manage their check by buying more value items.
  • California price increases surpassed the US average — and they continue to accelerate.

Most brands took some price around Thanksgiving. RMS expects this trend to continue, given the minimum wage increases in the state in January and April 2024.

Three-Step Strategy for Offsetting Wage Pressures

RMS has successfully navigated numerous brands through minimum wage challenges by providing tailored strategies for sustained profitability. With California being one of the leading states experiencing significant jumps in minimum wage, RMS outlines the steps restaurants across the nation can take to proactively address wage pressures:

Step 1: Adjust Your Pricing Strategy

Across-the-board price increases can prove detrimental. Strategic pricing offers options for addressing rising labor-cost pressures. A solid pricing strategy should reflect perceived and analyzed pricing opportunities as much as possible.

Actions: It’s important to minimize multiple price changes on the same products. Instead, opt for targeted category and item-level adjustments. Monitor customer behavior following price and menu changes, noting any shifts in behavior. Additionally, explore non-pricing options such as menu engineering, operational adjustments and promotional strategies.

Make your best effort to absorb some of the impact from the increase over several pricing rounds ahead of the increase date. By doing so, when the time comes for competitors to absorb the impact and raise their prices, you will be in a position to take a bit less.

Step 2: Determine How Much Price to Take to Offset Costs

When it comes to managing price relative to wage increases, RMS recommends leveraging POS data to identify pricing opportunities and understand the impact of labor costs on your overall bottom line.

Actions: To arrive at the pricing percentage needed to offset costs, take a two-step approach:

  1. First, calculate the carryover pricing benefit for 2024 sales by factoring in the impact of pricing implemented in 2023. 
  2. Next, estimate a dollar impact (rather than a percentage) from increased labor costs to arrive at the amount needed to offset remaining costs.

Step 3: Plan When to Strategically Make Price Adjustments

Customers tend to be more sympathetic to price increases that coincide with a publicized minimum wage change. More frequent rounds provide the ability to learn from past price increases and adjust the timing, magnitude and approach of future rounds accordingly.

Actions: Implement above-average pricing magnitude on the day or week of the effective wage change.

For brands in high-wage markets considering changing price on value offers as part of a broader strategy (not your only strategy), it makes sense to increase the price on these items during publicized wage changes.

Use Price to Your Advantage. RMS Can Help.

Pricing is one of the levers available to help partially offset wage headwinds.

The first place to start? With planning and analysis. When you understand the true implications of labor increases in dollars on your bottom line, you can proceed accordingly—informed and armed with data that provides the best and most profitable path forward.

RMS has multiple tools and approaches to help your QSR brand do just that—thriving in the face of adversity. Here are a few actions we can help you with:

  • Monitor your competitors’ pricing activity to better understand evolving market dynamics and relative value propositions.
  • Consider and activate all available non-pricing options to drive the desired outcome. These can include:
    • Menu engineering to optimize menu profitability and upselling opportunities — for example, analyzing and adjusting which items are displayed and how best to avoid blind spots on digital menus.
    • Operational adjustments in terms of opening hours and exploring more profitable and less labor-intensive options, such as drive-thru operations.
    • Promotional strategies that leverage loyalty programs and an increased usage of restaurant apps.
    • Benchmarking unit-level economics between locations to leverage average annual cost-saving opportunities — RMS’ Financial Insights Solution, metiRi, can help operators find up to a 4% profit margin per location.

If your brand is interested in competitive, data-driven pricing strategies that can serve profits in the face of rising wages and ongoing inflation, RMS can help. Contact our team today to get started.

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