Pricing strategy counteracts minimum wage increases

Our Client’s Challenge

One of the country’s largest quick-service restaurant (QSR) chains, with more than 3,300 company-owned and franchise locations, faced a challenging 10% increase in labor costs due to the rising minimum wage, putting great pressure on already tight margins.

Working with the chain’s managers, RMS explored pricing strategies to maintain profitability, store traffic and customer check size.

The Solution

RMS analyzed the chain’s transactional data for all locations, considering such factors as competition, weather, holidays, and nearby roadwork, to understand each area’s demand drivers.

To assess each location’s price sensitivity, we reviewed menu categories and the price elasticity for each menu item. This allowed us to design restaurant-specific menu pricing recommendations to help the brand maintain customer transactions and avoid down trades.

We recommended pricing adjustments on the client’s value menu that were implemented at the same time as the minimum wage increase. We also recommended additional price adjustments to the rest of the food menu. Changes on the value menu are typically very sensitive and more visible to customers, but given the economic context of the minimum wage increase, it was the right time to make the changes.

The Result

Restaurants that implemented our recommendations maintained similar levels of profitability despite the significant labor cost increases. Transaction levels remained consistent at each location.

Restaurants that didn’t participate raised prices more and on a broader basis. This resulted in a reduction in customer traffic of approximately 2% and a loss in profitability of 2.8 percentage points (ppt).

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