Fast food franchise owners in California fear losing patrons to Chili's and Applebee's

• Fast food franchise owners in California fear diners will flock to Chili's and Applebee's to avoid higher prices.
• Limited-service restaurants are raising prices to offset the state's $20 wage for fast food workers.
• As a result, the price gap between fast food restaurants and casual dining restaurants could narrow.

Recently, the state of California raised the minimum wage for fast food workers to $20, and franchise owners have also raised prices to compensate for this fear, as they may send some diners into the arms of fast-food chains such as Chili's and Applebee's.

These chains are not subject to the new minimum wage and, therefore, are not expected to raise prices as much. This may reduce the price difference between fast food restaurants and casual dining restaurants.

The $20 wage applies to workers at limited-service restaurant chains — those where diners typically don't get table service and pay for their food before eating it — with at least 60 locations nationwide.

Fast food restaurants in California have raised prices to compensate for the wage, which is 25% higher than the state's overall minimum wage.

Although the legislation was issued on April 1, some restaurants gradually raised prices to avoid the shock of a significant increase in prices from one day to the next.

Shane Paul, who owns seven Jack in the Box restaurants in San Diego, told BI that he has raised prices at his restaurants by about 10% or 11% over the past six to 12 months in anticipation of wage increases. He added that in previous years, he generally raised prices by about 3.5% to 4%.

Transactions at his restaurants are “really trending downward,” he said.

Paul speculated that some diners might go to casual dining restaurants like Chili's or Applebee's instead, which he said have deals that mean diners can have a sit-down meal for “a dollar or two more than us.”

Harsh Ghai, who said he owns about 180 Burger King, Taco Bell and Popeyes restaurants in California, expressed similar concerns.

He told BI that his price increases have already impacted restaurant sales, and that he expects more diners will turn to grocery stores and Chili's and Applebee's restaurants instead.

“We're going to start competing with them,” Guy said of casual dining.

He added that in a normal year, Guy's restaurants raise their prices by 2% to 3%. But he said he had raised prices in the past 12 months by between 8% and 10%, largely reflecting food price inflation. He said he couldn't raise prices any further to accommodate the higher wages because customers wouldn't come back.

Scott Rodrik, who owns 18 McDonald's restaurants in Northern California, told BI he has “deep concern” that the new minimum wage “narrows the competitive gap” between different types of restaurants.

Roderick said he raised prices in his restaurants by between 5% and 7% in the three months of 2024.

Executives at Kura Sushi, a Japanese chain with about 60 locations in the United States, told analysts in early April that they believed a $20 wage would increase the value proposition at a time when other chains continue to raise prices.

CEO Hajime Ohba noted that Kura Sushi's prices are becoming “closer and closer and closer” to fast food prices.

Diners generally go to fast-food and casual dining restaurants for various occasions, Brian Vaccaro, a restaurant analyst at Raymond James, told BI.

Sit-down restaurants typically attract diners who want to “relax and rewind” with family and friends. In contrast, people generally go to limited-service restaurants for speed and convenience.

Wages could rise across the entire restaurant industry

Analysts say it's difficult to predict exactly how customer habits will change in response to price increases at fast food chains. People can buy more groceries, choose value fast food deals, or switch to different restaurants.

However, some analysts expect other employers in the state — such as full-service restaurants and retailers — to start paying workers more so they can stay competitive, which could eventually mean other restaurants increase their menu prices as well.

Sal Vitale, who owns The Garden Club, a restaurant in South San Francisco, told BI that he would “absolutely” have to raise his fare to compete with local fast food chains.

However, in some cases, Vaccaro noted that servers at mid-priced, full-service restaurant chains are likely already making $30 or more per hour, including tips, so higher prices may just be a way off.

“If casual dining can maintain prices and doesn't see upward labor pressures, it could see some benefits as the gap between casual dining and service prices narrows,” Sharon Zacvia, a restaurant analyst at William Blair, told BI via email. Ltd.

“But limited service will still be cheaper, and the basic principles of speed and convenience will remain a positive factor for demand for limited service for customers on the go,” she added.

Are you a fast food worker excited about the new minimum wage? Or a franchisee or restaurant manager concerned about how this will impact your business? Send this correspondent to [email protected].