Feb 15, 2024
Dining out is becoming increasingly expensive in America, with the latest government data showing a 5.1% year-over-year increase in the price of eating food away from home as of January.
Andrew Wiederhorn, chairman and founder of restaurant operator FAT Brands, suggests that consumers should brace for higher costs while dining out when there are minimum wage increases.
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In an interview with Fox Business, Wiederhorn discussed the implications of the minimum wage increase to $20 an hour for fast food workers in California set to take effect in April. He said that the financial burden of this wage hike would ultimately fall on customers.
“Someone's got to pay for it and the restaurant operators don't have the margin for that,” he said. “So, prices are going to go up.”
Squeezing margins
Wiederhorn explained how minimum wage increases could affect a restaurant's finances.
“A restaurant operator makes anywhere from five to 15% in the bottom line at the end of the day,” he said. Estimating labor costs of 30%, Wiederhorn suggested a significant wage jump, such as the minimum for California’s fast-food workers going from $16 an hour to $20 an hour, puts pressure on restaurants to raise prices.
Wiederhorn also mentioned strategies restaurants could adopt to offer value, such as opting for an all-cheese pizza over variants like pepperoni or all-dressed, “controlling” portion sizes, or leveraging technology.
Despite these strategies, he emphasized the importance of prioritizing the guest experience in the hospitality industry, stating that delivering a quality experience to customers “just costs money.”
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Addressing affordability
Wiederhorn’s comments shed light on a critical challenge within the restaurant sector. Even McDonald’s, traditionally known for its affordability, is grappling with how to remain accessible to consumers.
During McDonald’s latest earnings conference call, CEO Chris Kempczinski said: “I think what you're going to see as you head into 2024 is probably more attention to what I would describe as affordability.”
The company’s CFO Ian Borden further stated that pricing decisions will be “consumer led,” adding that it’s the franchisees who set prices in their respective restaurants.
That said, McDonald’s reported growth in its business. In 2023, the company saw a 9% increase in global comparable sales, including an 8.7% rise in the U.S. Furthermore, adjusted earnings per share grew by 18% to $11.94, underscoring the company's resilience amid rising costs.
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Jing is an investment reporter for Moneywise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
