McDonald's Menu Prices Will Need to Keep Rising, CEO Says

The chief executive of McDonald's has said that the impact of a new law in California setting a mandatory minimum wage for fast-food workers would have to be mitigated with higher menu prices in the state, as the company's latest U.S. sales results improved due to "strategic menu price increases."

Asked about the law, signed by California Governor Gavin Newsom at the end of September, which will raise the minimum wage in the industry to $20 an hour—the highest in America—on an earnings call on Monday, Chris Kempczinski admitted "there is going to be a wage impact for our California franchisees" when it comes into effect.

"I don't think at this point we can say exactly how much of that is going to work its way in through pricing," he added, but said: "Certainly, there's going to be some element of that that does need to be worked through with higher pricing."

The new minimum wage will come into effect on April 1 next year. California's minimum wage across all sectors currently sits at $15.50 and is due to rise in January to $16.

The price of a Big Mac burger—which is used by economists as an informal benchmark to measure inflation—in California currently sits at $5.89, by McDonald's own figures, the 10th highest among U.S. states. Massachusetts has the dearest Big Mac, at $7.09.

Newsweek approached the California Department of Industrial Relations and McDonald's via email for comment on Wednesday.

Kempczinski told financial analysts that "there will certainly be a hit in the short-term to franchisee cash flow in California, [but it is] tough to know exactly what that hit will be because of some of the mitigation efforts. But there will be a hit." He said franchisees were looking at improving productivity, suggesting workers may be pushed harder for their higher wages.

The McDonald's CEO remained upbeat, though, adding that in the long term the company saw the law as an opportunity to gain a greater market share in California as it would also impact its competitors, while he believed the company was in a better position than them to adapt to it.

Last week, Jack Hartung, chief financial officer for Mexican fast food chain Chipotle, told its investors that the new minimum wage would likely have a knock-on effect on consumer prices by a "mid-to-high single-digit" percentage rise, according to Fox Business.

California is not the only place where McDonald's could raise prices to meet inflationary pressures, and statewide averages do not always give a full picture of what some customers are already paying.

In July, one branch in Darien, Connecticut was charging $18 for a Big Mac meal, with other meals costing more than that, the New York Post reported at the time. McDonald's states that the national average cost for a Big Mac meal is $8.64.

The latest quarterly results for McDonald's show sales increased 8.1 percent in the U.S., which the company attributed to localized price rises. The average price for a Big Mac in America currently sits at $5.17, whereas two years ago it was $4.82, according to data from The Economist.

During the earnings call, Kempczinski stressed a focus on value for customers, saying that it was "promising that our markets continue to grow share despite the cost of living pressures." U.S. consumers were being "more discriminating" due to higher inflation since the coronavirus pandemic, he added, but he hoped the industry "stays disciplined" on pricing.

The fast food chain chief did note the challenge inflation was having on growing the business, noting that franchisees were "having to absorb quite a bit of inflation—both on the food and paper side, as well as the labor side."