“Wait, that costs how much?!”
If you’ve been to a McDonald’s lately, there’s a decent chance that you left second-guessing if what you paid was actually the price of your food. It likely was the correct price, and your surprise about the cost of the meal probably wasn’t out of disbelief due to how affordable it was. No, it was likely the opposite.
Yes, these days, it’s no bargain to even eat fast food. Yes, there’s the value menu, which can be nice. But when you’re paying nearly $3 for even a Happy Meal, feeding a family of four with McDonald’s doesn’t cost a whole lot less than if you were to go to a quick-service or cheaper sit down restaurant.
The reason behind higher prices on McDonald’s food – not to mention many other chain restaurants – is simple: They’re paying their employees more in an effort to keep them happy and on board. As a result of doing so, many of these restaurants are either forced to raise menu prices or risk not hitting profit margin goals. But raising prices can certainly have its risks as well.
The Pay vs. Profit Conundrum
It’s estimated that labor costs account for up to 30 percent of a restaurant’s total sales, certainly making this a significant overhead expense. Complicating things is the fact that it’s far more expensive to hire and train new staff than it is to retain current workers, so there’s motivation for employers to keep their current employees happy. This is especially true in the restaurant business, where turnover already tends to be high. In addition to higher pay, many restaurants are also offering benefits to workers, which also factors into higher labor costs.
In order to more competitively pay their workers and deal with inflation, restaurant chains are raising their prices. McDonald’s is one of them. Shake Shack, Chipotle and Wendy’s are other examples. But the restaurants that raise their prices also have to risk consumers potentially choosing a different, more affordable dining option. Or they could simply not make as much profit, which no CEO wants to do.
The Domino Deal
There are restaurants that are raising menu prices to offset increasing labor costs, and then there are chains like Domino’s Pizza. The pizza chain is maintaining its affordable pricing – its two-medium pizzas with two toppings deal for $5.99 is going on nine years now – and not really sweating it. That’s largely because its stores are seeing a business uptick from people seeking a different option, considering that studies indicate independent pizza stores have raised prices by 7.5 percent over the past two years, price hikes that are unquestionably turning off previous customers.
The Dominos’ strategy is simple: Keep prices low and offset rising labor costs by selling more product. It’s a strategy that’s working. According to reports, sales grew on average by 7.7 percent in 2017. During the second quarter of 2018, sales were up 8.3 percent.
Other Strategies
There are various other means by which restaurants are attempting to save money on labor costs. Unfortunately, many of them involve not filling vacant positions or letting go employees when automation can do their task better and cheaper. For instance:
Self-ordering kiosks have begun popping up in Wendy’s restaurants and other stores. These eliminate the need for a multitude of counter workers during the busy periods.
Automated kitchens, including auto dishwashers, fryers and grillers, have been implemented in some situations to reduce the number of cook and kitchen staff needed.
The next time you eat at a chain restaurant, be sure you take note of what the bill is. And if you’re getting “sticker shock” when the total amount or check comes, it could be time to reassess where you take your business as a consumer. After all, that’s one of the factors that those restaurants that continue to raise their prices will have to contend with moving forward.
Regards,
Ethan Warrick
Editor
Wealth Authority
