McDonald’s Plan to Offset California Wage Hike? Bring Bagels Back

(Bloomberg) — California’s historic wage hike for fast-food workers drove McDonald’s Corp. to unusual lengths to help franchisees overcome rising costs.

Bagel sandwiches — a fan-favorite breakfast item — have been reintroduced at McDonald’s locations in California as part of a plan to boost store traffic. The burger chain is also spending $15 million on local advertising, even though it’s rare for the company to invest in promoting its products in a single state.

The moves reflect the urgency across the industry to cope with California’s mandatory 25% pay bump. One McDonald’s franchisee group has characterized the law as a “devastating financial blow,” estimating it would cost each location $250,000 without any mitigation strategies.

California required employers to start paying fast-food workers at least $20 an hour beginning April 1, only six months after the minimum-wage bill was signed into law.

California Minimum Wage Rises To $20 For Fast Food Workers

Franchisees, who own about 95% of McDonald’s US locations and set their own prices, were worried that simply charging more for menu items would scare off customers. Some franchisees felt they had been left out of negotiations with lawmakers, straining their relations with corporate headquarters.

McDonald’s assembled a task force of employees and restaurant owners to figure out a strategy for offsetting the expense, according to people familiar with the matter who weren’t authorized to speak publicly. The company called them the “Rise and Dominate” team.

“This team has gathered best practices from around the world where municipalities have managed wage increases and will pilot innovative short- and long-term solutions for California,” the company said in a statement.

Their suggestions included reintroducing bagels, which the company knew would attract diners. Ad money was also allocated to drive traffic, particularly to the more profitable digital channel.

Other initiatives were put in place to help lower costs and make workers more engaged. McDonald’s had been developing a new scheduling system for roughly four years and accelerated the rollout so it could be tested in California, according to a person familiar with the plans. The platform includes new communication tools, better traffic projections and data on which kinds of items customers typically order at different times of day.

Taken together, McDonald’s anticipates the moves might boost sales for California restaurants by 10% and raise their profit margins, getting them back to breakeven before the wage increase, according to two people familiar with the plans.

Franchisees have welcomed the company’s support, though they say it’s too soon to tell whether these initiatives will be enough.

Other California fast-food chains raised prices ahead of the pay bump. Burger King prices rose about 2% from February to early April, and Wendy’s prices were 8% higher, according to a sampling of 25 restaurants by Kalinowski Equity Research. By comparison, the cost of a Big Mac meal was little changed over that time at the restaurants surveyed. There are more than 1,000 McDonald’s across the state.

–With assistance from Eliyahu Kamisher.

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