Mapping Minimum Wage and Chain Menu Pricing Strategy

condetti_restaurant_menu_by_robnader

This week, we’re serving up some additional insights about the relationship between minimum wage and core menu item pricing. We we’re curious to see if prices set by major chain restaurant operators reflect, in some way, the varying economic conditions across states.

To that end, we looked at a sample of chains data that have near nationwide coverage to assess if there were relationships between popular menu item prices and the minimum wage set in a given state. In order to make our assessment, we averaged menu item prices by state and adjusted these values to a comparable scale against minimum wage.

While minimum wage varies significantly across states, there is less variation for certain chains. For example, Five Guy’s average prices for most of their core items vary by state, but inconsistent with the pattern that minimum wages suggest.

On the other hand, Olive Garden’s average prices vary in step with the minimum wage set by the state in a noticeably consistent pattern.

Is there a way to quantify the perceived relationship between minimum wage and these prices? To determine if there is evidence that a predictive relationship exists, we also tested how the item price changes when minimum wage varies by state.

A simple metric that accomplishes this is correlation, which measures the relational pattern of two different variables, if any. Correlation, or r, is measured on a scale between -1 and 1. When r=-1 or r=1, it means that changes in the value of one variable correspond to a consistent and similar (or opposite) change – in degree or in increment – the value of the other variable. When r=0, the relationship between two variables appears to be random and with no discernible pattern.

We found the highest correlation value with Olive Garden’s Fettuccine Alfredo against minimum wage (r=0.68). Alternatively, the average prices for Five Guy’s BLT across states, compared to respective wages, showed no significant relationship (r=-0.03) and was relatively flat. Said simply, minimum wage could explain 68% of the variance in the price of Olive Garden’s Fettuccine Alfredo across states, but only 3% of the variance in Five Guy’s BLT prices. By no means does this suggest that Olive Garden’s pricing scheme for their menu items is heavily dependent or influenced by a state’s minimum wage. Rather, it would be more rational to suggest that economic factors, such as labor costs, weigh more heavily on this chain menu prices.

An easier way to visually appraise the patterns of these items, compared to minimum wage, is to use normalized values, which ascribes an adjusted value for each price relative to its respective average (in this case, 1 is average; a value less than or greater than 1 means below/above average). From this, we can see examples where Fettuccine Alfredo pricing is remarkably consistent with minimum wage, and where BLT pricing seems to vary independent of minimum wage.

As wage standards continue to progress upwards in the United States, restaurants will face the challenge of accounting for increases in operating cost. Restaurant operators must be prepared for these upcoming changes, not only to keep up with changing prices, but also to remain competitive in the industry.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s