By Heather Haddon | Photography by Jane Hahn for WSJ

When Dave's Hot Chicken needed to figure out how to pay its workers an additional $2 an hour, the chain called in the dishwashers.

That is, dishwashing machines. Automating the chore with industrial-scale equipment is among the changes the company made to counter fast-rising labor costs.

Restaurant executives say their economic calculus is getting harder in California and 20 other states that recently raised minimum wages. The Golden State's minimum wage for fast-food workers increased last year to $20 an hour -- the highest in the U.S. for restaurant jobs -- and it could rise again this year.

Dave's and other restaurant companies, including Chipotle Mexican Grill, Shake Shack and McDonald's, have lifted menu prices to help cover rising payroll costs. Such price increases haven't always been enough, but executives know they risk scaring off diners if check sizes grow too fast.

Figuring it out has been especially pressing for Pasadena, Calif.-based Dave's, known for its Nashville-style hot chicken. The chain, founded by four friends as a pop-up concept in Los Angeles in 2017, generates $1 billion in annual sales. About one-fourth of its 270 restaurants are in California.

Emergency calls

Ahead of California's April 2024 minimum-wage increase, Dave's held emergency calls with franchisees to prepare. Executives said they examined every penny of their spending, from kitchens to menus, to figure out how to cut costs and boost sales.

During a franchisee conference last August, the company persuaded 80% of operators to agree to switch to automatic dishwashers rather than clean dishes by hand, which many still did.

The company also encouraged franchisees to contract out cleaning work. "It's like taking a power drill to all those jobs that essentially no one wants to do," said Jim Bitticks, Dave's chief operating officer.

Executives looked for ways to boost customers' spending, too. Dave's last year added self-ordering kiosks near counters in its California restaurants, which cost about $5,000 per location plus $150 a month in service fees.

Executives initially feared customers would find the machines impersonal. But diners ordered thousands of dollars in additional drinks when making purchases through the systems, which also freed workers to spend more time in the kitchen.

The company has looked for new ways to price and package existing products. For big groups, Dave's has encouraged franchisees to market "Hot Boxes" of food that sell for roughly $45 for 10 tenders, with a serving of pickles and sauce. For customers seeking cheaper eats, Dave's started selling bites of chicken starting around $6.99. Sides got a new look too, with a recent addition being fries topped with chicken and other items.

The chain examined its lineup of drinks, which tend to be more profitable than food. It added large drinks for $2.99, versus $2.29 for the standard size.

Last fall Dave's added frozen Slushers drinks for about $3.70, a profitable introduction because ingredients cost around 75 cents a pop. A cream topping for the drink costs an extra $2.

Instead of asking employees to cart 35-pound drums of frying oil through kitchens, Dave's installed a system that siphoned out old grease and drew in new batches through tanks. The switch saved about $15,000 per restaurant in labor and other costs, Dave's said.

The company is shifting prep steps of its chicken marination to outside producers rather than having workers do it by hand. It recently started serving its signature sauce in packets for to-go orders, rather than assigning workers to apportion it into plastic cups, and is testing a robotic fry cooker in a handful of California restaurants.

"There's a lot of little things," Chief Financial Officer James McGehee said.

Balancing wages

Executives said California's wage law sped up an operational overhaul at the chain. Hourly wages for California workers increased roughly $2 an hour on average, and franchisees also anticipated raising pay for more tenured workers.

With about 35 workers per restaurant, the pay increase translated to an estimated $8 million annual increase in labor expenses for the company.

After holding most prices steady since 2022, Dave's last year twice bumped up menu prices in California, totaling an 8% increase.

Dave's did lose some sales after increasing prices, but traffic continued to grow and made up for it, McGehee said. Average profit per restaurant increased $6,000 last year, he said.

Dave's estimated that its changes have shaved $100,000 from each restaurant's annual costs. Executives said they are now implementing what they learned in California across other locations.

In 2025, Dave's expects to raise prices again. Executives aim to keep that to a minimum by pushing more high-dollar catering orders, adding menu items and increasing late-night sales.

"We just have to get better," Bitticks said. "We can't just raise prices."

Write to Heather Haddon at heather.haddon@wsj.com

(END) Dow Jones Newswires

February 11, 2025 05:30 ET (10:30 GMT)

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