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Analyst: McDonald's may have to raise prices—and here's why

The trend of cities and states increasing minimum wage requirements could lead to higher menu prices at McDonald's as franchisees push back against corporate for help shouldering the labor squeeze, Morningstar consumer analyst R.J. Hottovy told CNBC Wednesday.

Another way McDonald's may find itself on the hook for soaring labor costs, according to Hottovy, could come in the form of incentives to its franchises, which make up about 90 percent of its U.S. restaurants.

"McDonald's has historically been a great co-investment partner," he said on "Squawk Box," a day before the fast-food giant's shareholders meeting. "If we do see wage pressure hit the franchisees, I suspect that we'll see the company becoming a greater co-investment partner to kind of offset some of the cost pressures on the labor side."

A protester walks among tents set up outside the McDonald's headquarters during a demonstration calling for higher wages and improved working conditions in the Chicago suburb of Oak Brook, Illinois, U.S., May 25, 2016.
Jim Young | Reuters
A protester walks among tents set up outside the McDonald's headquarters during a demonstration calling for higher wages and improved working conditions in the Chicago suburb of Oak Brook, Illinois, U.S., May 25, 2016.

Fast-food workers demanding $15 per hour began protesting McDonald's Wednesday, and plan to continue Thursday during the annual meeting.

For its part, McDonald's last year increased wages at company-owned restaurants, and projected employees at those locations would earn on average more than $10 per hour by the end of 2016.

Other companies, such as Wal-Mart, have also increased worker pay. The retailer in February implemented the second phase of an hourly wage increase for its employees to at least $10 per hour.

Meanwhile, New York City plans to move to a $15 per hour minimum wage by the end of 2018, with the rest of the state to follow three years later.

California goes to a $15 per hour wage floor by 2022, while Los Angeles and San Francisco passed their own measures to hit $15 per hour by 2020 and 2018, respectively.

The federal minimum wage has stayed at $7.25 per hour since 2009.

Earlier this month, Andrew Puzder, chief executive of CKE Restaurants, told "Squawk Box" that rising labor costs "make automation a more viable alternative." CKE is the company behind the Carl's Jr. and Hardee's fast-food brands.

Hottovy said on Wednesday concerns about massive job losses from robotics and technology are overblown.

"There's certainly room for robotics that improve the operations behind the scenes," he said. "I don't think they're ever going to replace workers. There's always going to be a need for that."

Against the wage debate backdrop and the lack of any new sales drivers in the pipeline, Hottovy expects the recent run in McDonald's to cool off a bit. After years of stagnation, the stock has surged about 25 percent since Steve Easterbrook took over as McDonald's CEO.

Easterbrook is in the midst of executing a turnaround plan, which included the highly successful launch of all-day breakfast at U.S. locations.

"Easterbrook gets a lot of credit for making this a much more nimble organization right now," said Hottovy, pointing to the all-day breakfast initiative going from the test phase to a national rollout in a little more than six months.

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