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This Is What Would Happen If Fast-Food Workers Got Raises

06 Aug
An employee delivers food at a Sonic Corp. drive-in restaurant in Normal, IllinoisPhotograph by Daniel Acker/Bloomberg

An employee delivers food at a Sonic Corp. drive-in restaurant in Normal, Illinois

Workplace

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Even McDonald’s (MCD) own hypothetical household budget (pdf) for its restaurant employees seems to suggest it’s difficult, at best, for many in its low-wage workforce to make ends meet. And all this week thousands of fast-food workers at many of the biggest U.S. restaurant chains have staged short-term walkouts in seven cities: New York, Chicago, St. Louis, Detroit, Milwaukee, Kansas City, Mo., and Flint, Mich. The workers are demanding a pay raise to $15 an hour, compared with current average wages across the industry that are closer to the federal minimum wage of $7.25. President Obama has proposed raising the lowest wages to $9 an hour, which would be a 24 percent jump over the minimum wage.

Food-service workers are among the lowest paid in the country. Here’s whatPayscale.com data, based on about 3,000 employee surveys, show about how much workers are making at the country’s 10 biggest fast-food chains compared with workers in other fields. Not all the chains listed here are facing protests this week—they are instead being highlighted for the size of their workforces:

So how much could restaurant chains stand to increase their wages before profits evaporate? It’s a complicated question. Based on years of research, some economists are now advocating a minimum wage of $10.50 (PDF), which they claim would increase a chain’s costs by only 2.7 percent. Roughly half of food-service workers currently make less than that proposed $10.50 rate, so not everyone would be affected. The companies could make up the difference through a combination of price increases—say, a nickel more for a burger—reduced turnover, productivity gains, and “a slightly more equal distribution of companies’ total revenues,” which is a nice way of saying the highest-paid employees would see their incomes increase more slowly, explains Jeannette Wicks-Lim, an economist at the University of Massachusetts Amherst and one of the signees of the petition.

Here’s a rough look at how fast-food financials break down. There are two kinds of restaurants: those run by the company, and those run by independent franchisees who set their own wages and pay royalties to the company (at many chains, most locations are franchised). Together, company-owned and franchise McDonald’s locations last year contributed $3.9 billion in economic value added, a measure of profit that subtracts for taxes and the cost of capital, according to Craig Sterling, managing director and global head of equity research at evaDimensions. Burger King’s (BKW)economic profit was $61 million by this EVA metric.

As companies report financials only for company-owned locations, here’s what payroll expenses and margins look like at company-owned stores at two chains, based on their annual filings.

Based on these numbers, raising the hourly wage to $15—about two-thirds more than what the average employee earns now—would likely wipe out profits at these company-owned stores. “If wages are the majority of labor [costs], and it doubled to more than 50 percent of revenue, restaurant operating income would clearly be a loss, assuming static menu prices,” explains Sharon Zackfia, an analyst at William Blair & Co. Assuming all wages double and other expenses don’t decrease, menu prices at McDonald’s would have to go up about 25 percent, which means an extra $1 for a Big Mac and a “Dollar Twenty-Five Menu” in place of the Dollar Menu, estimates theColumbia Journalism Review, which would be a big deal to consumers. A smaller price hike is perhaps more feasible.

Wages at franchised locations are a separate issue all together. Margins at these stores are likely lower than the figures above because of expenses and royalties that company-owned stores don’t have to pay. So before they could increase wages, franchisees would likely have to work out a better deal with the company.

Franchisees currently contribute about one-third of McDonald’s revenue and 40 percent at Burger King, so lower fees would certainly hit their bottom lines, as it would with any chain using that model. But, as Sterling noted in an e-mail, “the bottom line is that these firms have plenty of profits to go through before they go out of business.” Still, any move that would affect profits would provoke an almost certain Wall Street response: “Don’t think investors won’t care or react,” he said.

Of course, these are all hypothetical changes, and there’s no reason to think that the fast-food industry will suddenly stop protecting its profits in the face of these protests. If higher wages do come, raising prices is the preferred way to get there. “Inevitably, we anticipate most restaurants will pass on the wage increase to customers via price increases,” William Blair & Co. states in a report. So if workers succeed in their push for bigger paychecks, get ready for pricier Big Macs.

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