The effect of raising minimum wage to $15/hr on fast food industry

[GK4Herd]

i stole this from a reply on Reddit talking about the subject. I thought some actual numbers would be interesting when evolving your opinion on a minimum wage hike. (Assuming you're interested in actual facts and not guided by whatever side your held ideology lands you on.)

From Reddit...


Mortimer452 922 points 9 hours ago

I don'd deal with McDonald's specifically. I have, however, spent a large portion of my professional career designing sales, statistical and financial reporting solutions for pretty much every other QSR chain out there.

At my fingertips, I have access to daily sales, labor costs and every other dollar figure that exists for well over 10,000 restaurants across varying brands. Right now, I am looking at an actual weekly sales and labor report for a popular quick-service restaurant chain, for week ending of 11/24/2015.

Cost of Labor (COL) is a figure usually represented as a percentage of net sales in operational reporting. For this particular restaurant chain, their COL is typically around 28% of net sales. This means, for every dollar of food they sell, it costs about 28 cents in labor. When you buy a $15 meal, it costs them $4.20 in hourly wages to produce it.

Cost of Sales (COS) is another figure represented as a percentage of net sales - this is basically the cost of ingredients. For this chain, it also averages about 28%. Your $15 meal costs $4.20 in hourly wages, and another $4.20 worth of ingredients to make. That's 56% of the cost of your meal - the labor and ingredients to make it.

Franchise fees typically cost about 10% of net sales. This is the fee that the corporate HQ charges each franchisee for running a store with their brand. These three items (COS, COL and franchise fees) make up the majority of operating costs.

$27,321 Net Sales

-$7,702 COL (28.19% of net sales)

-$7,908 COS (28.48% of net sales)

-$2,732 Franchise fee (10% of net sales)

$8,979 remaining

COS + COL = 56.67%

This restaurant averages around $9.25 an hour for crew labor. Meaning, the average hourly wage for the crew staff (people making and serving the food) is $9.25 per hour.

Bump that $9.25 an hour average to $15 per hour, that is a 62% increase in labor costs. Let's pretend this restaurant had a $15 average wage for this week:

$27,321 Net Sales

-$12,477 COL (45.6% of net sales, increase of $4,775)

-$7,908 COS (28.48% of net sales)

-$2,732 franchise fee (10% of net sales)

$4,204 remaining

COS + COL = 74.08%

In the quick-service restaurant biz, you want your COS + COL to be under 60%. But you NEED to keep your COS + COL under 65% to remain profitable. It just can't happen otherwise. You CANNOT cover costs if you don't.

With a $15 hourly wage, $4,204 per week is all they have left. It may sound like a lot, but that has to cover the manager and assistant manager's salaries, rent/mortgage payments, garbage, utilities, maintenance, advertising, administrative overhead and anything else that comes up. It won't.

Fast-food restaurants run EXTREMELY tight budges, and work on EXTREMELY thin margins. It's one of the most competitive industries that exists. You cannot increase their labor cost by over 1.5X and expect everything else to still work the same. Restaurant manager will do whatever it takes to get their COL percentage back down to the 28% it was before.

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[GK4Herd]

I'm going to think out loud here. It is very obvious that the people who have invested considerably to own a fast food restaurant will need to protect their considerable investment. If forced to pay these higher wages, they are going to have to increase the cost of their product. When you eliminate an already thin margin it's either that or go out of business because the risk is not worth the reward. Most will likely pass on the cost to the consumer.

Now...when you consider the millions of jobs across tens of thousands of industries that will be forced to increase the cost of their products, you are looking at massive inflation. Who is this going to punish? From my vantage point this is going to hit hard on the very people that the wage increase was designed to help. It certainly isn't going to effect the high income and rich whose discretionary income far exceeds the portion that is needed for basic survival. (Food, utilities, rent, etc) This is going to hit hard on those who are using most if not all of their income to provide the necessities. These are the very people who are going to have to contend with rising costs of food and other basic needs whose cost was increased by the need to remain profitable.

Stores like Walmart operate on a thin margin and rely on volume to drive their profit. They employ tons of people. Increasing minimum wage would lead to massive layoffs (do they really need that disabled elderly gentleman handing you smiley face stickers as you come in) and increasing cost of products. Are we really helping the poor? Are we really punishing greedy corporations and rich people?

No...the intended result of increased wages would hurt those who it was designed to benefit most.

 

[herdfan429]

Thanks for sharing actual data.

 

[-CarlHungus-]

For fast food, I think automation would take over that industry if you significantly raise the minimum wage. With touch screen ordering and credit card only lines you could imagine a big chunk of the work force being eliminated.

This may be coming anyway, but you'll speed up the process dramatically with a wage increase.

 

[wisemaniac]

For fast food, I think automation would take over that industry if you significantly raise the minimum wage. With touch screen ordering and credit card only lines you could imagine a big chunk of the work force being eliminated.

This may be coming anyway, but you'll speed up the process dramatically with a wage increase.

Yup.

There are certain processes that people feel more comfortable dealing with a real person than a machine. Ordering food at a fast food restaurant is not one of them. Everyday we're being pushed into more & more automation - it's not going to be a jarring transition. Plus, given how demonized McD's already is, if prices were to suddenly spike for the same product, imagine the backlash.

 

[herdfan06]

For fast food, I think automation would take over that industry if you significantly raise the minimum wage. With touch screen ordering and credit card only lines you could imagine a big chunk of the work force being eliminated.

This may be coming anyway, but you'll speed up the process dramatically with a wage increase.

Sheetz has been using the ordering kiosks (ordering, not paying) for years, I am surprised it has not been widely adopted in the fast food sector.

 

[GK4Herd]

And self driving autonomous vehicles are right around the corner. The impact on employment will be huge.

 

[extragreen]

Looked at another way. To pay for the increase in labor and keep their profit margin the same, the firm would have to raise their net sales price by 17%. That means a $5.99 Big Mac Meal would be increased to $7.01. Am I figuring that correctly? A family of 3, all of which have a Big Mac meal, would have to pay an extra $3.06 for their dinner. If that family ate the same thing all 3 meals at McDonalds (21 meals) at an added cost of $64.26 per week, do you think they could afford it if their weekly income was increased by $230.00 (from $9.25 to $15.00 per hour = $5.75 per hour x 40 hours)?

 

[GK4Herd]

Looked at another way. To pay for the increase in labor and keep their profit margin the same, the firm would have to raise their net sales price by 17%. That means a $5.99 Big Mac Meal would be increased to $7.01. Am I figuring that correctly? A family of 3, all of which have a Big Mac meal, would have to pay an extra $3.06 for their dinner. If that family ate the same thing all 3 meals at McDonalds (21 meals) at an added cost of $64.26 per week, do you think they could afford it if their weekly income was increased by $230.00 (from $9.25 to $15.00 per hour = $5.75 per hour x 40 hours)?

Now multiply that across EVERY industry that raises prices due to increased cost. This isn't a wage hike for the fast food industry. It's one for every industry that employs workers for less than $15 per hour. This increase would have an immediate effect on thousands of industries. This inflation would ripple through the economy and hurt those it was designed to help.

 

[wisemaniac]

And self driving autonomous vehicles are right around the corner. The impact on employment will be huge.

The autonomous vehicles still make me nervous - & it's mostly because the cars have to be programmed to anticipate human ****upery. People actually stopping at at red lights being a big one in cities. Even Teslas, who are leading the field, tend to veer wildly on interstates.

Until every single car on the road is automated, from what I've read the commutes will actually take longer. Sure you get the ability to just be a passenger but screw that, especially if I have to leave earlier for work.

 

[extragreen]

Now multiply that across EVERY industry that raises prices due to increased cost. This isn't a wage hike for the fast food industry. It's one for every industry that employs workers for less than $15 per hour. This increase would have an immediate effect on thousands of industries. This inflation would ripple through the economy and hurt those it was designed to help.

Those things did NOT happen 1950-1956 when the minimum wage was increased by more (percentage wise) than the proposed 7.25 -15 increase.

 

[GK4Herd]

Because the economy wasn't full of minimum wage jobs like it is today. The workforce was comprised of almost all males who worked predominantly in industrial type businesses whose income exceeded minimum wage. I eat out more in one week now than I ate out the entirety of my childhood. That's because both the husband and wife work in most households making eating out much more prevelant. Good or bad, our economy is much more dependent on the services and products that come from lower wage employees.

You are old enough EG to remember the landscape in the 60s. Now just look around. In economically depressed WV there's strip malls chock full of retail stores, banks, restaurants, etc. that rely on lower waged employees whose wages allows them to be competitive and to even exist. This isn't the 50s where retails centered around a few mom and pops that both owned and worked the retail in order to exist. Outside of main street there was farmland that now houses the malls and shopping complexes.

You can argue the merits of the good ol' days vs today, but the reality is we are where we are. And the possibility of a wage increase would be way more detrimental. Who is the largest employer in our country? Walmart? I'm not sure, but they hire tons of people. You don't think a company that enjoys its competitive edge on a thin margin isn't going to have any effects you're fooling yourself. They will throw people out of the work force and invrease prices. Companies will seek automation as an alternative. They will move services and their production overseas.

Can we adapt? Eventually. But for a period of time...a long period, people's quality of life will diminish. It will cause businesses to shut down. And the rich will keep on getting richer and the poor poorer. Only more so.

 

[extragreen]

"Because the economy wasn't full of minimum wage jobs like it is today." Later today I'll see if I can research that. I doubt that statement is true.

 

[herdfan429]

"Because the economy wasn't full of minimum wage jobs like it is today." Later today I'll see if I can research that. I doubt that statement is true.

Yeah because there were McDonald's in every street corner in the 50s. And your previous attempt at explaining away things completely ignores the fact that the cost of ingredients will go up. The cost of transporting those said ingredients will go up. So that 17% increase will necessarily have to be more to keep profit margins the same.

 

[GK4Herd]

"Because the economy wasn't full of minimum wage jobs like it is today." Later today I'll see if I can research that. I doubt that statement is true.

I think common sense would dictate that there were far fewer minimum wage jobs in 1950s America. The influx of women into the workforce coupled with the loss of industrial based jobs tell me that there are a ton more lower paying jobs then in the 50s. But I'd be interested in what your research uncovers. But there's another difference as well. The 1950s economy isn't competing in a world market like today's economy. We've already lost a ton of jobs overseas. Can we compete with companies that have the benefit of these third world work forces? That was never a dynamic that was part of the 50s economy.

 

[ohio herd]

Looked at another way. To pay for the increase in labor and keep their profit margin the same, the firm would have to raise their net sales price by 17%. That means a $5.99 Big Mac Meal would be increased to $7.01. Am I figuring that correctly? A family of 3, all of which have a Big Mac meal, would have to pay an extra $3.06 for their dinner. If that family ate the same thing all 3 meals at McDonalds (21 meals) at an added cost of $64.26 per week, do you think they could afford it if their weekly income was increased by $230.00 (from $9.25 to $15.00 per hour = $5.75 per hour x 40 hours)?

No way. Raising the wage to 15 hour is too much too fast. Maybe the 10.10 an hour wage some have pushed for would work if phased in over a few years.Companies have to make a profit to operate, they get no Gov handouts(GM and Big banks the exception). The concept of price elasticity of demand comes into play.If the Big Mac combo meal goes up to 7-8 dollars consumers may chose to eat the meal less often or even seek out other choices. For me, if I can take my family to McDonald's or Apple-bees and pay a few dollars more at Apple bees then I assure you that is where we are going. Now that assumes they don't raise their rates either. The concept is complicated so I will link you to an article that can explain it better than I can.

http://www.economicsonline.co.uk/Competitive_markets/Price_elasticity_of_demand.html

 

[raleighherdfan]

Looked at another way. To pay for the increase in labor and keep their profit margin the same, the firm would have to raise their net sales price by 17%. That means a $5.99 Big Mac Meal would be increased to $7.01. Am I figuring that correctly? A family of 3, all of which have a Big Mac meal, would have to pay an extra $3.06 for their dinner. If that family ate the same thing all 3 meals at McDonalds (21 meals) at an added cost of $64.26 per week, do you think they could afford it if their weekly income was increased by $230.00 (from $9.25 to $15.00 per hour = $5.75 per hour x 40 hours)?

Dear god this is buffoonery, short sighted analysis. Not only must a business cover their own labor costs, but they also must meet the price increases passed on to them from their suppliers and vendors because of their increased labor. Greed intentionally overlooks the food and material costs that must factor in to GROSS SALES increases in order to meet costs and actually obtain a positive NET number after operating costs are met.

 

[extragreen]

Ohio, I don't think anyone is suggesting we raise the wage from 7.25 to 15 over night. Your opinion if I understand is that the cost increase due to better wages will lower demand. My opinion is that demand will increase from lifting minimum wage.

 

[ohio herd]

Ohio, I don't think anyone is suggesting we raise the wage from 7.25 to 15 over night. Your opinion if I understand is that the cost increase due to better wages will lower demand. My opinion is that demand will increase from lifting minimum wage.

well EG maybe I misunderstood the post, my bad. Just curious, how many years would you think?. I personally think this is complicated and also think there are many factors at work. Raising the wage slowly and carefully monitoring the effect might work over a reasonable time period. However, I am afraid that inflation and automation will wipe out any and all gains.I am also concerned about those on fixed incomes. Last time gas went up there was a chain reaction in the economy that sent prices spiraling up. Now that gas has come back down the market seems to remain the same. Some would say this amounts to a bonus for consumers but time will tell IMO. Here is what I do know, some of the best minds we have in this nation work at this stuff everyday and many of them at the end of the day walk away shaking their head trying to figure it all out.

 

[extragreen]

Number of years? No more than 6 years, in steady increments each year. Then tie it to inflation so we don't have to have this discussion again. Inflation will NOT wipe out the gains, inflation will likely slightly offset those gains, slightly. I agree with your concern regarding those on fixed incomes. Surely, we could help them someway or another also.

 

[extragreen]

GK, I have searched for a couple of hours, and I cannot find the number of people making minimum wage in the 50's.

 

[GK4Herd]

GK, I have searched for a couple of hours, and I cannot find the number of people making minimum wage in the 50's.

I looked as well with no luck. What I did discover was a slew of articles with conflicting takes on minimum wage raise depending on the ideological slant of the source. In other words I could both support and denounce your point of view with a bunch of articles.

 

[extragreen]

"In recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market. Research suggests that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front."

http://www.epi.org/minimum-wage-statement/ 600 economists open letter to Obama and Congress in support of raising minimum wage to $10.10

I realize they weren't asking for the $15/hour. Still.

 

[raleighherdfan]

It is interesting that the last minimum wage increase occurred during GWB presidency. The same administration that liberal minds point to when demonstrating proof that jobs were lost or destroyed, income gaps widened and the economy moved into recession.

 

[Raoul Duke MU]

Shit, just hire some illegals.

 

[Penn2moss]

Minimum wage laws are terrible.

A $15 minimum wage means that any individual that can not generate greater than $15 per hour of revenue for their employer can not have a job. It is a law that discriminates against those with the least amount of education and training. It make it impossible for those on the lowest rung of the ladder to even have a chance of climbing up to the middle class. They are legislated to a life of welfare.

Why $15? why not 20 or 50 or 100? We would all be rich!

 

[extragreen]

^^^^Total nonsense.^^^^
We nearly doubled the minimum wage overnight in 1950. Did it legislate all those who received it to a life of welfare? Did it create unusual inflation? Did it create lower employment figures? NO.

 

[raleighherdfan]

^^^^Total nonsense.^^^^
We nearly doubled the minimum wage overnight in 1950. Did it legislate all those who received it to a life of welfare? Did it create unusual inflation? Did it create lower employment figures? NO.

Continue with your linear, narrow perception. Why was the "War on Poverty" needed by the early 60's?

 

[i am herdman]

^^^^Total nonsense.^^^^
We nearly doubled the minimum wage overnight in 1950. Did it legislate all those who received it to a life of welfare? Did it create unusual inflation? Did it create lower employment figures? NO.

Then why not make it $50 an hour? Where do you draw the line?

 

[extragreen]

Then why not make it $50 an hour? Where do you draw the line?

Because $15 is reasonable, which is something you don't usually recognize. It allows a person who works 40 hours per week to be above the poverty level if he/she has a spouse and a child, and have some left over. Without checking the details, I imagine that this would also get many people off of the government "handouts" you hate so much, and it would add revenue to the government.

 

[herdfan429]

^^^^Total nonsense.^^^^
We nearly doubled the minimum wage overnight in 1950. Did it legislate all those who received it to a life of welfare? Did it create unusual inflation? Did it create lower employment figures? NO.

Yeah because the economy of 1950 and 2015 are EXACTLY the same. Nothing has changed in 65 years.

 

[extragreen]

Yeah because the economy of 1950 and 2015 are EXACTLY the same. Nothing has changed in 65 years.

That's a pitiful excuse, and is not a reason. The fact that the economy has changed over the years might in fact cause the result to be better, you don't know. Neither do I. It's a fact that it would lift at least 46% of all households below the poverty line to above the poverty line.

 

[herdfan429]

That's a pitiful excuse, and is not a reason. The fact that the economy has changed over the years might in fact cause the result to be better, you don't know. Neither do I. It's a fact that it would lift at least 46% of all households below the poverty line to above the poverty line.

If you dont know what it will do to the economy then how is it a fact that it will lift almost 50% of households below poverty line to above the poverity line?

 

[raleighherdfan]

If you dont know what it will do to the economy then how is it a fact that it will lift almost 50% of households below poverty line to above the poverity line?

His response will be priceless!

 

[herdfan429]

His response will be priceless!

I know what it will be. It will include a link to some article stating that it will raise 46% of people above the poverty line.

 

[extragreen]

I know what it will be. It will include a link to some article stating that it will raise 46% of people above the poverty line.

And that is a fact.

 

[raleighherdfan]

He doesn't know for sure if the economy will be better....but such an action will guarantee to lift people out of poverty???????