Recently I’ve seen “the McDonald’s debate” popping up everywhere, from blogs to facebook postings to group debates. “The McDonald’s debate” is what I call the debate over raising federal minimum wage laws. What “should” a fast food worker make? What are they “worth”? Why should they be “given” more? Why should the government be involved with wage fixing at all? These and many more are the questions that surround this debate, I’m going to try to answer some of them for you, and show you why increasing the minimum wage of at very least a McDonald’s employee wouldn’t need to result in higher prices for the consumer.
I’d like to tackle the “worth” question first, as the matter of worth is often subjective. In the field of business however, worth is easily quantified: you are measured by the value you add to the product. By your production, essentially. Now corporate employees’ value added is measured differently, and those costs stand aside from the costs we’re speaking about here, and would remain completely unaffected. On the floor level however, an employee is measured by the balance between two things: their productivity, and their expendability. The point where those two interests intersect is the basic value of the employee.
Now here’s the problem: the employee’s need to work skews one side of the scale in the favor of the business; expendability. As a result, you do not have a true market value, you have a market value scaled down by the natural laws surrounding the interactions between a larger, more powerful entity and a smaller, weaker entity. It’s almost like sitting the school yard bully in a room alone with the wimpiest kid in class, then saying “well if the wimpy kid wanted some candy, he’d just take some”. Well, it’s not that simple, otherwise he’d have some. So, being the reasonable and intelligent people we are, we balance the scale. This is why a minimum wage is necessary. Now let’s talk about the feasibility of it’s implementation, as far as it pertains to McDonald’s specifically.
A large part of the argument against a higher minimum wage in the fast food industry, is that an increased cost would need to be passed on to the consumer. This is simply untrue, as I will illustrate to you.
According to recent figures, compiled by “burgerbusiness.com” and pictured to the right, this is an average McDonald’s franchise’s income statement. We’ll use these numbers (numbers shown from 2011 fiscal year) and determine whether the costs of increased minimum wage would “need” to be passed on to the customer, or whether owners looking to line their own pockets would CHOOSE that route despite there being perfectly reasonable alternatives that leave everyone happy. Reasonable alternatives that any responsible business owner both should and would take. Not that I have a problem with them acting in their own interest, quite the opposite; it’s what I would expect. However, I think that us as individuals should do the same, and ultimately that’s what we’re doing when we vote to increase the minimum wage: looking out for the “common man” in his struggle against a business owner’s desire for profit.
Now, you’ll see first that the average McDonald’s franchise makes about $2.7 million per year. This is revenue, not profit. The bottom line is profit; “store level operating income”. That’s just under $154,000. The average franchise makes this on 575,000 annual customer transactions, serving almost 1,600 customers a day (an increase of more than 500 daily since 2003-2004). These are just some base numbers to get our brains cranking together, get our toes wet. Now we’ll dive in…
As you go down the income statement you notice a lot of typical expenses, any business has. Food costs and paper costs represent direct costs, the cost of material directly related to the product. Then you have payroll, crew payroll at $540,000 for the year. Which means, that the entire crew makes less than 1 dollar per transaction. Notice the percentage at 20%. That’s a full 5% of sales lower than it should be at a minimum, in a limited service restaurant, and 10% lower than what it should be at optimum levels.
As you continue down the income statement, you notice something missing from the fixed expense side of things; rent. That’s for one reason; when you own a McDonald’s franchise your rent is a percentage of your sales, with the lowest percentage being 8, and the highest at 14. Another 4% goes to “franchise fees”, accounted for under the same heading as rent, and showing us that the average rent is 10.5% of sales. According to industry standards, set by Baker Tilly, rent in a restaurant should be 6% of sales. Instead, the average McDonald’s franchise pays an extra 4.5% of sales (or about $121,500) in rent, because it pays rent to the McDonald’s corporation itself. You see, McDonald’s the corporation buys the land and building, then as part of the agreement you must and can only rent from them. And they can charge you whatever they want, in this case, an extra $121,500.
Now, I haven’t touched franchise fees (4%) or profits (5.7%), but could easily peel off a few points from both without doing any significant damage to the business or it’s corporate parent. Even just with the $121,000 saved so far from excess rent, if an average McDonald’s employs 60 people, you could pay each an extra $2,000 per year. If the average worker works 30 hours a week, that’s a $1.28 raise per hour. You could easily double that out of profits and franchise fees by pulling 2-3 point out of franchise fees and the rest out of profits, if you were a business owner who had long term sight, and cared about their employees. If you double that, you’re giving each employee a $2.56 raise. From $7.25 an hour, you’ve just brought them up to $9.81`an hour, you’re still turning a profit of up to $113,000, and you’re still paying rent and kicking extra money up to the parent company.
Now was that so hard? And we haven’t raised the price of a single burger, or a single french fry a cent. Not one cent. Let’s say you wanted to though. Let’s say for a second that you did. 575,000 transactions per year, if you add just 50 cents to each in one way or another-and who would notice?-that’s over $275,000 annually. Or more than 50% of current payroll. If you have to move the price of fries up 10 or 15 cents, would that be so bad? With happier, more productive workers you get a better quality product and better customer service. Not only would it not cost you business, such a move could increase business drastically, as you quickly become the smoothest running, friendliest fast food operation in the city.
You see, minimum wage is not the enemy. Greedy business owners and corporate giants like McDonalds who don’t want to pay their workers enough to live on are the enemy. On McDonald’s own website they outline a plan for their employees to succeed financially, citing the need for the employee to work a second job. Forget school, forget seeing your kids if you have them, get a second job because working here isn’t cutting it-and even the company knows it.
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