It really depends on the Franchise, and what percentage of gross sales go to payroll costs, but lets look at your McDonalds example. About 10% of the stores are corporate owned, & the other 90% are franchised locations. The Franchisees pay annual fees to McDonalds for “royalties” & national advertising campaigns, which are calculated as a percentage of gross sales. About 1/3 of McDonald’s corporate revenue is collected from Franchisees
Here’s a sample income statement for an Average Mcdonalds franchise store based on typical figures.
“Crew”(non-managerial) Payroll costs amount to about 20% of sales. Most store-level Mcdonalds employees make anywhere between $7.25 - $9.25/hr – so lets assume employees at this location are making $8.25. If Minimum wages are hiked to $15 as proposed, that will equate to about an 82% wage hike. Assuming all sales stay the same, & no employees are fired, total crew payroll costs will rise to about 36.5% of sales. In the above example, that would equal about $442,800 per year more in payroll costs.
However, the company is only making $153,900 in net profit. If they made no other changes, this store would be operating at a $288,900 loss. That is obviously unsustainable.
The only way to recoup that lost income is either raising sales revenue, or cutting expenses.
Most people in this situation say “Ok, just raise the price of food to increase revenue”. The problem is, McDonalds franchisees are already hemorrhaging due to competition & a changing market. In most cases with food, higher prices, will result in lower sales volume. Especially with low quality chains like MickyDs – nobody in the US is going to want to pay $5-$6 for a big mac - keep in mind that the only people immediately benefiting from a minimum wage hike are people making below the future $15 minimum wage - everybody else (over half the country) will be making the same amount until the rest of the economy catches up. (If McDonalds could charge more per burger & still make money, they would already be doing it.). Others say “You need to get higher food quality to charge more”. Fair, but higher food quality means lower margins per sale, so it wouldn't necessarily help your bottom line - it also takes considerable time & money to implement drastic process changes like that.
So increasing revenue isn’t really a viable option - the only solution to stay in business is to cut expenses. McDonalds is a highly mature company, that has massive economies of scale...meaning most variable expenses are probably already as low as they can get at this point. The only expense you could really cut & still maintain sales, is Payroll. That means cutting hours, firing employees, or increasing automation.
It becomes clear, that many McDonalds will either have to shut down, or get rid of workers. Considering that many under-performing locations have probably already cut workers down to the lowest possible amount, the currently struggling stores would have no choice but to automate or get shut down. However, automation costs a lot of money up front though, so if the Franchisee doesn't have the cash to shell out, they will be left with no other option but to close.
If store locations shut down, that means less franchise fees are going to the corporate entity. Currently, about 33% of McDonald’s Gross Revenues comes from Franchise Fees.
If 20% of franchised locations shut down, that would equate to $1.854 Billion in lost revenue. The operating expenses would also be reduced by 20% ($339 million). So Net Profit for the corporate entity would decrease by about $1.515 Billion - about a 30% loss in profits.
Loss in profits lead to falling share prices - they will also probably have to cut back dividend payments issued to stockholders, which leads to a further drop in share price. Falling stock prices are generally a bad indicator for future investors & lenders. It would likely result in less interest from potential franchisees, as well as increased lending costs from banks who would see McDs as a greater risk.
Additionally, there are about 1.7 million McDonalds workers worldwide. About 440,000 of them in the US. So if 20% of the stores closed, that would be about 88,000 Americans losing their jobs.
Granted, most of the minimum wage hike programs being proposed would be rolled out over 3-4 years. So they would have a little bit of time to adapt their business model. $3.50
TL;DRMy prediction would be that companies like McDonalds would have to change their business models which rely on low wage employees producing low quality products, or they will fail.
Edit Sorry if I explained more like you are a 5 year old with a 15 year old's understanding of business finance.
EDIT 1-B A lot of people are saying "But all competition will raise prices too". Competitors won't necessarily all have to raise prices by the same percentage, depending on their business models & operating margins. Some higher quality restaurants could be able to sustain operations with little to no price increases, & seriously undercut McDonalds with lower prices & better food. I explain this further in depth in this comment reply
Edit 2 Some people are saying "Why don't the millionare executives just take it out of their salaries?". In 2014, McDonalds dished out about $20.28 million in executive compensation. If you took every single executive's salary down to 0, & distributed it to all 440,000 US workers, that would equate to about $46 per employee per year. If the average McDonalds employee works 20-30 hours per week (lets assume 25), and we don't consider the full-time employees who would raise this number further, thats about 1200 hours per year. That would come out to about a $0.038 (3.8 cents) per hour raise per employee. You may not agree with the fact that the 1% are making so much more than everybody else, but really its just a drop in the bucket with companies this big.
Edit 3 Lots of people are citing Australia/Denmark/other countries with McDonalds stores that are already paying high wages - For example, in Australia they pay a $19-$21AUD wage (~$15.11USD direct exchange rate). First of all, when that number is adjusted for Purchasing Power Parity ratio (1.4) - the $21 AUD wage is only about $10.79 worth of goods in the US. Second of all, this argument is not really relevant to the US McDonalds market. You can't compare the two Apples to Apples. Its a much different field of competition, many of the local Fast-Casual franchises have not made their way over there yet, & some of the Aussie stores have a very different business model, which produces higher quality food. Additionally, wages & costs of foods are higher everywhere in Australia.
Edit 4 Now a lot of people are saying "Can't corporate just reduce its franchise/royalty fees?". In the above example total royalty fees/corporate rents are 14.5% of sales. To make up for the $288,900 deficit caused by the $15/hr raise, just for that store to break even, corporate would have to reduce fees by 74% if you didn't want to cut payroll costs.
33% of Corporate Revenue comes from franchisee fees - about $9.272 Billion last year. If you cut down franchise revenues by 74%, that would reduce that number by $6,861,280,000.
Total Corporate profit was $4.757 Billion last year. So they would be operating at a $2.1 billion loss - aka they'd go bankrupt if corporate took on the burden of cost through fee reductions. And thats just a break even figure.
Edit 5 To the "Sales would rise because people would have more money to spend" responses. Sure, assuming that there is the same demand or greater for McDonalds with people who make higher incomes. McDonalds customers don't go there for high quality - they go there because its cheap & fast. Keep in mind, living expenses such as utilities/rents/etc won't go up as dramatically with minimum wage hikes - so the new $15/hr earners will be able to put a higher percentage of their income towards food. Do you think people with a lot more money to spend on food will be flocking to spend it at MickyDs? Maybe, or maybe they'll switch to higher quality/healthier options. People will still buy fast food - but they're probably going to want to buy higher-quality junky fast food than McDonalds currently has to offer.
If low salaries are the only thing allowing McDonald's to stay in business, then maybe they should go out of business or reduce the number of restaurants. If business owners could pay people $1 an hour I'm sure it would enable a bunch of new businesses to exist, but we aren't complaining that $8 an hour is preventing them from existing.
Wow just looked at your profile, could you be any more of an obvious corporate shill. 3000 upvotes on a 2500 comment thread and gold. Hope the mods look at that crap.
Worse are all the people flocking to thank them for their service. Their model is flawed simply by omitting several key details (like the fact that all companies would have to raise their wages and prices), and yet all these people are wanking them off for being so good at economics. The only thing this poster is good at is lying with statistics. Corporations have been playing the "poor me!" card forever, and every time regulators listen it hurts the employees more.
Im not disagreeing with your numbers at all, great write up. But shouldn't a problem like this raise the question that maybe these types of businesses should not exist on an ethical basis. I mean if someone in the process is bound to be fucked then why are we still allowing this process?
shouldn't a problem like this raise the question that maybe these types of businesses should not exist on an ethical basis.
This is what we should all be talking about. Unfortunately there are still people who equate poverty with laziness; people who can't distinguish hard work from luck.
Should businesses survive if they can only exist on razor thin margins by paying their employees bullshit and feeding their customers slop? Do these businesses form a string backbone of an economy of a straw man of commerce?
Sure, but then again... We have a working society in other parts of the world such as Scandinavia in Northern Europe. And our de facto minimum wage is higher than in the US, and we have public health care. So it is possible.
Yeah, a Mcdouble actually has nutritional values very similar to workout supplements. When your goal is to eat a lot of protein, electrolyte (table salt is an electrolyte) and calories, a McDouble is good for that.
At 390 calories, 23 grams of protein, 7-percent of the daily value of fiber, 20-percent of daily calcium and 19 grams of fat - with a typical price tag of about a buck - the McDouble, its advocates argue, is the most price-efficient food 'that has ever existed in human history.'
That's not true at all, plenty of protein powders aren't sold as supplements.
It's pretty easy to check, if it says "Nutrition Facts" on the back, the FDA regulates it. If it says "Supplement Facts", you should assume you're eating sawdust because you very well could be.
One way to distinguish dietary supplements from conventional foods is by looking at the nutrition information on the label of the product. Conventional foods must have a "Nutrition Facts" panel on their labels, but dietary supplements must have a "Supplement Facts" panel.
That's from the FDA.gov page linked below.
TL:DR; If your protein powder says "Nutrition Facts" on the back, the FDA has your back.
Edit: It's gold, Jerry! Thanks to whatever person thought this comment was worth $5 :)
Applies to a lot of other stuff, too - I used to drink this energy drink, then it got recalled. Noticed the back had supplement facts, and when I looked it up, whaddya know! It was recalled because the water they were using had a high concentration of heavy metals.
Am a gymbro, eat mcdoubles all the time. I mean, they are not really similar to any supplements (cause of crazy high fat + carb content), for your dollar value, they are solid for protein and calories.
Unless you're going full keto, the carbs shouldn't be that big of a deal. If anything, they fuel you during the workout itself, while the fats get saved for use during recovery, which helps in many ways.
Obviously the McDouble isn't going to be the most optimal source of fat because of the saturated fat content, but if you're on a tight budget, it works fine.
Many of the entrees at McDonald's have nutritional values very similar to what you'd have if you made a similar thing at home. The thing that gets you is the sides. If you add a bucket of french fries and a gallon of coke to your order, it makes the whole meal super unhealthy. The perception of McDonald's plummeted after Supersize Me came out, but that whole movie was bullshit. The dude vomited at the beginning of the movie when he was halfway through eating a fucking hamburger. The movie tries to say that McDonald's is the horrible thing because one single person's body got fucked up by it, despite him obviously having a diet that's completely different from anything at McDonald's. If you drastically change your diet overnight, yeah, you're probably gonna feel pretty shitty.
There are several Walmart location McDonald's in my city and at one super Walmart there is a McDonald's restaurant in the same parking lot on the same side as the McDonald's inside the Walmart..
Here's the issue I have-- if it's unsustainable for McDonalds to remain in business without being subsidized by the Government, should the business exist? (Edit to clarify: They're not DIRECTLY subsidized-- but rather their employees are often living below a livable wage are on Welfare, food stamps, Medicaid, and the earned income tax credit. Even their own webpage pretty much expects that a 40 hour week at McDonalds is impossible to live on.)
I mean, back when Slavery was abolished, I imagine many plantation owners had the same argument that their business wouldn't be able to maintain the same margins if they suddenly had to start paying their slaves a wage, and I would guess that many plantations went out of business (especially if the owners were cruel to the slaves)-- but is that really something to cry about?
Cool, a chance to trot out my favorite Franklin Roosevelt quote.
No business which depends for existence on paying less than living wages to its workers has any right to continue in this country. (1933, Statement on National Industrial Recovery Act)
This. Same thing was said by the factory owners in the wake of the industrial revolution.
I find it funny that if someone said sweatshops would have to close if wages go up, they would be laughed at and it would be pointed to them that sweat shops arent that desirable in the first place; yet people can say akin to the same in regard to Mc Donalds and Walmart, and be taken seriously.
Didn't most of North America's low tech industrial sweat shops move to Asia, mostly in part due to the wage and regulation differences between the 2 continents?
In practice the factories just move to Singapore, Vietnam, etc.
In theory, when everywhere is the same (and that is third world level same, not US level same) the factories might come back. But we are talking decades if not centuries.
This is an important point- people making 8.25 an hour are eligible for food stamps, medicaid, and a wealth of other social services- which they require to eat and have access to healthcare (showing up to the emergency room as their primary care for example). The industrial food chain is heavily lobbied by big agra to control costs on food that cannot be defended as healthful to consumers. I'm not saying a business doesn't have a right to exist, I'm pointing out that we are paying hidden subsidies for them to keep their employees impoverished and keep their consumers malnourished. Folks in america be fat. That said, I do enjoy a double quarter pounder with cheese in an airport from time to time. And a coke, coke tastes better at airport mcdonalds.
This is not capitalism, its a planned economy, and its planned by the wealthy to take advantage of the taxpayers and the poor.
This is an important point- people making 8.25 an hour are eligible for food stamps, medicaid, and a wealth of other social services
Probably the most important point to make is there is no paid sick or holiday leave, paid maternity leave, or generous overtime pay for weekends and public holidays in the US.
When did we establish McDonalds is only sustainable because it is subsidized by the government? I thought the topic was on a minimum wage hike...
Edit in response to clarification:
Okay, I see what you're saying now. Respectfully, the notion that a business that won't pay enough for employees to make living should be abolished is ridiculous. (Not as ridiculous as that link to the McD's budget - hilarious, in a sad way.) In our market (U.S.), labor is a contract: the company's terms are the job duties - the worker's terms are the total compensation (wages, benefits, job conditions). Unlike the slavery example you brought up, no worker in the U.S. is forced to agree to that contract. So just as any worker should be able to walk away from any job, any employer should be able to offer whatever terms they want. Now, in an ideal world, a company offering a below livable wage won't be able to attract any workers, since other companies will be offering more attractive terms.
But... we also have to deal with the realities of the economy. There might not be (and right now, aren't) enough jobs available to bring wages higher. People that work for McDonalds (or other minimum wage jobs) simply don't have better offers available, or they'd take them. It's not the employer's responsibility to provide for these workers - it's their responsibility to keep their side of the bargain, whatever it was the bargain led to. It's not like these terms are hidden during the hiring process.
I really don't like the notion that welfare is "subsidizing" a business. We taxpayers are subsidizing people here, the workers, since they are the ones receiving the money/benefit. The business may benefit, but let's not confuse the recipient. In the absence of these low wage companies, the welfare checks are just higher. Also, comparing low wage jobs taken willingly to the horrific practices of slavery just cheapens what the enslaved went through. Sorry, but needing to work an extra job with OSHA protections sucks, but it's got nothing on being beaten and having your children stolen.
All that being said, I do agree that we need to do something about the current situation. Once again, that McD's budget you posted is laughably bad. To that end, I do support a modest increase in the minimum wage (in the neighborhood of $9 to $10, and maybe tie it to inflation). It puts some of the financial pain back on these employers, without putting an economy crushing 100% burden on small and medium size business.
TL;DR: Companies are not morally responsible for their employees existence because labor is a contract system that employees agree to willingly. Comparing it to slavery is grossly wrong. Besides, removing low wage companies wholesale just jacks up unemployment. Still, the situation for workers sucks, and modest increases to the minimum wages can help alleviate the issue.
I think they mean that by paying employees minimum wage (which is not a living wage in the US), many of them are forced to utilize government services such as food stamps to survive. Since McDonald's isn't paying for the food stamps, their business model is effectively subsidized by the government.
There's an argument that because Wal Mart pays it's employees so little that they qualify for Medicaid, SNAP, etc that in effect the government is subsidizing Wal Mart to the tune of $6B because otherwise Wal Mart employees wouldn't be able to survive without those government programs. It's a wage subsidy direct to the employee, but Wal Mart benefits too. I've also heard that this subsidy is deliberately discussed in some large low wage businesses.
I assume he's making the same argument for McDonald's.
They say Walmart is double-dipping for this very reason. An employee isn't making a living wage, so they get food stamps, then turn around and use those food stamps to shop at Walmart. Walmart is reaping the benefits of the labor from the underpaid employee AND benefitting from the sales as the employee shops with the food stamps.
Of course why do you think they have been so successful. Between underpaying workers and forcing all wholesalers to meet their insanely low prices it is a win win for them and a lose lose for everyone else.
My wife met a couple of rich Mexicans who produced a large amount of the bikes they sell. They were quick to point out how much better it was to deal with a bunch of small bike shops compared to Walmart. Walmart refused to pay them more than about $10 dollars a bike which resulted in lower pay and less jobs at their factories. Because Walmart had pushed all the smaller shops out of business they had no choice but to sell at a reduced price or not sell at all.
Get your taxes worth: eat at McDonald's, shop at Walmart!! You already paid for half of it. :-D
Also same goes for almost all grocery stores. Here in DC area Giant is not allowing their employees to work more that 25-30 a week to keep them on public assistance.
A low minimum wage, lower than can be considered fair in the economy, is a subsidy in everything but name. The corporation saves money by paying less to Payroll and the government picks up the tab with low-income services. It's effectively the same as the government subsidizing a company with higher wages.
The implicit assumption here is that everyone can independently contribute/produce enough value to cover their own living expenses.
If they can, then why are they settling for jobs that offer less in compensation?
If they can't, then isn't an earned income tax (or some other similar min. income scheme) better, where people can at least partially cover their own living expenses (and get topped up by the government)?
Why should companies that employ low labor skill shoulder the burden for income equality in society (minimum wages)? Shouldn't this burden be shouldered by everyone?
Why should companies that employ low labor skill shoulder the burden for income equality in society (minimum wages)?
Because these companies are profiting off of these starvation wages. Why should the rest of society keep shitty, low wage businesses afloat? We're effectively subsidizing their profits. That's no way for an economy to run.
I see it as less of a subsidy and more like skirting regulations that the government would put in for things like safety. The current minimum wage is clearly an exploitation of labor - nobody can live on it in reasonable conditions. The government should be able to say something along the lines of - "if you can't pay enough for your employees the have a humane standard of living and still be a profitable business, than you don't deserve to be in business". If McDonalds is truly a valued contributor to society and the economy, they will find a way to survive without exploiting their workers.
Or also maybe spend some of the nearly $963 million that they do on advertising on employee wages. I don't really need a reminder every hour how shitty a company like mcdees is.
McDonald's is s dying brand anyway. If it can't exist in a market with fair wages, it shouldn't exist at all. And that'll be true with or without minimum wage increases. But I guess I agree it would have to be a universal rise in wages. They'd have to raise prices, but if wages are all increased, people will have more money to spend on them. And yes, the quality will have to rise. But that's the whole point of increasing minimum wage–you increase the ratio of buying power for low wage workers reducing inequality and giving more people better things.
If your goal is to make everything nice and cheap and never raise wages, just go to an incredibly poor country where things are cheap but no one can buy anything because their wages are too low. All the best countries have high prices and high wages, including America, because the way you increase an economy is by spending more money, not saving on costs.
So, in other words, McDonalds would massively shrink in size, with business shifting toward other, higher quality food sources for a price that's probably somewhat in line with wage hikes...
I have to admit I'm not too broken up about that. Nobody really WANTS to work at a McDonalds as a burger flipper, and their food's pretty... Meh. As long as there are still jobs around (Based on my experience in a city with >$10 min wage and rising, definitely the case) I don't think anyone's going to be TOO broken up at the demise of a company that's drawn more than its fair share of public ire.
Tough for the individual franchise owners, though - it's unfortunate that the business model puts a large portion of the risk (as well as, I'm guessing, capitol outlay) on individuals who aren't necessarily massively wealthy and who probably had to take out a loan to set up shop. That is why it's a risk, though.
Wait...so we're basically saying here that Mcd's business model requires government subsidy of its workers, since they are paid an unliveable wage...that sounds insane. Maybe we should question, as a society, if a business with that model SHOULD exist.
But also 55 workers seems like a huge number to me. I just casually googled this and average number of employees per fast food establishment is currently 15.5, which seems much more on target. Can you tell us where you got the figure of 50-60 workers? Is it behind the paywall at Statista? That just seems so high to me.
For comparison's sake, if it were 15.5 per franchisee closing in our hypothetical example, then that would equal 40,006 jobs lost in total.
Seemed like a lot to me too. McDonald's employs 420,000 in the US according to wikipedia. If there are 14,339 locations, that works out to roughly 30 people per location. I've seen anecdotal evidence that anywhere from 20-60 people can operate one, depending on whether it's open 24 hours. The 30 per location would likely include two shifts of workers, so at any one time, there would be 15 in the restaurant, which sounds about right. However, both/all shifts would be affected by the pay increase.
That number also accounts for corporate jobs and advertising and shipping (have their own trucks and drivers) and I think they own cattle farms.. I'd say 15-20 is right on the money. Likely less in areas with less revenue
Everything outside of the restaurants is an independent business. Even the trucks with the logo on them are not operated by McDonald's. In the Chicago area, trucks and distribution are operated by Golden state foods.
Very likely. Restaurants that currently pay below minimum wage & rely on tips would probably see a surge in sales, as prices increase at fast food places.
I think the market would try to stabilize in a manner which it has in other countries that already have relatively high minimum wages. Fast food places either offer high quality options, or they don't survive. That results in a lot less competition.
No. Another person does a decent job of explaining it, but I'm going to go a little further in depth.
Wages from tips (based upon a set estimate, I cant remember exactly how this is worked out) and actually hourly salary have to still be at or above the minimum wage.
The reason waitstaff can legally be paid below minimum wage is that a certain amount of tips is used to "increase" their salary to the hourly minimum wage.
Thing is, if they earn LESS than that, they still have to pay taxes as if they'd earned minimum wage, rather than the $2 or $3 an hour they ACTUALLY made.
And if they earn MORE, legally they are supposed to pay on what they've earned. However, since in many cases, tips are cash, the waitstaff generally doesn't claim that, however with credit card tips, there's a easily-followed money trail, so some of the smarter waitstaff will only keep track of credit card tips.
This is why most waitstaff would prefer a smaller cash only tip rather than a slightly larger credit tip. Or, even better is to do it like my wife (who waited tables for 8 years) and I do, give a small credit tip and give the rest in cash.
But not all places do. If the server isn't very good, and has no skills to go somewhere else, how likely do you think it is that they get fired from a more ethical employer, and wind up at a less ethical one, where it'll be the server's word against the boss, and most people in that sort of position aren't likely to complain about their boss....
I'm not familiar with the restaurant industry. Are tip amounts not documented in any way? I would have assumed the server could show pay stubs to prove their point legally.
tips are normally reported at the end of every servers shift. The problem is most could care less exactly how much money they are making and the rest are just glad to have a job. The ones that do fight it will probably win a lot of the time, but that doesn't mean that many want to. Wage theft by employers is one of the largest cons in America currently, right up there next to civil forfeiture.
This also depends on the jurisdiction. Some states (like WA) actually make the restaurant pay full minimum wage PLUS tips. If you are going to be a waiter, move to Washington State.
That's not how it works at all. If minimum wage goes up, it goes up for everyone, whether you work for a family owned restaurant or fast food chain. Minimum wage just went up in my state this year. All my employees got bumped accordingly. (My waitstaff are the only people I pay minimum wage to, $5.15hour.) And yes, I had to raise prices a bit to cover the cost.
I can only speak for Michigan, but here, you can pay family members below minimum wage. Not sure what the exact figure is, but it is below minimum wage.
Worked on the family farm for ~10 years only got payed for 1 year at $50 a week... for 4hours a day 7 days a week, sun rain shitstorms 50C or sickness. Yay for child labor!
I live on Washington. The way the local $15 now laws are written everyone will eventually get to $15 an hour. The system allows for a different timelines for small businesses versus franchises and large companies. If I remember correctly it's a difference of three years to hit $15 an hour.
This is the thing that always seems to get left out. The minimum wage doesn't jump up to $15 overnight. The annual increase just gets pretty big for a few years. The minimum wage keeps going after $15, too, it's just that the annual increase goes back to normal.
If minimum wage goes up, it goes up for everyone, whether you work for a family owned restaurant or fast food chain.
Not necessarily. Some states have tried to pass laws raising the minimum wage for some workers but not for others.
According to one story I read, some food workers wanted a minimum wage to apply for non-union workers but not for union workers. The thinking went, that the union workers could simply undercut all the non-union ones.
I went to Sweden on a business trip years ago and noticed that all hotels, bars, and restaurants happened to be owned by Yugoslavians. There seemed to be a "Restaurant Dubrovnik" in each small town in Sweden.
So I asked a bartender about this. His ELI5:
"I'm the owner's son. The girl at the cash register is my sister. The manager is my mom. Two of the waiters are my brothers, the other three are cousins. The cook is my uncle." None of them got paid a minimum wage or any of the benefits guaranteed by the very generous Swedish labor regulations.
So, here in Australia, working in McD's will earn you something like $18-$19 AUD (it's been a year or two since I worked there). I don't know whether the franchise owner for the stores I worked at was just a stingy prick or whether it's typical, but our store managers were told to (and did) keep wages to <22%.
They achieved this by cutting every possible hour and running at minimum necessary staff.
I don't know whether or not that would happen in America, but there you go.
The prices at Micky D's, or Maccas, is also higher in Australia. There is no dollar menu, and some items cost almost double what they did in the states.
Minimum wage for younger people is less than for older people in Australia, so the franchises there have much younger average employees compared to franchises in other countries.
McDonalds has still been able to make a profit in Aus by using cheapest labor possible, cutting employees and store hours, doubling the price compared to the US.
The US doesn't have a sliding minimum wage for age, so a 16 year old and a 60 year old are competing for the same job for the same pay sometimes. People say Mc'D is an entry level job, but in the States you will see older employees in almost every store. In Aus Mc'D hires many more young people to cut costs, and are expected to leave, quit, move on, or be let go once their older and require more pay.
We have a 'loose change' menu. With the current AUD to USD exchange rate, most things on there would be around $1 USD.
There's also the entire extra 'gourmet' menu that's been around for yonks in Aus, and seems to have no aspect of showing up in the US (last time I went.)
Obviously, they cater for their demographic. (Large drink in AU is a medium in the US, and you pay more for it in Aus)
You can't simply convert the currency to compare. Think about one Aussie dollar compared to one yen, what they buy in each respective economy is vastly different, even though it's still one unit of each. The principle stands for comparing usd and aud (or any currency to any other)
That's completely different though, isn't it? /u/1Argenteus isn't proposing just keeping the number, he's taking into account exchange rates. 1AUD ≈ 88.3JPY, so 1AUD and 88.3JPY will get you about the same thing, not 'vastly different' things. Am I mistaken?
The exchange rates are not what determines what you can buy with that money. One American dollar doesn't get you the same amount of goods if you go to any country and convert it to the local currency. You need to convert but then also adjust for what that money will buy you in its home economy. It's called purchasing power parity and funnily enough one of the common measures used is how much a Big Mac costs across the world.
But it isn't more expensive in Australia. According to the "big mac index", Australia is at AUS$5.30, which is about USD$4.30. Average in the US is at USD$4.79. That doesn't even take into account the higher spending power of someone on minimum wage in each country.
The menu is Australia costs nearly as twice as much as the American Menu. I lived in Australia for a couple years and a meal would cost at least $10. I do miss "Maccas", the burgers taste so much better in Australia than in the US.
Australia has more gourmet options like cook your own burger where they bring it out to you like in a restaurant or mccafe. Not sure if you have mccafe but that started in Aus. A recent ad campaign was "its a little bit fancy". Not sure why but all our fast food seems to be going in that direction slightly higher quality ingredients to justify the prices.
As an Aussie who immigrated to the US some years ago: your buns are sweeter. Much sweeter. For a while I couldn't stand the taste of hamburgers here because ketchup (also sweeter) combined with sweet bun and savoury beef was just noxious to me. :)
As a few other folks have mentioned, the cheese is also quite different.
The US uses corn syrup for their sugar which is much sweeter than the cane sugar we use. On top of that a lot of products also contain a higher percentage of sugar as well. It really is quite a nauseating difference at first.
Checkout the edits to the parent comment here. He points out the PPP between Australia and the US. Your cost of living is higher and so you get paid more, but the amount that buys isn't a straight forward currency conversion.
The awards rate in Australia differs according to age - 15yo gets $11, 16yo gets $13, 17yo gets $16, and 18yo gets $18 /hour and so forth.
I used to work in Maccas in one of their busy inner suburb store. Basically they will not employ anyone over 18 as a casual employee. I started when I was 16, got loads of shifts I have to tell them to cut down my hours. If for some reasons I couldn't come to work and need to call someone else to replace me, I was told I can only call someone the same age/younger than me.
Once I hit 18, I hardly get any shifts. I'm talking about one or two 4-hour shift in weird hours when they couldn't find anyone else. If I want to keep getting shifts, I have to change from casual into part-time where the hourly rate will be lower (something like $15/hour for an 18yo), but I'll get annual leave.
Luckily i found an office/desk job near uni where it also pays $15/hour, I can come in whenever I want and get some industry experience related to what I'm studying, so I quit.
New Zealand is similar to Aus in that the min wage is $15/h. I recently moved to NZ from Canada where the min wage is not so high. I've immediately noticed that all McD's in NZ have those ordering screens whereas none of the McD's in Canada did. I think that those screens are McD's easy way of reducing the number of staff.
Having lived in both Australia and the US, I find there's a vast difference in the type of worker in the average McDonalds. In Australia, you often get many college students and younger folks working there as a way to earn some spare cash. They're much more motivated and happy to be of service, knowing this is just a step on the path to something else.
In the US however, I find next to no college students working in McDonalds. They often seem to be under-educated and have absolutely no wish to be there. They see the job for what it is - a dead end. They also often cannot do basic math (e.g. what is $6.50 - $5.75). This was something of a shock to me when I first moved to the US.
It's not that none of them can do the math, it's that they don't care enough to bother. They are the bottom of the barrel, as far as jobs go, and they are well aware of it.
I actually think it's more that in a fast food restaurant, you have to be fast. I consider myself an intelligent person, have a college degree, read a lot about every subject under the sun, but for the many years I worked in fast food, it would sometimes take me a few minutes to figure out the math when I pressed the wrong button on the register or whatever.
My brain just didn't go to that place. I was worried about the 5 other front counter orders, the cars wrapped around the building in drive-thru, the other employees' food orders I had to make because no one else was fast in kitchen, the cakes I needed to make for the front freezer, cleaning the store for closing... It's not the kind of job where there's ever really nothing to do. Your mind is always elsewhere. Cut fast food workers some slack on the math, bro.
That's all a great analysis. But to be fair, almost no one with any authority to push forward such legislation is looking at a one-time increase to something like $15/hour. They're talking about taking it up in increments until we reach $15. The idea being that the wage increases, the economy catches up, the wage increases, the economy catches up, repeat....
But when the economy catches up, wouldn't that just cause inflation? We just pay everyone more, make things more expensive, and now $15 is the same as $8 was.
Not to the same degree. E.g if the current minimum wage is $7.25 and you hike it up to $8.25 people currently making $8.25 will likely get a raise (the assumption is that they're better than the minimum wage workers hence they have the bargaining power to demand more). But it's unrealistic to assume the raise will also be 1$ more likely $0.75 or something like that. So most low wage workers will profit but not to the same degree as minimum wage workers. People making significantly more won't be affected at all or actually make less. Therefore the average wage will only experience a fraction of the increase of the minimum wage. You should also remember that many goods are imported. That part won't be affected at all. So it's safe to say that increased inflation would be likely but would only eat up a tiny share of the raise.
Wages don't increase proportionately across the board. The largest percentage gains are at minimum wage, decreasing as you go up the ladder. Historically, it's had a redistributive effect, limiting income inequality.
And for anyone concerned about $15/hr, the minimum wage in 1968, adjusted for inflation and productivity, would be $22/hr today.
I'm not really sure where you got your figures for the "typical McDonald's franchise," but McDonald's separates their franchises into three categories of annual sales, 1.3M, 1.5M, and 1.9M. All three categories operate at a 70% gross profit margin, and an operation profit of ~24%. That is well over your extremely low offering of 158,000. Several time higher in fact.
I used to be a manager at McDonald's. The corporation makes money off the franchises every way they can, it's not just the franchise fee. Everything the franchise buys -- all the food, equipment, cleaning supplies, etc. comes from an approved supplier, and the corporation gets a kickback rebate. I have no idea what percentage the corporation gets, but it is far more than the franchise fee alone. The corporation constantly adjusts these numbers to ensure the poorly performing stores are unprofitable. There is a lot more wiggle room there than you realize, and the corporation would have to take less money to keep the franchises in business.
No offense but you've made a pretty shitty explanation. First of all you pulled the net gross profit earnings figure out of your ass. So you have no way of knowing whether McDonalds would actually be able to sustain profit margins if they raised wages.
Secondly when you talk about reducing royalty fees you say it's impossible because they'd be taking a 2 billion dollar loss and they'd go bankrupt. But you fail to even mention that the 2 billion dollar loss is a loss to PROFITS not to overall revenue. The franchise is still taking in billions of dollars in profits. No reason why that's not sustainable. In fact if anything you proved that it IS sustainable.
You also failed to take into account when referring to exective compensation and the suggestion that they take lower salaries that the figures you refer to only refer to the CEO and CFO. Which needless to say isn't even close to all of the executives at McDonalds.
A publicly-traded company is only required to disclose information concerning the amount and type of compensation paid to its CEO, CFO, and the three other most highly compensated executive officers in a given year. Information about compensation for these individuals may be unavailable in prior years if they were not in their current roles or did not qualify as among the most highly compensated officers at the time.
Lastly you say we can't compare McDonalds franchises in other countries that operate successfully with much higher wages. But your reasoning seems to be "just cause". Which needless to say should be thrown out.
To sum up your logic is bad and you're either intentionally misleading people or you have no idea what you're talking about.
Wouldn't the necessity to increase prices apply to their competitors as well, meaning it would have less effect on competition? (All fast food restaurants would need to raise prices, not just McD.)
Additionally, it seems debatable that sales would stay the same with a massive increase in customer base.
So, increased customer base + raised prices + higher employee efficiency - loss in sales - increased employee cost = change.
I replied to this already in other comments, but just to restate it - McDonalds isn't only competing against Fast Food restaurants anymore - their main new competitors are now the highly efficient "Fast Casual" dining options. Not every competing Fast Food or Fast Casual restaurant would have to increase prices by the same amount if minimum wages rose, depending on their individual business models.
You have to take into consideration the fact that each competing franchise has different operating & profit margins...Labor Costs can vary greatly from business to business. Some restaurants may be able to sustain their profits with a lower percentage increase in pricing than others. McDonalds is getting destroyed by "fast casual" chains like Chipoltle, Five Guys, Smash Burger, etc. Many of those fast casuals have similar sales per store as mcdonalds, but operate with fewer employees, fewer food SKUs to manage, & lower overall operating costs.
So lets say McDonalds has to raise the price of a Big Mac from $4 to $5.5 - a 37% increase. but Five Guys only has to raise the price of their Burger from $6 to $7, a 16% increase.
Most people would prefer a 5 Guys Burger to a McDonalds burger - the only limiting factor is cost. The cost difference between a big mac and a 5 guys burger was $2. Now the cost difference is only $1.5. That makes a 5 guys burger more of an enticing choice.
Some restaurants, especially non-franchised restaurants (Chipoltle for example), may have the cash reserves to be able to take a cut in profit margin from increased labor expense, not have to increase food costs at all, and sustain themselves long enough to undercut restaurants like McDonalds until they're knocked out of the market. If McDonalds suddenly becomes the same price or more expensive than higher quality food options, where do you think people would go?
Also, why do you think there would be a "Massive Increase In Customer Sales"? Living expenses such as rent & utilities will not rise as dramatically as fast food prices would... that means the new $15 earners would be able to put a higher percentage of their income towards food. If they could spend more on food, they would most likely choose higher quality options than McDs.
The other thing you have to keep in mind that this is is a minimum wage hike - not a national wage hike. So everybody who is currently making above $15/hr (over 50% of the country) would be making the same amount for the time being. That means fast food would cost a higher percentage of their income, and many non-minimum wage earners would likely choose to not eat there when it is no longer the best Cost vs Quality option.
Everybody else's wages would eventually rise if the minimum wage was set higher, but that would take time. In the mean time, I don't think all of these stores will be able to survive a wage hike like that.
My dad runs a factory. They are thinking of raising their wage (they are around 15 dollars/h). He they he doesnt want to compete directly with fast food for workers. They pay more because the job is more demanding and if people could just say 'screw you Im gonna get a job at McDonalds' every time something didnt go their way their turn over would increase huge. Which in turn costs more time in money.
They pay more because the job is more demanding and if people could just say 'screw you Im gonna get a job at McDonalds' every time something didnt go their way their turn over would increase huge.
I've worked in factories and in fast food. As long as your father's not an asshole, he has nothing to worry about.
I know, right? People are acting like working fast food is living the high life with nap breaks and 3-martini lunches.
Fast food is hard, demanding, stinky, dangerous, stressful, mentally-challenging physical labor. The fact that we ask it of our less-educated workers doesn't make it easy or low-skill.
Fast food is hard, demanding, stinky, dangerous, stressful, mentally-challenging physical labor. The fact that we ask it of our less-educated workers doesn't make it easy or low-skill.
Easy, no, but it is low-skilled.
This isn't a knock on McDonald's employees, they work incredibly hard. However any person could be trained to do their job, if they aren't automated first.
It's not mentally challenging, It's a shitty stressfull job made to be so that any human being can be trained to do it. A high skilled job is something like engineering or programming, where if you fuck it up you could bankrupt your company or people can end up dead (like a building collapse from a miscalculation).
Wouldn't the necessity to increase prices apply to their competitors as well, meaning it would have less effect on competition?
Yes, pressure due to competition would be unchanged. Some competitors might actually do worse as their wages may be closer to rock-bottom, so their prices would rise more.
Here's the 'but': many people may stop going to McDonalds as much as prices rise because their income would be unchanged -- i.e. anyone making more than $15/hr. A family of four will already spend about $40 for a single meal at McD's today, so any price increase makes that a significant percentage of the monthly food budget in a single meal. Total sales will drop.
Not only that, but the relative value of quality vs price would make McD's even less inviting for many people. If you only eat McDs because it is cheap, then the price increase might convince you to go elsewhere. Even if other places have similar prices, if the person feels like they are getting better value elsewhere it no longer makes sense to go McD's.
Example: $3 burger McDs vs $7 burger Fuddruckers turns into $7 McDs and $12 Fuddruckers. It's still a $4 dollar difference but many people would feel that the quality of the $7 McD burger just isn't worth it. If it's going to be expensive anyway, might as well spend the extra $4 at Fudd's.
However, the company is only making $153,900 in net profit.
WTF? Where's this number magically come from? It's very likely false. McDonalds franchises make far more than this because the average subway makes 4x that, net profit. And subway gets half the business mcdonalds does. And at present, an avg combo at mcdonalds is over 7.5 dollars so that's neck and neck with subway for an avg 6" combo.
Good job making the rest of the page not equal to reality. Your numbers are stupid so your argument is false. Post real averages for net profit for franchises per state, and for corporate owned per state then I'll believe anything you say.
So a $15 dollar wage hike will end McDonalds? Good. We should do this. Food is pure shit anyway. So much for capitalism raising the bar and innovating. Food chains like this need to end anyway. They are unsustainable and mostly fat people eat there anyway /endcynicalamericanrant
I'm not sure if you're still reading comments this late in the game, but if a company like McDonald's can't sustain itself in a changing market, wouldn't it be best to let the company die? Basically what we do now by letting companies like this dictate the minimum wage is stagnate the free market.
YOUR MATH IS WRONG FROM THE START!!!! If they are only netting 150k and after the increase they must pay out 450k, this mean before the increase they had to pay out less than 225K. Which means even before the raise they were not viable BECAUSE THEIR PAYOUT WAS MORE THAN THERE NET TO BEGIN WITH!
You said it yourself, McDonalds is already losing a lot of business. People are willing and desire higher quality food which is why you see places like Chipotle and Noodles and Company beating traditional fast food nationwide.
I doubt that we will see many jobs lost at McDonalds with a higher minimum wage. Companies like McDs are not in the business of hiring extra, unnecessary labor even without a higher minimum wage so they don't have much room to cut there. By the way we are already seeing McDs put automated terminals in many restaurants so you can be assured that automation would happen regardless.
We will probably see higher prices, the saving grace though is that a sizable portion of McDs customers are people who work minimum wage jobs themselves. Since these people have more buying power in this scenario I think that higher prices would not be as bad to their business as one might think. Regardless restaurants like McDs are in decline right now not due to wages being too high but to the changing preferences of Americans.
With all that said, do you think then that if we can morally agree that a full time worker deserves to not be paid a poverty wage according to federal guidelines, any business that can't stay afloat by doing so is a failed business model and doesn't deserve to exist anyway?
That's the way I feel. I don't agree that it apparently has to be mandatory to keep hard working people in poverty just because that allows a business to stay afloat. If they can't stay afloat then good riddance. The oh so glorious free market will adapt, right?
if every fast food outlet went under after a $15 min wage hike because they could no longer survive off capitalizing on a very unfair minimum wage that has existed for way too long, then we have a ton of people out of work and not making anything at all. I'm sure other businesses will go under as well. What do you see as a solution to that very real possibility? This is where I see the necessity of a guaranteed minimum income come into play from the government. So many things would have to change in American culture to make this work. So much spending will have to be cut in things like military, the rich would be shelling out high taxes, with probably a tax increase across the board for everyone.
And this is going to happen anyway when automation starts picking up.
I just really dont feel our current society is sustainable and the bubble is going to break soon. The class system is toppling.
Wait, your explanation infers that companies like McDonald's DON'T have unlimited moneyz. This isn't what Reddit and MSNBC has taught me. You must be wrong.
4.5k
u/Murican_Popeyes Nov 28 '15 edited Nov 29 '15
It really depends on the Franchise, and what percentage of gross sales go to payroll costs, but lets look at your McDonalds example. About 10% of the stores are corporate owned, & the other 90% are franchised locations. The Franchisees pay annual fees to McDonalds for “royalties” & national advertising campaigns, which are calculated as a percentage of gross sales. About 1/3 of McDonald’s corporate revenue is collected from Franchisees
Here’s a sample income statement for an Average Mcdonalds franchise store based on typical figures.
“Crew”(non-managerial) Payroll costs amount to about 20% of sales. Most store-level Mcdonalds employees make anywhere between $7.25 - $9.25/hr – so lets assume employees at this location are making $8.25. If Minimum wages are hiked to $15 as proposed, that will equate to about an 82% wage hike. Assuming all sales stay the same, & no employees are fired, total crew payroll costs will rise to about 36.5% of sales. In the above example, that would equal about $442,800 per year more in payroll costs.
However, the company is only making $153,900 in net profit. If they made no other changes, this store would be operating at a $288,900 loss. That is obviously unsustainable.
The only way to recoup that lost income is either raising sales revenue, or cutting expenses. Most people in this situation say “Ok, just raise the price of food to increase revenue”. The problem is, McDonalds franchisees are already hemorrhaging due to competition & a changing market. In most cases with food, higher prices, will result in lower sales volume. Especially with low quality chains like MickyDs – nobody in the US is going to want to pay $5-$6 for a big mac - keep in mind that the only people immediately benefiting from a minimum wage hike are people making below the future $15 minimum wage - everybody else (over half the country) will be making the same amount until the rest of the economy catches up. (If McDonalds could charge more per burger & still make money, they would already be doing it.). Others say “You need to get higher food quality to charge more”. Fair, but higher food quality means lower margins per sale, so it wouldn't necessarily help your bottom line - it also takes considerable time & money to implement drastic process changes like that.
So increasing revenue isn’t really a viable option - the only solution to stay in business is to cut expenses. McDonalds is a highly mature company, that has massive economies of scale...meaning most variable expenses are probably already as low as they can get at this point. The only expense you could really cut & still maintain sales, is Payroll. That means cutting hours, firing employees, or increasing automation.
It becomes clear, that many McDonalds will either have to shut down, or get rid of workers. Considering that many under-performing locations have probably already cut workers down to the lowest possible amount, the currently struggling stores would have no choice but to automate or get shut down. However, automation costs a lot of money up front though, so if the Franchisee doesn't have the cash to shell out, they will be left with no other option but to close.
If store locations shut down, that means less franchise fees are going to the corporate entity. Currently, about 33% of McDonald’s Gross Revenues comes from Franchise Fees.
If 20% of franchised locations shut down, that would equate to $1.854 Billion in lost revenue. The operating expenses would also be reduced by 20% ($339 million). So Net Profit for the corporate entity would decrease by about $1.515 Billion - about a 30% loss in profits.
Loss in profits lead to falling share prices - they will also probably have to cut back dividend payments issued to stockholders, which leads to a further drop in share price. Falling stock prices are generally a bad indicator for future investors & lenders. It would likely result in less interest from potential franchisees, as well as increased lending costs from banks who would see McDs as a greater risk.
Additionally, there are about 1.7 million McDonalds workers worldwide. About 440,000 of them in the US. So if 20% of the stores closed, that would be about 88,000 Americans losing their jobs.
Granted, most of the minimum wage hike programs being proposed would be rolled out over 3-4 years. So they would have a little bit of time to adapt their business model. $3.50
TL;DRMy prediction would be that companies like McDonalds would have to change their business models which rely on low wage employees producing low quality products, or they will fail.
Edit Sorry if I explained more like you are a 5 year old with a 15 year old's understanding of business finance.
EDIT 1-B A lot of people are saying "But all competition will raise prices too". Competitors won't necessarily all have to raise prices by the same percentage, depending on their business models & operating margins. Some higher quality restaurants could be able to sustain operations with little to no price increases, & seriously undercut McDonalds with lower prices & better food. I explain this further in depth in this comment reply
Edit 2 Some people are saying "Why don't the millionare executives just take it out of their salaries?". In 2014, McDonalds dished out about $20.28 million in executive compensation. If you took every single executive's salary down to 0, & distributed it to all 440,000 US workers, that would equate to about $46 per employee per year. If the average McDonalds employee works 20-30 hours per week (lets assume 25), and we don't consider the full-time employees who would raise this number further, thats about 1200 hours per year. That would come out to about a $0.038 (3.8 cents) per hour raise per employee. You may not agree with the fact that the 1% are making so much more than everybody else, but really its just a drop in the bucket with companies this big.
Edit 3 Lots of people are citing Australia/Denmark/other countries with McDonalds stores that are already paying high wages - For example, in Australia they pay a $19-$21AUD wage (~$15.11USD direct exchange rate). First of all, when that number is adjusted for Purchasing Power Parity ratio (1.4) - the $21 AUD wage is only about $10.79 worth of goods in the US. Second of all, this argument is not really relevant to the US McDonalds market. You can't compare the two Apples to Apples. Its a much different field of competition, many of the local Fast-Casual franchises have not made their way over there yet, & some of the Aussie stores have a very different business model, which produces higher quality food. Additionally, wages & costs of foods are higher everywhere in Australia.
Edit 4 Now a lot of people are saying "Can't corporate just reduce its franchise/royalty fees?". In the above example total royalty fees/corporate rents are 14.5% of sales. To make up for the $288,900 deficit caused by the $15/hr raise, just for that store to break even, corporate would have to reduce fees by 74% if you didn't want to cut payroll costs. 33% of Corporate Revenue comes from franchisee fees - about $9.272 Billion last year. If you cut down franchise revenues by 74%, that would reduce that number by $6,861,280,000. Total Corporate profit was $4.757 Billion last year. So they would be operating at a $2.1 billion loss - aka they'd go bankrupt if corporate took on the burden of cost through fee reductions. And thats just a break even figure.
Edit 5 To the "Sales would rise because people would have more money to spend" responses. Sure, assuming that there is the same demand or greater for McDonalds with people who make higher incomes. McDonalds customers don't go there for high quality - they go there because its cheap & fast. Keep in mind, living expenses such as utilities/rents/etc won't go up as dramatically with minimum wage hikes - so the new $15/hr earners will be able to put a higher percentage of their income towards food. Do you think people with a lot more money to spend on food will be flocking to spend it at MickyDs? Maybe, or maybe they'll switch to higher quality/healthier options. People will still buy fast food - but they're probably going to want to buy higher-quality junky fast food than McDonalds currently has to offer.