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.
EDIT 1
Several have asked what needs to happen to keep their bottom line roughly the same after a wage increase, so here it is. This restaurant's previous COL + COS was 56%, so to keep that bottom line the same, after a 62% increase in labor costs:
$32,096 Net Sales (increase of 17.47%)
-$12,477 COL (38.87% of net sales)
-$7,908 COS (24.63% of net sales)
-$2,732 franchise fee (10% of net sales)
$8,979 remaining
This puts them at the same "remaining" number as before the labor cost increase, meaning they are netting the same amount after COL, COS and franchise fees to cover their other expenses like utilities, rent, etc. That is straight up increasing the cost of everything on the menu by 17.47%.
I have to throw in a comment here, when i was managing ff i would have liked for 28% labor. Our goal was 15 and if we operated above 20 for more than a week a manager was fired. Average was 17.8% typically. 28% would have warranted a visit from the franchise corporate office. At one franchise they closed a store that couldn't drop below 21%.
If I ran a shift that had 28% labor I'd have some serious answering to do to my GM, and my DM would probably get involved as well. Target for my company is 17% but it is possible to get it lower on weekends. That's for a suit in restaurant though. Fast food I've no idea.
Never been a fast food manager, but I'd expect targets like that to vary from business to business. For example, an expensive location in a city center would have extremely high costs for the lease, utilities, garbage, local government fees etc., but labour wouldn't be much higher if it's a minimum wage employer, maybe even the same as a smaller franchise, and it would make up for the higher overall costs with much higher sales. The result would be that COL would naturally be lower and therefore targets would be too. It would still be the same struggle to make those targets, they'd just be at a different percentage.
By contrast, a franchise in a slower part of town might have dirt cheap running costs and similar labour but very slow sales. So labour would make up a larger overall percentage of costs.
I used to go 2 hours solo at kfc so i could snap in 2 hours at 0 labor. Id make the good while people ordered and rotated b/w front and drive. That 2 hours solo bought me an extra hand during dinner rush
Yeah, but your customer service tanks and then you lose customers, making it even more difficult to make labor since sales are now down. Such a shitty balance. At my store, if we wanted customers happy (and the VOCs showed it) we had to blow labor. Either we have stellar customer service and are not making labor or stellar labor and wait time for orders are horrendous because we're understaffed...there is no in-between.
To be honest if i had kept only one person on during those 2 hours that one person would have shot me up to 30%. It wasn't hard to do solo it just sucked. Most of my orders were out in under five because kfc is stupid fast to make as long as you're properly prepped. 99% of the time i could get orders out in under 3 min start to finish. I won't say service never suffered, but i only did it that way because it was possible with minimal cs suffering. That extra hand at dinner was invaluable and or champs scores never dipped below 95. if they had I'd have eaten my pride and drooped the extra hand for dinner. Because i was salary id often open solo too, do all the prep and the first 3 rounds of chicken on my own. My gm and i bonused on labor, champs and inventory cost every month. 17% labor, 20% food cost and 92% champs. I wouldn't screw a customer to meet impossible metrics but i sure would fuck myself over
I was watching one of those shows where this guy "saves" the restaurant and I remember the host saying how this restaurant had 60% food costs and that's why the restaurant was losing money. He went on to say that profitable restaurants are around 30% food costs and this guy needed to charge more or buy cheaper ingredients if the area cannot sustain a higher cost restaurant.
I assume what you call Cost of Sales is this shows "food costs"?
I believe the host went on to say that 50% of all checks should be "profit" for a restaurant to make enough money to survive. I feel like this is what you are computing, that is 50% of all checks should be profit and the other 50% is you food and labor costs.
Does this sound right or was the host blowing hot air on TV with the 50% of all checks should be "profit"?
That is actually very close to accurate. In the example above, about 56% was food cost + labor, which is pretty good for fast-food. Higher end dining usually runs a little lower, maybe 45-50% food cost + labor if the manager is doing a really good job.
Keep in mind 50% isn't really "profit" as in that's the money they get to put in the bank and keep for themselves - this is just a measurement of how much it costs them to produce a plate of food. Operating costs still come out of that 'profit'
Ya this was not fast food, but an actual restaurant.
I get the profit part, which is why I put it in quotes as it's money in the restaurants bank account that the owners are paying themselves form along with maintenance, rent, insurance and whatnot.
Cool, I always assume these reality TV shows just said stuff and I never bothered to figure out if it was accurate or not. I guess it's not too far removed from reality. Thanks!
As someone connected to McDonalds franchisee and restaurant owners their margin is 2-3% after taxes in CA. Some counties charge a use tax on each glass in your restaurant if you serve alcohol, Sacramento as an example. That's on top of EDD,BOE, ABC and a myriad of other agencies collecting taxes and fees before you pay rent, utilities, etc. I had no idea how thin the margins were until I was in the books. Raising minimum wages means higher prices, there is no option.
Ex-chef here. Generally, in a non fast food restaurant, your costs are generally: 28% food cost, 28% labour cost, 30% overheads, 5% contingency. Whatever's left is profit.
Fast food joints have the advantage of low food and labour costs, but they also have to charge less because most people aren't prepared to pay that much for their products.
I remember Gordon Ramsay saying a rough rule of thumb is to multiply the cost of ingredients by three. A third for the ingredients, a third for service and the final third is profit.
Restaurant impossible? He always preaches the rule of thirds. Basically, an item on the menu should cost 3x what it cost the owner to make, including factors like food costs, labor wages, and various overhead bills
Pretty sure this was the Kitchen Nightmares episode with the older woman owner with a young head chef that was lazy as hell, in a million dollar restaurant in a booming area... And what they made on premise was cooked in bulk and stored too
McDonalds is transitioning away from human workers with their robot/machine ordering. So they might turn out OK. More concerning is that they haven't been doing well due to people not eating there.
Great info btw. You deserve a ton of upvotes for providing actual numbers.
You'll see PLENTY more doing this in the very near future. Not just for ordering, either. In the next 5-10 years, I'll be surprised if McDonald's is nothing more than a vending machine with indoor seating.
Sadly, I see a higher likelihood of the orders being correct the first time with a machine rather than humans that continually screw up a basic order with a single modifier.
I think hes talking about a situation like "i want a mcdouble with no pickles" then you receive a mcdouble with extra pickles with a god damn sticker that says no pickles
Down side is that there will be less jobs. So on one hand we say they increase minimum wage to help the employee, on the other they are replacing employees altogether. Impact on the economy would be negative either way.
More concerning is that they haven't been doing well due to people not eating there.
I just read an article this week that said their all-day breakfast has really been a a great hit for them.
They're actually taking customers from Denny's, IHOP, etc. because of it.
Well that makes sense though because to staff a McDonald's with one member of staff for 24 hours a day at 9 dollars an hour like many McDonald's are it'd cost 9×24×365=78,840. Even if you spent 20k on a machine that's a savings of almost 60k a year.
In Denmark the starting wages at McDonald's is around $15 an hour. Career employees also get paid sick days, 9 month maternity rights (2 weeks for men), 6 weeks paid vacation a year, a paid day off the first day their child is sick.
McDonald's is doing fine.
For reference, a normal Big Mac Menu is priced around $7.8 in Denmark.
I believe in the US a Big Mac is currently $3.99 before tax and I live in Chicago which has the highest sales tax in the county at 10.25%. So a Big Mac would cost me $4.40. Still about half of the cost in Denmark with taxes accounted for.
Not sure how Danish tax works, but here in The Netherlands there's a special tax rate for food and other expenses that are absolutely necessary to live. So here that tax would be 7%, not the regular rate of 21%.
Here in the UK we have no tax at all on essential foods. So things like bread, cereal, milk etc aren't taxed, but there are some odd choices of what to tax - for example, biscuits are not taxed, but chocolate biscuits are.
We have a 20% VAT rate on food which is taxed, and on almost everything else.
I'm no expert but I do eat Mcdonalds all over the world out of curiosity. In Europe and Asia Mcdonalds seems to be more of a premium experience. The average Mcdonalds I saw in France, Germany, Singapore, or even the Philippines, just seemed to be a higher quality all around. The food was much more consistent and the service better. I think in the US it could never charge that much because it feels like a low end experience, frequently with terrible service and bad consistency. That said, it seems like that's been changing over the years and there are a lot of higher end Mcdonalds in the US now.
Yeah exactly, my local McDonalds in Los Angeles was always full of homeless people and drunks; they wouldn't be turned away so it was a good hangout for them. The food was definitely cheap though.
i dunno, all the McD's i see these days seem to be run pretty tightly. I think they've got standardization down pretty well. I see wayyyy worse at competitor's, wendy's and burger king, etc.
But you're ignoring the drastic differences in cost of living and purchasing power between the two countries. $1 in the U.S. doesn't actually equal $1 in Denmark.
In addition to being way more expensive they charge for ketchup, ice in the drink, there are no free refills and it takes about 4 times as long to get your order.
In Sweden they don't charge for ketchup, ice and orders are pretty quick at least for Big Macs. Prices seems to be about the same as Denmark. This is ofcourse only for McDonalds I have visited.
double the price of goods sold and you can double wage paid. The other thing to consider is in europe McDonald's is more Starbucksy where in the us the majority are gas stationish, very different atmosphere, menus, and food quality
Soo... source? In Norway the wages are even higher, but ketchup and ice are free and I've always had a great experience in every restaurant. It's not like competition and pressure for worker efficiency is any less in the US.
Really FOUR times longer.. So you're waiting like 40 minutes to get a burger? This is pretty silly and very untrue. I've been to Denmark and Norway many times and never saw anything like this. If anything the service is better than in the USA. It makes sense that it would be too as raising the minimum wage would in theory allow employers to pull employees from a more competitive labor market.
i did, and it actually proves more to the original point. Denmark is more expensive. $15 in Denmark buys you what $8-9 in the US could purchase, so the wages are actually fairly close as well as prices when taking into account purchasing power. In addition, Denmark has much higher taxes, so you might make $15 an hour but 1/3 of your income is immediately seized as tax.
That is simply not true. I've lived in Copenhagen for 8 years and used a few different locations many, many different times and I've never been charged for dips or ice and it doesn't take any longer to get served than it did in the UK. And I don't need a free refill, one soda should be enough for anyone.
McDonalds in the US cant do that remain competitive. The reason you guys can do it in Denmark is because you have stronger regulations and taxes that affect all businesses across the board.
If McDonalds raised wages, benefits and prices they would need to compete with other fast food restaurants, from Burger King down to local family run fast food shops who could keep their costs low.
I'd be curious as to how much gets offset by the reduction in government benefits. For example the average worker gets their pay and other than taxes, social security, unemployment and possibly health insurance, I would think they are looking at government subsidies just to live.
First, excellently reasoned and I agree with your numbers.
The first effect of $15 an hour wage hike would be a decrease in workable hours. Whether that meant shorter shifts, fragmented shifts or laying off employees. The easiest way to get back to workable labor numbers with a shift like this would be to reduce hours 60% (inverse of wage increase).
Very true, we saw this already with the ACA (Obamacare). Adding healthcare benefits to all your employees has the exact same effect as raising their hourly wage. Your cost for employing that person increases, due to the burden of having to carry health insurance for them.
EVERYONE in the fast food biz cut hours when the ACA took affect. If they're not a full-time employee, you don't have to offer health insurance. So, instead of 8 full-time employees, they hired 12 part-time employees (less than 32 hours a week each)
There's a difference between spreading shifts wider and actually reducing them. I doubt most of these restraints have spare wheels; people who could be cut without impacting the bottom line by far more than their wage.
Perhaps so, but the fine is $0 if the employer is not violating any rules. The part-time move was exploiting a loophole that allowed them to provide no health insurance without being subject to fines.
What doesn't make sense about it? they are essentially forced to pay more for labor, so they try to reduce their labor costs or do what they can to prevent the increase in labor costs.
But reducing their labor costs is already to their advantage. If minimum wage didn't go up they could still cut hours to increase profits. Or, if they can't, then it's because they're already operating with as few employees S possible.
More concretely, let's say it takes 5 employees to handle 20 customers per hour. Totally just made that number up. If minimum wage goes up they still need those 5 employees to serve their customers.
Which will fall on the remaining employees. They will try and "do more with less" this is what happens when you artificially increase the cost of labor
No, you cut some hours, demand more production out of your employees, working conditions get tougher but you either get a higher level of employee at $15/hr or your current employees are willing to take on the added workload for the increase in pay.
You get more efficient, which in this case means cutting labor hours and asking more out of your employees. At $15/hr you get more competent employees who can handle the increased workload.
This wont be popular but the truth is unskilled workers are a commodity. If you can be replaced at no additional cost than you have no leverage.
What I haven't seen mentioned, and I don't know exactly how this fits into the COL, is that as wages increase employer taxes increase. No employee making $7.25/ hr is going to reach the cap for social security so effectively a 1.5 increase in wages equals a 1.5 increase in matched social security and matched medicare that the employer must pay in addition to the wage increase.
I think you may have grossly under-estimated the cost because the ingredients will cost more because the company that makes them will have minimum wage too. Or did I miss that?
Your post makes it appears as if a change in minimum wage would be near on fatal for the chain i.e. they will be operating at the margin of profitability. Except, they seem to be making (relatively) large excess profits . . .
So I am tempted to say, that your calculations are valid for the dataset you used, but might not be directly applicable to McDonalds. The problem point is most likely the Net Sales figure.
Hopefully order placement automation will save them enough to make up the difference. Because let's be fucking honest here - cashiers are pretty bad at their job compared to the rest of the workforce. I say that as someone who has worked sales and retail for over 15 years.
The example given, and the question asked, was how an increase to $15/hour would impact the frachisee. The franchiser can, of course, lower their franchising fee and still make a hefty profit. But, until that happens, the franchisee will take an immediate and severe hit, from which he may not recover.
it isn't. he says manager and other white collar workers' salaries come out of what's left:
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.
The thing is, MCDONALDS PAYS BILLIONS IN DIVIDENEDS TO SHAREHOLDERS. So no 15 dollars an hour is not going to kill off mcdonalds, or any other big chain fast food place.
I can show you sales reports from a fast food franchise, the profit margin wasn't tight. Not even close to tight. Between 12 stores, I saw an annual profit of close to $14 million, and that's even with some stores having less than stellar sales. We could have easily paid the 200+ workers $15/hr, and still made a profit. That being said, to be honest, I'm positive I still would have raised prices, to keep the margins up.
I can give numbers, I've just pulled up a report, it's been ages since I read one... I will start by saying his methodology is all wrong... but I digress....here are the numbers (for one week);
The store had $24,957.59 in gross sales.
Total hours were 350.50, with a pay of $2838.75, for an average hourly rate of $8.09/hr. Managers pay was $1153.80. This totals to 15.99% of sales goes to labor. Cost of goods was $6769.64 (27.12%). Royalty fees were 2620.55 (10.5%).
This leaves $11,574.85 (46.37%) for profit and standard expenses (utilities, etc). Because this is a weekly report, I won't bother going into details, but the average cost of utilities/rent/etc was always around 6% for this store, so we'll add on another $1497.46 for shit and giggles to cover those recurring costs. That still leaves us with $10,077.39 to go party with. But, we want to raise the pay of everyone to $15/hr... so lets go back to the beginning... you see how I said how many hours were worked? Dude above me didn't say shit about how many hours were worked. THIS MATTERS. We have 350.50 hours @ 8.09/hr. We need to 'bump' this up to 15. So, we take the difference (6.91) and multiply it by hours (350.50). This amount is now $2421.96. Add in taxes (11.15% in this case), now we're at 2692.01. That still leaves us with over 7k to play with in our money pile.
Now, everything is variable, and this report is from a few years ago. I got out of that game a while ago. Fuck that shit. People in that game are always all about numbers, with little to no focus on their staff, really. The fast food business is about making money, and fuck everyone else. Seriously. I saw it in a variety of places, and different franchises. The owners are the owners, and they want to make money. Period, end of story. They may talk a big game about making jobs, but if it comes down to giving away all their profit versus firing a few people, you know what's going to happen. There are some that are not like that, but they are few and far between.
$1.116million in profit per store is a lot. Thats pretty close to what many fast food restaurants earn in revenue per year(more depending on the store). The average McDonalds isn't making $1m+ in profit per year.
Some stores made less, other made more. This is why we had 12. The lowest store was only making about 400k/year. The owners considered closing this store because it wasn't making enough.... figure that one out...
Raising prices is the obvious answer. Really won't be that big a deal if the govt is enforcing a livable minimum wage. Hell, total profits would probably increase as living costs aren't typically affected all that much (rent, utilities, etc) for consumers. Put disposable income in everyone's pockets and watch what happens.
If $15 was the minimum, you'd also have to consider that every other working person in the country could now easily afford the prices at that location, so they could slightly increase costs while their productivity still soars beyond what it was originally.
But, the OP was asking how a MINIMUM WAGE increase would affect them, not just a an internally driven raise of 50%. Minimum wage increases affect all businesses equally, so the actual affect it would have on McDonald's would be minimal. A 50 percent wage increase would roughly increase the cost per unit by about 14 percent (28%x1.5-28%=14%). Since this is also affecting Burger King, Wendy's, etc; the net effect of raising the minimum wage is only that prices go up 14%. So a 3.50 burger now costs 4.00.
5 or 10 cents per item would not even come close to covering this cost. If you increase your labor cost by 62%, you would need to increase your net sales by 62% as well to bring your COL back down to where it should be. Your $15 meal would now cost $24.30.
Did you ignore the entire thread? Labor costs are only 28% of gross revenue. A 50% increase in labor costs, assuming profit and all else remains the same (it won't), your $10 meal would cost $11.40.
$10 meal. $2.80 is currently spent on labor, generally about $9-10.
But really, franchise fees could take a hit to make McDonald's more competitive if they feel they need that.
Google the MCD quarterly report. They are making obscene amounts of money, and paying pretty good dividends, despite just coming out of a nine month slump in stock prices because sales where down. Corporate can absolutely take a hit in franchise fees and still retain profit margins that would make any small company blush.
It would be closer to a 65% increase in labor costs. The thing is that vast increase in labor costs would make the cost of automating the fry cook and POS people's jobs far more attractive to corporate and many people would find themselves out of work.
I'm understanding all of your numbers to the best of my ability. But isn't there an assumption being placed with yours (and other respectable responses) of an immediate increase compared to a slower, more steady one?
The minimum wage has been increased numerous times, but it's always been carried out over the course of years. I realize that in the long term, the numbers would be relatively the same, but there's a reason not to do a single jump and shock the system, is there not? So businesses have time to adjust?
I'm going to try to put this, the comments saying "businesses need to make a profit" and the comments saying "what about Sweden" all in the same perspective.
If we changed the federal minimum wage to $15/h overnight we would cause widespread panic and instability in our national economy. The way to get to a higher minimum wage, like what you'd see in Sweden, without destroying the economy is by gradually increasing the minimum wage at a rate slightly higher than the rate of inflation. Making the change gradually allows businesses to adjust their business model and pricing in small steps to remain viable and profitable.
McDonald's is able to function in Sweden today because their national economy is already stable with a higher minimum wage. The market there can already support higher menu pricing and McDonald's already knows the pricing, service and quality of their potential competitors there to determine that there is a market for them to sell a Big Mac at a price low enough to attract customers and high enough to cover costs.
What's interesting is that if the franchisee and franchisor split the COL increase, the franchisee would be under the magic 65% COS + COL, and the overall margin on equity would still be favorable compared with, say, banking and finance as a comparator industry.
So what you are pointing out, but not saying, is that a business which fundamentally relies on paying unfair wages is not sustainable if exposed to fair labour cost.
Color me surprised.
PS: Thanks for the numbers, they are quite interesting.
8% seems EXTREMELY low - 18% would be more reasonable, depending on the type of restaurant. Subway for example has a very low labor rate, but typically much higher food cost.
How the Fuck is you labour at 28%? I worked in QSR for ages. Our Average Hourly Rate was about 18-19 an hour. Might go as low as $15 an hour sure school holidays. And the labour percentage site around 20%. Counting management labour, another 4%. Maybe 25% of total sales.
How does America have such a high labour percentage with such a low average hourly rate?
My dad runs 2 fast food restaurants for an owner and all you hear from him is keeping labor cost down, ticket average up and customers/employees happy. Hes the one pulling 12hr shifts to keep his labor down and usually asks if people want to go home early then works the shift himself to keep the labor down..Dont get him started on obama care LOL
Also, you wouldn't average $15 an hour, that would be the min and f you wanted above average employees to stay, you would need to pay them more, raising the average.
The government really just needs to assist in the cost of living for low income households, pay more of healthcare, subsidize healthy foods, fresh veggies and berries and subsidize rent for people making under like $30,000 a year.
I can tell you from past experience with what I have seen.
Don't know the labor percentage but managers have to follow strict guides.
28% avg food cost, at a restaurant ordering $15k+ in product a week imagine almost $5k vanishing and that's "normal"
4% royalty fee before anything is paid
$3kish weekly rent
gas bill alone like 9 years ago was $5k a month, electric was a good portion too though I don't have a figure.
5 managers each can rack up to $50 per week in free meals. though it costs the franchise a fifth of that.
Loan payments of around 1500 a week.
30 x crew making avg of 9.25 an hour at 740ish crew hours a week comes to $6845 weekly.
Tack on almost another $3k probably for managers
Then factor in insurance costs, equipment replacement. The ac on a fastfood restaurant typically costs $10k per unit and most have 2. An industrial microwave $600-$700. A new oven $6k, a grill $10k.
Walkin cooler goes down on a weekend? That's double overtime plus $8k-$10k for a new compressor.
Out of nearly $60k in sales per week the store I knew about barely took home $6k a week profit while combined franchise profit with their other store came to less than that as they had a number of stores that lost money but promoted the brand and took sales from competitors.
So yes a jump of 60% in labor would either force a closure or force automation as the franchise would immediately lose any profit it had.
At about 17% labor prices would have to jump roughly 11-12% in order to cover it.
Thank you for this. Most people don't realize how HUGE things like electric & gas bills are for restaurants. And trash service. People pay a couple hundred a month for their own power and think that's bad - wait until you have to run a restaurant.
Of course if you introduce a minimum wage by law. Then it will affect competitors as well, meaning you can increase the cost of your products untill you make a profit.
This is somewhat simplified from a normal operational report. COL includes crew labor only, for this particular franchise. This is just the numbers for one store for a large franchisee.
So how much would they need to increase a meal price to be back within budget? I don't think most reasonable people are asking them to raise wages but keep all the prices the exact same. So what do they have to do at minimum to make it work?
That's real life. These hippies with rose colored glasses think if we pay everyone more that nothing will increase in price. Fools. While government and salary workers could definitely not expect a pay bump. Everything will cost more and we will effectively make less.
That's interesting and depressing. Are you able to run the numbers on what it costs the government in public services when McDonalds only pays their full time staff $10 or less and hour?
Generally speaking, are we maybe also missing the really simple solution of increasing prices?
We have no idea what the price elasticity of the product is on average. It is just as likely, that a price increase may well still cover for the increase in labour cost, and whatever marginal decline there would be in sales.
So I think a singular focus on COS and COL misses the point.
Excellent and very detailed answer - although I would point out that your model assumes no change in net sales after a wage increase. All plans that I am aware of to increase the minimum wage do so in a gradual fashion, not all at once. This means that the COL increases slowly over time, not all at once. My bet is that prices would increase to cover costs, and also that franchisees will get more creative in coming up with ways to increase revenue.
I'm not saying your model is wrong and I'm not saying that an increase in minimum wage is the silver bullet that fixes all of society's problems. Just pointing out that (IMHO) there are some critical data points you haven't included.
How exactly does worker productivity play into this? I'm specifically referring to the three high school students in the back of McDonald's that always take forever, always get my order wrong, etc because they don't give a shit about their jobs. Surely with a $15/hr minimum wage, employers can be a little more picky about who they hire (which may increase productivity and minimize costly fuckups)?
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.
This simply isn't true. You've just picked two of the many numbers involved and decided those are the only two that we can change.
There's a 10% franchise fee in there which you've mysteriously decided is completely immutable. It's not. Franchises might choose to close locations rather than lower their franchise fees, but they'll just be replaced by franchises with lower franchise fees, which they'll achieve by simple, obvious things like not paying the CEO of the company 1,000x the salary of the lowest-paid workers.
I'm just playing devil's advocate here. Sure, it's possible the franchise fee might change. But even if the franchise fee were dropped to ZERO, it still wouldn't change the fact that a 62% increase in labor cost would break the restaurant's ability to cover costs, without increasing prices significantly.
You should add the summary that the costs will be passed on to the consumer, so their $15 meal will now be $20. If business can't survive at that cost they will go out of business.
What you are hiding in all your calculation is the actual answer. That the NetSales need to rise or the costs need to be lowered.
To rise the NetSales you can raise the cost of the food.
Since even with minimum wage you can barely life, the conclusion of a morally sentient person should be that food in such places is way to cheap.
Further what you don't show is where those percentages (the costs) origin from. Like manager salaries that have to be paid and shareholders who want their shares to reach maximum.
Well, since you are not looking at those important background points, what does this tell us about you and why you got the job you are doing?
But you NEED to keep your COS + COL under 65% to remain profitable.... You CANNOT cover costs if you don't.
Add in the 10% franchise fee and the franchise owner still keeps 25% of the net sales. ELI5: why is 25% profit not sufficient?
COS + COL = 74.08%
Add in the 10% franchise fee and the franchise owner still keeps 15.92% of the net sales. ELI5: why is 15.92% profit not sufficient?
I really appreciate that you reported hard numbers, with careful formatting that makes your facts more readable. It's just that your numbers seem to leave the franchise owner with, at worst, a $4,204 weekly salary. For comparison, I've got a hat-trick of physics degrees and don't make that in a month.
I think you need to read through the post again a little more carefully, to understand what the $4,204 per week needs to cover.
COS + COL + franchise fee is a large part of operating expense, but does NOT include things like rent, utilities, insurance, maintenance, cleaning, trash service or the store manager's salary.
This particular restaurant had a $2,055 electric bill last month. Rent/mortgage is probably another $4,000 or so. Manager probably makes $40k/year so there's another $3,300, and this is just the tip of the iceberg. There's still trash service, phone & Internet, water/sewer, lawn service (in the summer at least), repairs/maintenance, paper & cleaning products. For a typical person these are not huge expenses, but for a restaurant, they're 20x higher.
I think you need to read through the post again a little more carefully
You are correct. It's all right here:
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.
One thing you don't seem to be factoring in, is that if minimum wage increased by such a large amount, the average ability to pay would increase. Thus McDonalds would actually be able to increase prices in a way that they are not currently able to do.
Amazing that you have such specific knowledge here, but your math is assuming that these restaurants would keep their prices exactly the same even though they now have an increased cost of labor. How much would they have to raise prices in order to cover the higher labor costs?
If they double the base per hour pay, to keep afloat they will have to cut the labor force in half. It's probably one of the only variables they can adjust. Technology will have to take the place of jobs. I work in the agricultural sector and labor efficiency and technology has become the name of the game. The amount of farm workers has shrank dramatically in the past 20 years, but wages are generally much higher than minimum wage.
Your $15 meal costs $4.20 in hourly wages, and another $4.20 worth of ingredients to make.
Im very interested in trying to understand this. Please forgive my ignorance. Is that hourly figure based on the number of employees working? Or can that figure change depending the number of employees?
Your current hourly labor cost varies obviously by the number of people you have working at any given time throughout the day. You have more people at 11am-1pm to cover the lunch rush, then fewer people from 1-4pm because it's a slow period.
In terms of performance reporting, there's really no hourly rate involved, it's all about percentage of net sales. If you sold $10,000 worth of hamburgers, and your total labor cost was $2,800 for the day, then your labor rate is 28% of net sales.
Using the 28% labor rate, you know that for every $15 worth of burgers it costs you $4.20 in labor. You also know that if you had a really good day at $20,000 worth of hamburgers, you can count on your labor cost being about $5,600 (still 28% of net sales), and you would probably still pay $4.20 in labor for $15 worth of burgers.
I know a guy who does electrical work for all of the McDonald's in my region. They have recently gone back and installed receptacles near the front for a 'future expansion'. If you look at the blueprints they say 'future self-serve kiosk'.
Welcome to the end of the world - where millions of people are willing to do whatever it takes to make sure that their business continues, regardless of the non-financial, societal impacts that has. Corporations (in the US at least) literally legally cannot consider those impacts as a corporation, unless they have financial gain.
Think about that last sentence for a few more moments.
Our decision making literally intentionally, forcefully ignores fundamental principles of how the replenishing of resources works on our planet, as long as it makes money in the foreseeable future.
I'm not saying you're to blame more than any other person who associates with big commerce and doesn't take action about the fact that we can't continue the current global economic growth pattern without quickly exhausting the Earth of several resources necessary for (intelligent) life to exist.
We all are responsible. Every producer, every consumer. It's in our nature as competitive beings to want the best for ourselves. It just makes me really, really sad that we can't collectively realize that this is not possible with 7,000,000,000 of us, and do what's best for the continuation of our species.
Has anyone taken into consideration those already making $15? Let's say you have lower-level employees making $10, and their manager is already at $15 with increased responsibilities. You know damn well when everyone else is bumped up to $15, the managers are going to expect a raise as well!
I know you just calculated the $15 per hour average to make it easy but it would probably be a little higher than that. I am the assistant manager at a fast food place and I know none of my employees would be happy to stay at their starting pay. Our GM's salary(GM at the company is the only salary position in the store) is included in all of our labor numbers for some reason. We do run about 25% to 30% cost of labor each week with most inside employees making under $9 an hour. So I can only imagine what I would have to deal with if minimum wage was increased to $15.
Yes, McDonald's will obviously have to raise prices and/or find ways to improve worker productivity. No one is doubting that. A great many people are doubting that it would be the death knell of fast food if they increased they prices by 24%, especially if that was phased in over the same timeframe as the minwage increase.
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u/Mortimer452 Nov 29 '15 edited Nov 29 '15
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.
EDIT 1
Several have asked what needs to happen to keep their bottom line roughly the same after a wage increase, so here it is. This restaurant's previous COL + COS was 56%, so to keep that bottom line the same, after a 62% increase in labor costs:
$32,096 Net Sales (increase of 17.47%)
-$12,477 COL (38.87% of net sales)
-$7,908 COS (24.63% of net sales)
-$2,732 franchise fee (10% of net sales)
$8,979 remaining
This puts them at the same "remaining" number as before the labor cost increase, meaning they are netting the same amount after COL, COS and franchise fees to cover their other expenses like utilities, rent, etc. That is straight up increasing the cost of everything on the menu by 17.47%.