Francorps Chairman Weighs the Effect of a Minimum Wage Increase

Last week, protestors gathered at McDonald’s headquarters during McDonald’s Annual Meeting to draw attention to their goal… nearly 100 percent increase of the hourly wages paid to employees in McDonald’s

Aside from the fact that everyone wants to earn more money and a better economic life, the impact of an across the board increase, even short of this magnitude would have a major inflationary effect on
the entire economy.

The foodservice industry, and particularly the burger industry, is an extremely competitive industry, with hand-to hand combat over prices, coupons, and low margins.

In Francorp’s work with hundreds of restaurant clients, we consistently see fluctuations and increases in prices of beef, chicken, potatoes, and sugar that are often absorbed to avoid pricing themselves too high over
competition. Labor costs are monitored down to the tenth of a percent to control operating costs, in addition to the healthcare benefits provided. Altogether, it is an industry of extremely slim margins. Direct labor costs in restaurants average 15 percent of gross revenue. Doubling those costs would render a deathblow to the restaurant industry, unless passed on to consumers.

An increase of the minimum wage on a national level will have a major domino, inflationary effect. Restaurants, retail, service businesses, and any businesses employing minimum wage employees will have to pass on these increases to the consumer.

The companies that are manufacturing, producing, and distributing the goods sold to these companies will have to increase wages they pay their employees too. More companies will be forced to purchase more products outside the U.S. and to reduce their work forces to contain costs. Houses, cars, groceries will all cost more…everything will cost more and more people will become unemployed.

Don Thompson, CEO of McDonalds weighed in on the issue. He stated: “About one-third of our employees are ages 16 to 19. Nearly 60 percent of our hourly employees are 24 years or younger. And about 70 percent of our workforce is part-time, many of whom are just getting started. We’re proud that we and our franchisees provide training and resources to help open the door of opportunity that many of us have been blessed to experience.” He added that there is “no better testament to McDonald’s commitment to employees than the fact that in U.S. alone, almost 50 percent of our general managers in company-operated restaurants started as hourly employees.”

Do the math: A typical restaurant that does $1,000,000 per year in sales, averages food costs of 40 percent and direct labor costs of 15 percent plus management and assistant management costs of 10 percent.
If you double the direct labor costs to $15 per hour, they now increase the labor costs to 30 percent or $300,000. Food costs would be undoubtedly higher because the suppliers will be increasing the wages of their workers as well, but even using current average food costs at 40 percent, amounts to $400,000. Add in the rent of 10 percent or $100,000; then insurance, utilities, administrative, supplies, – another 15 percent or $150,000; a Franchise Royalty payment of 5 percent or $50,000; advertising expense of 5 percent or $50,000, and you have a total of expenses of $1,050,000 – or a net loss of $50,000.

The only option is to raise prices and hope that the price increases do not cause a drop in sales. Of course the resultant increases in the price of everything will wipe out the additional wages of the employees as everything will cost them more.Inflation anyone? Isn’t that the point? This is a free country. No one has to work at McDonalds.

For those of us whose parents were immigrants, our parents told us to work hard, go to school, get promoted or move onto a better job. Where does it say that we should get more money for doing the same job without increasing the level of productivity or our value to the companies for whom we work? The fact that almost 50 percent of McDonald’s general managers started out as hourly employees is testimony to the opportunity minimum wage earners have to earn their piece of the American Dream. Let’s not forget that McDonalds feeds us, provides jobs, pays taxes, and financially supports many causes, including its own Ronald
McDonald House. McDonald’s is part of the solution, not part of the problem.

With more than 40 years of experience in corporate management, franchising, direct sales, and business administration, Donald D. Boroian is among the nation’s most sought after consultants in the field of business
expansion. He and his companies have provided consulting services for more than 10,000 businesses, including some of the nation’s best known franchisors: McDonald’s, KFC, Hallmark, Ford, and many more.

Mr. Boroian’s book, The Franchise Advantage, is widely regarded as one of the most authoritative and skillfully written books on franchise development. He is also co-author, along with Joseph Mancuso, of the popular Simon & Schuster book, How to Buy and Manage a Franchise. Mr. Boroian’s third book, Franchising Your Business, is largely regarded as the most authoritative publication on franchising.

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