As much or more than any other company, McDonald’s Corp. (NYSE: MCD) and its franchises have fought increases in the minimum wage as mandated by city, state and perhaps the national government. The fast-food chain’s management has to be particularly panicked by the effect of higher pay on Wal-Mart Stores Inc.’s (NYSE: WMT) forecasts.
As 24/7 Wall St. recently pointed out in Companies Paying Americans the Least, a McDonald’s cashier makes as little as $8.24 an hour. While it could take years for that sum to reach $15, each bump up costs the fast-food company tens of millions, if not hundreds of millions, of dollars a year across the employee base.
McDonald’s business model is already under extreme pressure, as people turn away from its fast-food menu. It has tried to solve this with plans like “Breakfast All Day.” It is too early to say whether the experiment will work. However, looking back, revenue fell 10% in the most recent quarter to $6.5 billion. Net income fell from 13% to $1.2 billion from the same quarter last year. Management commented:
In the U.S., second quarter comparable sales decreased 2.0%, reflecting negative guest traffic as the featured products and promotions did not achieve expected consumer response amid ongoing competitive activity. Operating income for the quarter decreased 6%, reflecting the soft, top-line performance. Going forward, local market tests around all-day breakfast and menu simplification will continue as part of the work underway to enhance the experience for over 25 million U.S. customers who visit McDonald’s each day
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Effectively, a $15 minimum wage would take the pay of some workers up as much as 60%. This will not be true against the entire worker base, but it would increase pay for the lowest paid workers. McDonald’s net income yearly run rate has dropped to $10 billion and is falling. Any further erosion would drive out any investors who still have confidence in McDonald’s.
Advocates of a higher minimum have argued that low-paid workers must have pay that puts them above the poverty line. That does not mean that companies like McDonald’s will not be badly bloodied by the decision.
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