Could Wage Increases Hurt McDonald’s as Much as Wal-Mart?

In October, Wal-Mart Stores Inc. (NYSE: WMT) saw its stock drop nearly 15%, wiping out more than $21 billion in shareholder wealth. The company blamed poor performance on wage increases. McDonald’s Corp. (NYSE: MCD), by contrast, saw the exact opposite, as its stock jumped nearly 14% in October. McDonald’s also is considering a wage increase.

Wal-Mart has been increasing its minimum wage from $8, soon to be $10 an hour, which reportedly has cost the chain $1.5 billion in additional expenses. McDonald’s workforce is about 20% of Wal-Mart’s as of their last annual reports, with Wal-Mart employing 2.2 million people and McDonald’s 420,000. Extrapolating out, a similar wage increase would cost McDonald’s about $285 million in extra operating expenses, assuming apples to apples. Can McDonald’s afford that?

It certainly won’t bankrupt the company, but it probably won’t make shareholders happy either. McDonald’s is having as hard a time showing overall growth as Wal-Mart is, except McDonald’s earnings have, as of last statement, because of a sharp drop in its income taxes. Last quarter saw a 33% drop year over year, which translated to a better bottom line, even though EBITDA was actually worse.

Then why do it? One possible reason is to try to fend off even more increases to a $15 minimum wage that have already been passed in New York City (specifically targeting fast food) and Seattle. Another reason may be to quell future lawsuits. Wal-Mart, for example, is involved in two expensive court battles right now, the first a class-action lawsuit originally filed in 2002 and now at the Pennsylvania Supreme Court, and the second an equal value lawsuit out of Manchester, United Kingdom.

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Beyond considering wage increases for its workers, McDonald’s has been trying of late to listen to its customers more. The return of the original recipe calling for butter instead of margarine and original English muffins for McDonald’s iconic Egg McMuffin, and the successful introduction of the Premium Buttermilk Crispy Chicken Deluxe Sandwich have done the company well. A gradual transition to cage-free eggs also has been announced. If McDonald’s listens to consumers’ desire for sales of the morning menu all day long, perhaps its profits will continue to rise, even though it will be paying out higher salaries, either by force through minimum wage laws or voluntarily in attempt to preempt them.

By Matt Winkler