Last fall I walked into the McDonald’s on Madison Street in Seattle to order myself a metaphor. The point was to demonstrate how incredibly cheap fast food is by historical standards, and how little impact a $15 an hour minimum wage would really have on fast food prices.
I estimated that even if the entire cost of raising the minimum wage to $15 was passed on to consumers (and it wouldn’t be), menu prices would rise by only 20 percent, tops. Probably closer to 16 percent. Maybe as little as 10 percent.
And considering that, adjusted for inflation, the same 15 cents that bought you a McDonald’s hamburger back in 1948 buys you a $1.49 double cheeseburger today, it’s hard to argue that consumers can’t afford to pay a little bit more for their burgers.
Friday I walked into that exact same McDonald’s and paid $1.69 for the exact same double cheeseburger, a 13.5 percent price hike in less than six months. And yet for all the warnings from the industry that higher prices would drive away customers, it was business as usual at the Madison Street McDonald’s.
The fact is, restaurants and other businesses implement price hikes like these all the time, for various reasons, and nobody notices! In the worst case scenario for franchise owners under the proposed minimum wage ordinance, their labor costs would rise by no more than 18 percent a year over three years, before being indexed to inflation. But labor only accounts for a third of their costs. Pass all of that along to consumers (and again, they won’t), and you are looking at just a 6 percent annual price hike—less than half the rise in double cheeseburger prices just since December.
To put that in perspective—using the industry’s same minimum-wage-hikes-equals-higher-prices math in reverse—if all of the gains from a 13.5 percent price hike were passed on to employees in the form of higher wages, Madison Street McDonald’s workers would be making about $13.35 an hour today! Just from charging the equivalent of 20 cents more for a double cheeseburger! A price hike that customers apparently accepted with a shrug, if they noticed at all!
So let’s not pretend that fast food franchisees can’t afford to cover the cost of raising the minimum wage to $15 over three years, when they routinely pass on to consumers similar cost increases all the time.
McDonalds Hikes Prices 13.5 Percent! (And Nobody Notices)
Um, you did.
McDonald’s more than tripled the pay package last year for its CEO, Don Thompson, to $13.8 million, up from the $4.1 million he received in 2011. Admittedly, in 2011 Thompson was “only” chief operating officer (he became CEO last July), but it’s a bit eyebrow-raising that McDonald’s sales recently declined for the first time in 10 years and he still got this large pay bump.
Another fun fact about McDonald’s is that it recoups about half of its CEO’s pay each year via this clever little tax loophole:
http://www.huffingtonpost.com/.....72972.html
Raise prices now in anticipation of higher wages and if not then higher profits for the corporation.
It’s likely that the price increase occurred in substantial part due to the increase in the cost of a single ingredient:
Good says that ground beef may see especially steep price hikes. He thinks that while steak retail prices could climb 5% to 10% in 2014, ground beef could climb 10% to 15%.
http://www.marketwatch.com/sto.....2014-02-20
I suspect that prices haven’t yet been increased to account for the upcoming increase in the labor cost of that franchise.
Perhaps relatively few in that area of Seattle notice the 13% increase, as Goldy alleges. But add on price increases due to substantial wage cost increases, and sooner or later it’s going to affect sales (see below).
And as far as nobody noticing is concerned, perhaps that should be revisited:
Sales at U.S. restaurants open at least 13 months fell a steeper than expected 1.7 percent in the first quarter. McDonald’s prices were up 3 percent during the quarter and traffic fell, suggesting push-back from diners.
http://www.reuters.com/article.....PV20140422
Maybe it was the polar vortex.
My personal anecdote is just last week I tipped a waitress $1 less because I now know this isn’t a tip credit state and my meal had some of her pay in it.
http://money.cnn.com/2014/04/2.....-earnings/
McDonald’s said sales at U.S. stores open at least one year were down 1.7% in the first quarter.
Earnings in the quarter fell 4% to $1.21 per share. Analysts surveyed by Thomson Reuters had predicted $1.24 per share. Revenue increased 1% to $6.7 billion, which was in line with expectations.
Or a 1.7 drop in disposable income as cheap labor conservatives continue to erode jobs to boost profits.
Fun fact: Meal-worms are an ingredient in the ‘hamburger’ used by fast food burger joints — including McDonald’s. Old McDonald had a worm farm….. e-i -e -i -o…
What does mcdonalds put in their burgers?
They use meal worm filler in their patties purchased from a company called ‘100% Beef’ so the misleading claim of “Contains 100% Beef” is true.
http://wiki.answers.com/Q/What_does_mcdonalds_put_
I nominate @1 for HA’s Disingenuous Comment Of The Year trophy.
@2 That’s nothing. Coca Cola is giving $13 billion of newly-issued stock to its execs.
@3 Okay by me. I own McDonalds stock, which is doing just fine despite all the minimum wage scare talk.
@4 That would be my guess. Chalk it up to climate change. Drought has forced cattle ranchers to reduce their herds, driving up the price of beef in the last couple years. Converting 40% of America’s corn crop to ethanol for cars has also driven up beef prices (and other meat prices) by increasing the cost of feed. If McDonalds customers can afford climate change, they can afford wage increases, too. That’s how I look at it.
Meanwhile, your heart needn’t bleed for McDonalds shareholders, whose dividends have increased 50% and stock value has increased 100% over the last five years. They can afford to give the kitchen slaves a raise.
(Full disclosure: Roger Rabbit owns McDonalds stock. Not all of it, though, only some of it.)
@ 7
Fun fraud, you might have meant.
http://www.snopes.com/business/market/allbeef.asp
@4 “But add on price increases due to substantial wage cost increases, and sooner or later it’s going to affect sales (see below).”
Man, you could’ve seen this one coming from a mile away! Have you ever noticed how Cheap Labor Conservatives blow off cost increases for everything else, but react to every wage increase like it’s the end of the world?
You should take a look at MCD’s stock chart over the last 60 years, Bob. McDonald’s has survived every minimum wage increase of your lifetime, and it’ll survive this one, too.
@7 That one is a (recently revived) hoary old urban legend.
http://www.snopes.com/horrors/food/wormburger.asp
It ought to be pretty obvious that using worm meat as a hamburger extended wouldn’t make economic sense, because worms cost a lot more to raise than beef does.
@ 14
GM ‘survived’ the Great Recession. So did Chrysler.
McDonald’s will feel very little from the Seattle minimum wage hike. For a McDonald’s franchise owner with a Seattle store, it won’t be some little blip on a spreadsheet.
You would do well to understand the difference.
@7 reminds me of a Johnny Carson monologue joke from the time of the Nixon Price Controls, which created shortages of everything from toilet paper to beef. The joke went like this:
Carson: I understand McDonalds is down to their last pound of beef, which means they can serve only a billion more burgers.
The following week, Carson read a letter on his show that went more or less like this:
Carson: I received a letter from McDonalds’ lawyers. It says, “We really enjoy your show. We thought your joke about McDonalds hamburgers was very funny. Of course, as everyone knows, it was just a joke as McDonalds hamburgers are made from 100% premium grade A beef.”
You can bet there was a meeting of McDonalds execs, lawyers, and PR consultants that went something like this:
Execs: Can we sue NBC?
Lawyers: Nobody has ever sued Johnny Carson for a joke. It’s uncharted territory. We’re not sure we could win.
PR Guys: It would be a PR disaster. The media would recycle that joke for months, if not years.
Execs: So what are our damage control options here?
PR Guys: We recommend laughing at the joke.
Lawyers: And making them pitch your product on Johnny’s show.
Execs: Sounds good. Let’s run with it.
Lawyers and PR Guys: We’ll draft a letter.
Why is there a bullet hole next to my comment @17? This is the second time this has happened? Is someone shooting at me?
@16 Okay, Mr. Business Expert, explain why McDonalds franchisees in Seattle can’t/won’t pass along labor cost increases to customers the same as they do with all other cost increases?
“Fun fraud, you might have meant.”
Like ‘Real Kraft Cheese’ YOU might have meant. The only reason I know that this is an urban legend is that meal-worms are more expensive than beef.
@ 19
Ask Robert Reich to go deeper into that. He says that wage increases will be borne by the employers. I think they’ll pass some of it through, but contrary to what Goldy might believe I don’t think they’ll be able to do that time and again, including the minimum wage increase, without further hurting store traffic – recall that McDonald’s franchises are already seeing fewer customers. Goldy has written that he’d pay $0.50 more for a good banh mi. But would he pay $.50 more for a slapped-together always-tastes-the-same dollar menu item on a squashed bun with limp pickle slices? Does he pay it but skip the Coke and just go with water instead? There’s far more profit potential in Coke than there is in a double-cheese. That’s what McDonald’s is really afraid of losing – people skimping on the high-profit items because the low-profit items cost more.
They’ll bear it to some extent, sure. Those that can, anyway. It’s already been shilled widely around here that businesses that can’t pay $15 don’t deserve to be in business to begin with. Those who remain? They’ll look for ways to deal with it.
Ask yourself: When a widely used mechanized method of producing a hamburger first emerges, in what chain fast-food restaurant is it most likely to first appear?
Increases in wage costs on a per-hour basis will stimulate (further) interest in automation. Someone still needs to collect cash at the drive-thru, sure. But enhanced employee productivity (revenue dollars per employee hour) in some way or another will result, and that, I suspect, will enable franchisees to trim staffing hours. Sooner or later. Especially if people are saving their money and same-store traffic continues to contract.
Of course, that doesn’t make for a very good metaphor. Not at all.
Maybe one day in the future we’ll be treated to a photo of Goldy’s backyard grill, cooking some double-cheese substitute for what McDonald’s sells.
He can call it Poopty.
Banner ad at the top of this page: Jack in the Box.
“…recall that McDonald’s franchises are already seeing fewer customers.”
If the burger chains bite the dust, then S. Americans won’t be cutting down the rainforests to create some quick grasslands for producing beef.
http://wiki.answers.com/Q/How_.....nvironment
Grrr Mcdernalds evil!!! fight da power!!!!! All da money should be given free to da people!!!! *weed cough* werkrs of teh world unit!!!
Clearly McDonalds is headed towards bankruptcy.
re 24 “Grrr Mcdernalds evil!!! fight da power!!!!! {blah blah blah}”
So I take it you think that simultaneously spewing more CO2 into the air while cutting down the rain forests that process the CO2 (don’t forget all the heinous cow farts) is just a concern of old hippies who lack your practical mindset and hilarious skills at ham-handed spoofery?
You are clearly a thoughtless buffoon.
As long as I get my $25.23 per hour, I don’t much care.
@21 ” recall that McDonald’s franchises are already seeing fewer customers”
Everybody’s seeing fewer customers. That’s what happens when you reduce your customers’ wages and send their jobs to other countries.
Goldy’s anecdotal evidence carries about as much weight as climate change deniers using everytime it snows as proof global warming is a hoax. Both Goldy & climate deniers lack critical thinking in their examples. Also are Goldy & Sawant aware that the majority of businesses in Seattle are neither Target or McDonalds?
@29 Fair enough. It’s anecdotal evidence. All I ask is that you’re just as skeptical of the anecdotal evidence offered by business owners when they insist there will be mass layoffs and business closures should the $15 minimum wage pass.
@ 30
So you went searching for an anecdote, not a metaphor.
I feel better now.