McDonald's Has Bigger Problems Than Its Low-Wage Fight

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Fast Food Protests
Nick Ut/AP
You deserve a break today, McDonald's (MCD).

The chain has posted three consecutive quarter of negative comparable-store sales for its domestic restaurants, and unless it comes through with a 1 percent uptick in June, this will be quarter number four.

Some suggest that a key reason diners are defecting is the chain's failure to give a sympathetic ear to the fast-food labor movement's vocal push for a $15 an hour wage -- a change that would roughly double its current base wage for front-line employees. Earlier this month, Reuters specifically pinned McDonald's recent stateside struggles on "internal missteps that have slowed service and image-denting protests from its minimum-wage workers."

So yes, there's that PR nightmare. But there's also the dovetailing issue of deteriorating customer service. A year ago, McDonald's hosted a webcast with franchisees on rising complaints about employee friendliness. One in every five gripes being filed was related to unfriendly employees. And a QSR magazine study around the same time showed that waits for drive-thru orders were on average nearly a minute longer than waits at rival Wendy's (WEN).

This doesn't mean that McDonald's troops aren't worthy of a raise. In fact, the long wait times and growing customer dissatisfaction are probably the direct results of the chain expanding its menu too quickly. The front line has simply been dealt a bad hand be the execs. However, it still doesn't mean that higher hourly wages wouldn't lead to fewer defections.

Wage a War

The push for McDonald's and its major fast-food rivals lift their starting wages to $15 an hour -- as well a similarly inspired protest movement aimed at getting the same concession out of Walmart (WMT) and other retail establishments -- is gaining momentum. Disgruntled employees are being joined by union organizers and other activists to lobby for a living wage.

Unions hope that employees will feel empowered and unionize. Beyond that, there's a trend toward greater automation already underway; that will likely intensify if McDonald's has to beef up its entry-level payroll. The chain has been automating tasks. Without a human touching them, soda fountains can now pour beverages into appropriate-sized cups that are dispensed as they're ordered. Smoothie ingredients are sorted and blended with the touch of a single button. Some locations are testing informational tablets with mobile ordering.

Rage Against the Machines

Automation -- in lieu of significant menu price hikes -- would be in the background of any significant wage hike at McDonald's. If anything could improve customer satisfaction, it would be more efficiency.

%VIRTUAL-article-sponsoredlinks%So, in theory, activists may be right in suggesting that McDonald's paying employees at least $15 an hour will bring customers back. But they may not like it as much if the way the chain gets there involves slashing its workforce by a third or more, and handing off many rudimentary tasks to machines.

Smaller chains will have more trouble making the upfront investment in technology that checks out customers at automated kiosks (eliminating misunderstood orders) and speeds up the food prep process (reducing drive-thru waits), so expect the inevitable automation revolution to come at their expense.

What's Really Eating Away at McDonald's

However, this doesn't mean that the reluctance of McDonald's and its franchisees to pay a living wage is the only thing pinching their sales. If it were as simple as that, other chains that also pay close to the minimum wage wouldn't be faring better than McDonald's.

There's certainly a human case to be made in wanting McDonald's to pay more. The minimum wage doesn't go nearly as far as it once did, and it's nearly impossible for an adult to make ends meet on $7.25 an hour. However, to pin the blame for McDonald's recent woes solely on a backlash against corporate greed fails on several levels. It's the menu (and its growing complexity) that are holding the chain back relative to its peers.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends McDonald's. Try any of our newsletter services free for 30 days.
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