The business model that made McDonald's a fast-food powerhouse is crumbling

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Trouble at McDonald's?

The fast-food business model is under threat.

Chains like McDonald's, Burger King, and Wendy's have long relied on cheap labor to keep menu prices low while still driving a healthy profit.

But the days of cheap labor could soon be over, turning the entire business model on its head, according to Deutsche Bank analyst Brett Levy.

The industry is facing unprecedented pressure to raise wages because of three major factors: a shrinking labor pool, local legislation increasing the minimum wage, and new overtime pay rules, Levy wrote in a recent note.

"With a high level of scarcity across the labor pool (with a current ~5% unemployment rate), it has created an intense headcount battle," Levy wrote. "Second, the ongoing changes to wage-related legislation has created an artificial escalation of costs, which in some cases are greater than companies can handle."

That, along with new overtime pay rules, "could combine to plunge the restaurant industry into a challenging and potentially prolonged phase of escalating wages," he wrote.

While the federal minimum wage, at $7.25 per hour, hasn't been raised in seven years, state and local governments across the country have been enacting legislation to push their minimum wages higher.

About one in three states now has a minimum wage that's higher than $7.25 per hour, and those states have plans in place to raise wages even higher on an annual basis.

As labor costs inflate, restaurants will be forced to raise menu prices and fire some workers as well as reduce labor hours for its remaining employees, according to Levy.

To absorb the cost of a $1 per hour wage increase, a fast-food chain with 18 employees would have to significantly raise prices or cut 180 monthly labor hours, according to his estimates.

Former McDonald's USA CEO Ed Rensi predicted a similar scenario in a recent interview with Business Insider on this topic.

"They are going to raise prices to offset the cost of labor, and then they are going to lose customers," Rensi said. "And guess what happens when they lose customers? They fire employees because they don't need them anymore."

Longer term, many companies would have to invest more in technology and automation to further reduce the need for employees, according to Levy.

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RELATED: 10 fast food hacks to save you major money

10 money-saving fast-food hacks
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10 money-saving fast-food hacks

Restaurant: McDonald’s

Hack: Order two four-piece nuggets instead of one six-piece. It’s cheaper, you get more nuggets and you get more sauces. Score.

Photo credit: Getty

Restaurant: McDonald’s

Hack: Order a McDouble without the ketchup and mustard but with lettuce and Big Mac sauce. You'll pay for the Big Mac taste for the price of a McDouble.

Photo credit: Getty

Restaurant: Chipotle

Hack: Order half of one protein and half of another kind (like chicken and steak). You’ll almost always get more than half of each and end up with up to 1.5x the protein in your burrito or bowl for the price of a normal portion.

Photo credit: Getty

Restaurant: Krispy Kreme

Hack: Fill out the survey on the bottom of your receipt for a free doughnut with the purchase of one. Hypothetically if you kept doing this, you could win unlimited free doughnuts. Not advised.

Photo credit: AP

Restaurant: Arby’s

Hack: Order two junior roast beef sandwiches instead of one regular classic. You'll end up with more meat for a lower price.

Photo credit: Getty

Restaurant: Jamba Juice

Hack: Substitute any ingredient in any smoothie for the same price. If you’re craving a smoothie with non-fat yogurt instead of mango, or extra strawberries instead of blueberries, customize it to your liking without any extra charge. It will save you more than being charged for creating your own smoothie from scratch.

Photo credit: Getty

Restaurant: Jack in the Box

Hack: Order two Jr. Bacon Cheeseburgers and combine them into one for a much cheaper version of a Bacon Ultimate Cheeseburger. 

Photo credit: Getty

Restaurant: McDonald’s

Hack: Order a sausage McMuffin off of the dollar menu but ask for the sausage to be substituted with egg—an egg McMuffin for a dollar.

Photo credit: Getty

Restaurant: Any pizza place

Hack: When you call to order delivery, ask if there were any orders that weren’t delivered—the pizza place will often give you those orders for a discounted price (perfect if cold pizza is your thing.)

Photo credit: Getty

Restaurant: Subway

Hack: Order a Double Steak and Cheese Sub instead of the Philly Cheese Steak Sub—you’ll get the same sandwich at a normal foot-long price.

Photo credit: Getty


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