3 Reasons Why McDonald's Would Be Smart to Pay $15 an Hour
There's a wage war under way, and McDonald's (MCD) is on the front line. Protests have broken out at the leading fast food chains this summer, urging the restaurants to raise their starting wages to $15 an hour.
On the surface, it's a partisan issue. Liberals generally side with the pro-labor argument, lobbying for reasonable wages so employees don't have to take second or even third jobs to get by. Conservatives generally argue that the free markets should dictate wages, letting supply and demand for jobs dictate how much an establishment is expected to pay.
Let's toss this all into a McCafe blender and approach the reasons why it's actually in the best business interests of McDonald's to roughly double its starting hourly wages.
1. If Anyone Can Pay More, It Would Be McDonald's
Economists estimate that McDonald's would take an $8 billion hit annually if its employment costs rose to at least $15 an hour in wages.
That's a lot of money, but McDonald's does have some of the highest profit margins in the industry. Mickey D's has clocked in with net margins of 19.85 percent over the past four quarters. Put another way, nearly $0.20 off of every dollar in sales makes it to the chain's bottom line after taxes. That's nearly double Burger King's (BKW) net margins of 10.53 percent.
The popular argument is that McDonald's can afford to pay more. It's not an entirely fair shot. After all, these are the net margins of the parent company.
Many fast food outlets are run by franchisees, and they have slightly different models. They're not as wealthy as the parent company, and they're working off leaner margins and returns on their investments.
However, as the world's largest restaurant operator with healthy markups it is the one that can best brace itself for the move.
2. McDonald's Would Crush the Competition
Let's give this a capitalist's attempt at game theory.
McDonald's takes the lead by becoming the first national chain to embrace $15 as the starting line for employees. Right off the bat, there's goodwill with consumers. This is important, because comparable-store sales at the typical McDonald's store have been struggling for nearly a year. The plan to get consumers to pay up for higher-priced McCafe beverages, chicken sandwiches on artisan bread, and exotic salads has run into a few speed bumps because diners crave more of the cheaper Dollar Menu items.
Then we get to the competitive advantages of a company paying more than other employers.
It would be hard for smaller chains to attract and retain top talent when they know they could be making twice as much at McDonald's. By the same token, McDonald's would have a larger pool of job applicants to fill what would probably be fewer jobs as more tasks get automated. There would be less turnover, since there aren't too many other alternatives for those lacking college degrees paying that much at the retail level.
Until the rest of the industry caught up, McDonald's would have stable and more efficient staffs. Smaller chains would likely have to institute much higher menu price hikes than McDonald's would to justify the new wages. Everywhere you turn McDonald's is stronger -- and every rival is weaker -- the moment that the burger giant juices up its starting line.
3. It's Going to Happen Eventually
California's legislature OKed increases in its minimum wage last week. The current rate of $8 an hour in the state will go up to $9 an hour next summer and up to $10 come 2016.
Sure, that's just California. However, it's not as if every state is tethered to the $7.25 an hour federally mandated minimum. Washington is already at $9.19 an hour, and 10 states bump their minimums higher every year to keep up with inflation.
All of these gyrations will test chains hugging the bare minimums as pay rates inch higher over the years. Just think how McDonald's would be all set for several years at $15 an hour. As the competition sweats out the compromise between food quality and menu prices with every uptick, McDonald's can just keep going along as if nothing's happening.
Don't assume that only the left-leaning politicos think that McDonald's should be paying $15 an hour. There's a strong argument to be made from the pro-free markets camp, too. McDonald's paying $15 an hour would be good for business.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our newsletter services free for 30 days.