A former high-ranking McDonald’s warns that a $15 minimum wage erases all of the profit at independently-owned by franchisees.
“I worked for the company for three decades, and served as its USA President for 13 years. I can assure you that a $15 minimum wage won’t spell the end of the brand,” said Ed Rensi, the former president and chief executive officer of McDonald’s USA. “However it will mean wiping out thousands of entry-level opportunities for people without many other options,” Rensi wrote for Forbes.
At the beginning of this year, 14 states raised their minimum rates, and lawmakers in California just made a deal to hike the most populous state’s hourly minimum to $15 by 2022. McDonald’s increased pay by $1 for employees of its 1,400 corporate-owned locations last year, putting pressure on franchisees to follow.
“The $15 minimum wage demand, which translates to $30,000 a year for a full-time employee, is built upon a fundamental misunderstanding of a restaurant business such as McDonald’s. 'They’re making millions while millions can’t pay their bills,' argue the union groups, suggesting there’s plenty of profit left over in corporate coffers to fund a massive pay increase at the bottom,” he explained.
“In truth, nearly 90% of McDonald’s locations are independently-owned by franchisees who aren’t making 'millions' in profit. Rather, they keep roughly six cents of each sales dollar after paying for food, staff costs, rent and other expenses,” he claimed.
“A typical franchisee sells about $2.6 million worth of burgers, fries, shakes and Happy Meals each year, leaving them with $156,000 in profit. If that franchisee has 15 part-time employees on staff earning minimum wage, a $15 hourly pay requirement eats up three-quarters of their profitability. (In reality, the costs will be much higher, as the company will have to fund raises further up the pay scale.) For some locations, a $15 minimum wage wipes out their entire profit,” he wrote.
“Recouping those costs isn’t as simple as raising prices. If it were easy to add big price increases to a meal, it would have already been done without a wage hike to trigger it. “
Meanwhile, McDonald’s has been feeling some pay-cost pain in the U.S. The profit margin at U.S. restaurants narrowed to 15.1 percent last year, from 17.4 percent in 2014, and the company cited higher wage and benefit expenses, Bloomberg reported.
“Labor costs are going to rise and they’re either going to have to suck it up or pass it along,” Bob Goldin, vice chairman at industry researcher Technomic Inc., told Bloomberg.
“And my sense is they’ll do a little bit of both.”
To be sure, a $15 minimum wage could pressure U.S. restaurants' profit margins, Moody's warned earlier this month, Reuters
Moody's says that a gradual pace of wage increases will lessen the burden on restaurants. The impact to California restaurants could be more pronounced as employees who receive tips will receive full minimum wage in addition to tips, the ratings agency also said.
(Newsmax wire services contributed to this report).
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