Minimum Wage: Cost basis

I hear, "McDonald offering a livable wage" would only cost a few cents per burger. So let's do the math. I hear all the time, that McDonald’s can afford to pay a “livable wage” without raising costs, or "it’s just a few cents a burger", by people that don’t understand basic economics, or business. Doing the math? The avg McD's sees ≈$150K in profits, and this would rause costs by ≈$250K, putting them in the red by $100K. They will pass that $4.50/order on to customers. ℹ️ Info           ~ Aristotle Sabouni Created: 2017-05-20

Here’s some notables taken from the average McDonald's balance sheet:

• The average McDonald's generate about $2.5 million in gross revenue, but then they have a lot of expenses like rent/mortgage, taxes, utilities, food, taxes, and labor (and their taxes).
• The average McD's Employs 61 people in operations and restaurant management positions, and spend nearly $507,595 on wages (about $800K or 32% of gross revenue, when you factor in benefits, tax liability, and other costs around employment).
• A McDonald's ends up with an average net profit after those expenses of 6%. Or about $150K/year in net revenue (for about $2M in initial investment/risk).
• A jump from $7.25->$15/hour means $264K in increase wage costs, on profits of about $150K…. so they’re now losing $114,000.00 on each store per year. How many new McDonald’s will open with that as their forecast, how many will close because of it?
• Globally, they sell about 2.3B burgers (orders)/year, and have about 40,000 stores. So about 57,500 orders per store, means they either have to make up $4.59/order (pass that on to customers) -- or they need to cut costs by that much somewhere else. (Automation, de-employment, lower quality/quantity, etc).

The store (and chain) must respond, or the average store will go out of business.

They must: raise prices, trim staff, automate, cut quality/quantity, or some balance of these, or shut down.

Most will cost jobs. If they raise prices, they passed the costs on to customers and if that has any impact on demand (as it usually does), that will hurt future growth (cost jobs) — lost future jobs are a hidden cost, but it’s still a lost opportunity. Either way, those claiming it will have nominal impacts on the business, don’t know business.

Cause and effect

When places try raising the minimum wage, they get exactly what economists predict, a lowering of benefits, fewer jobs, higher costs, and more outsourcing and automation to replace higher costs of labor.

This isn’t just McDonald’s, this is most companies (especially restaurants). The public thinks companies are running on profit margins of about 36%, in truth, most businesses are running more like 6%. (McDonalds turns out to be average). If you raise their labor costs by nearly 30% or more, there goes those profits. They’re either out of business, or raising their costs to consumers — which hurts far more people than it helps.

Starbucks is in the same situation, if pay goes up, then automation becomes more affordable. Do I really need an army of idiots getting my orders and name wrong, when I can replace 8 people with one person whose job is to keep the robot loaded, and call if anything breaks? Do you really want all the barista’s turned into panhandlers?

NOTE: There are other options to defer the costs, but they’re all bad as well. You could lower quality to get costs down — but that impacts sales and isn’t good thing. You could cut back on profits — but that means less return to investors, which means less investment/reinvestment, and stores grow less, less jobs are made, and the more attractive OTHER investments are (ones that create fewer jobs or create jobs out of country). And so on. The balance sheet must balance, and when you raise the cost of labor, it’s going to come from somewhere.

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🔗 More

Economics The study of choice, scarcity, Social reactions to policies, and unseen consequences.

Minimum Wage The delusion that politicians know the big magic round number that fair for everyone, everywhere, at the same time.

The Broken Window Fallacy This is a fundamental concept of economics (and logic) about seen advantages versus unseen costs. There's no "win" here.

Minimum Wage Laws The minimum wage warriors seem reluctant to accept the economic realities: price and wage controls never work.

🔗 Links

• http://www.mcmichigan.com/2661/30770/default-page/
• http://somicom.com/media/2015/05/22/mcdonalds-is-opening-restaurant-run-entirely-by-robots-in-phoenix-az/#.VWiyVly6cUE
• Europe tried, and got expected results (automation): http://www.neowin.net/news/mcdonalds-orders-7000-touchscreen-kiosks-to-replace-cashiers
• Automation replaces workers: http://www.aei.org/publication/picture-alarm-minimum-wage-proponents/
• http://hotair.com/archives/2014/08/10/the-coming-robot-rights-movement-and-the-minimum-wage/
• http://www.forbes.com/sites/realspin/2016/04/25/mcdonalds-minimum-wage-reality/#5a38158f58bb
• https://www.aei.org/publication/the-public-thinks-the-average-company-makes-a-36-profit-margin-which-is-about-5x-too-high/
• Companies that use more labor/automation (like Amazon) likely to win via high minimum wages (unemploying more people): http://www.fool.com/investing/general/2016/04/08/as-minimum-wages-go-up-amazoncom-looks-like-the-bi.aspx
• http://qz.com/134661/briggo-coffee-army-of-robot-baristas-could-mean-the-end-of-starbucks-as-we-know-it/
• https://fee.org/articles/restaurant-chain-announces-bankruptcy-says-minimum-wage-hike-to-blame/

Tags: Economics  Minimum Wage  The Broken Window Fallacy  Minimum Wage Laws