3 Reasons Why McDonald's Would Be Smart to Pay $15 an Hour

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Fast-Food Strikes in 50 U.S. Cities Seeking $15 Per Hour
Patrick T. Fallon/Bloomberg via Getty Images McDonalds employees and supporters protest in Los Angeles for a living wage of $15 an hour, using the slogan "Fight for 15."
The Golden Arches have become a battleground.

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.

An early report indicated that McDonald's would have to raise prices by 17 percent to offset the increase, but that was later debunked for not accounting for the franchisee model or the need for a company to respond to competitive pressures. However, we can't discount that if consumers knew that McDonald's was paying more that it would be easier to push higher prices through.

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.

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239 Comments

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whiteoak

when they decide to pay 15.00 per hour for burger floppers then we need to raise he pay of our Military Servicemen to about 50.00 per hr,,,,

November 16 2014 at 3:45 PM Report abuse rate up rate down Reply
i.iowa

Dear article writer. Success is the progressive realization of a worthy ideal. You want to know why so many people fail in life? Because they've got to put the fuel in. To many people expect something for nothing. It's like standing In front of a fireplace saying you want to be warm without putting any wood in. Success isn't the result of making money. You can travel down and street in a America and determine what kind of service someone is providing.

May 24 2014 at 10:14 AM Report abuse rate up rate down Reply
boomer01

This is a ridiculous article. The other starts with a conclusion (that $15/hr minimum wage would be great) and then tries to support it with weak arguments.

You know what would be great? Automation. Get rid of 80% of franchise employees and pay $15 an hour to the person who makes certain the equipment and computers are operating correctly.

What are the benefits?
1.) Every employee earns $15 an hour.
2.) Automation cuts costs and helps the franchise owner.
3.) Consumers benefit with lower prices.
4.) No more cold French Fries.
5.) No more order screw ups.
6.) No more language barriers for those that "No hablo Ingles"

December 05 2013 at 10:46 AM Report abuse rate up rate down Reply
denadmartinez

its silly idea who is going to buy the junk food if they raise the price to pay for wages all jobs would have to do that!!!

November 14 2013 at 2:38 PM Report abuse rate up rate down Reply
rhbong

There are many jobs that require true skills that make close to $15 an hour. Heck, I tutored college calculus and physics for less than $15/hr. So what field will people flock to when you can have a 6th grade education and start earning $15/hr asking people if they want fries with that? Really? A junior high couple can flip burgers full time and earn $60,000/yr? Great, think about any job in the U.S. right now that requires more education, more skill, and more commitment but earns less than that and consider it obsolete.

November 13 2013 at 10:40 PM Report abuse rate up rate down Reply
shmtnmusic

What BS! No one who goes to McDonalds is thinking about how much the teenager behind the grill or register makes .They are looking for something cheap to eat. These jobs are for the young to get some type of experience and earn some pocket money for themselves. These are not supposed to be lifetime jobs to raise a family on. I'm sick and tired of the whiners who have stuck around way to long in a job that isn't meant to be a lifetime vocation. Get some balls and leave for something better. If you're not qualified for anything else, don't blame the business for your lack of brain power or ambition.

November 12 2013 at 10:20 AM Report abuse rate up rate down Reply
ladywindsor1

The CEO of Costco earns $5 million USD. His employees are notoriously well paid with benefits. WalMart on the other hand notoriously pays low, but the Walton family and investors are stinking rich. Billionaires they are. I am not suggesting there is anything wrong with being billionaires, but how much money do they really need? And at what expense?

November 06 2013 at 3:07 PM Report abuse rate up rate down Reply
donut999

What a stupid story. McDonalds profit for 2012 was $8.6 billion. Do not be rattling on about it cost them $8 billion and only rattling on about margins while ignoring the bottom line impact. No employer owes any employee any wage other than the prevailing wage. Defined, that is wage that will attract qualified applicants to fill any open positions. And stretching a bit on the word qualified for these entry level jobs.

No one ever deals with the issue of what the impact is on other employee's. If Lucy has been there 3 years and is shift supervisor making $15 an hour, what do you do with her? Raise her to $30 an hour. How is Lucy from either a Walmart or a McDonald's going to like it that kids with ged's and no work experience or qualifications are suddenly being paid her wage to be cart cowboys or girls and stacking cans of green beans on a shelf or flipping a burger?

November 04 2013 at 4:19 PM Report abuse +3 rate up rate down Reply
Jeff Howard

15 dollars an hour , operating a cash register or flipping a burger. YOU ARE INSANE.

October 27 2013 at 7:09 PM Report abuse +2 rate up rate down Reply
Robert & Lisa

As usual, the liberal logic says they know how to better manage other people's money than the people who earned it do. The socialist liberals are so conceited and arogant.

October 20 2013 at 4:16 AM Report abuse +2 rate up rate down Reply