Is McDonald's really very profitable? I ask innocently, I don't live in America, I never eat in McDonald's, and I think you are probably right, but I'm seeking data to back up the assertion.
If McDonald's arbitrarily raised wages, could they do that without increasing the costs of their products? Would that then make them less competitive against the horde of other fast food shops, and therefore reduce their sales dramatically in what may (or may not, I really don't know) be a hyper-competitive industry.
These are the types of considerations I'm sure are important.
I haven't read the article and have no opinion either way, but I want to make it clear McDonalds are franchises (at least in the US). I'm not positive but the local owner can pay what they want. McDonalds making 10 billion a year has nothing to do with it. You'd have to see how much the franchise owner makes. You of course can argue McDonald's charges the franchises too much leaving little room for higher wages.
Increasing pay by close to 50%,one would expect that prices would have to increase by closer to 15%, not 4%. Though, given how price sensitive those customers are, it isn't clear how much you can raise the price.
In terms of margin, it looks like McDonalds is doing much better than other chains:
>...In 2012, for example, when McDonald's had a net profit margin of just under 20 percent; Burger King's net margin was less than a third of that and another big chain; Wendy's, had a scary thin 0.3 percent.
But even at McDonalds, I think it is safe to assume that in the longer term, fast food restaurants would look into replacing rising labor costs with machines - that might be replacing cashiers with kiosks or even machines that prepare and cook the food, etc. This would be expected to happen anyway, over time, but mandating huge increases in labor costs will mean it happens quicker and be more disruptive. (One might say "good riddance" as these aren't great jobs, but they are entry level jobs which are disappearing in all industries.)
Remember reading an article in Forbes back in the '80s that cited a study comparing the profitability of McDonalds franchises that paid minimum wage, and those that paid somewhat higher. Guess which were more profitable? The ones who paid higher wages.
McDonalds operates at a larger scale than any other restaurant in the world and by a very large margin. What works for McDonalds won't work for restaurants that must order supplies on a much smaller scale.
Also, in McDonalds' early days they didn't have the leverage over suppliers that they wield now, so its food costs have come down by orders of magnitude. This reminds me of something my cost accounting professor told me- to get to large scale businesses have to price items as if they are already at large scale. If you buy a stamping machine that cost $1 million capable of maximum output of 100,000 units, but currently only have sales of 5,000 units, do you price each unit at 1,000,000/5,000 or 1,000,000/100,000? If you opt for the former, you'll never get to maximum output because customers won't be able to afford your prices.
An interesting side note: Forbes magazine had an article a couple of decades ago on a study comparing McDonalds franchises which found that those who paid more than minimum wage were more profitable than those that paid minimum wage (and yes the study did control for socio-economic status of the location: it was an apples to apples comparison).
Revenue != Profit. You really have to control all your costs to just break even in fast food. Of course in the case of McDonald's a good bit of that revenue is also going to McDonald's Corp as franchise fees.
McDonalds is a bit of an outlier here; they have incredibly predictable food costs due to high levels of standardization and a worldwide inventory network. The franchisees have a certain amount of leeway on pricing, some of which is dictated at the corporate level down, but it's based on bona fide expenses.
If local regulatory conditions cause your labor cost to go up, they are absolutely allowed to (and will) raise prices to compensate.
I always find it fascinating that nobody mentions the elephant in the room with regards to minimum wage. Instead of raising the price of goods (BigMac in this case), there is a much simpler answer - reduce profit.
Given that McDonald's makes approximately $10B in profit per year [1], I think everyone up the chain will still be able to keep their mansions and multiple homes if it only makes a couple of billion in profit each year.
McDonalds is a poor example here. McD is primarily a franchise model, selling supplies and demand for what the brand sells. Higher wages would primarily impact the franchisee. The only way McD (the corporation) can increase wages is to mandate that franchises pay above minimum wage.
I believe Starbucks is a better example as they don’t use the franchise model.
Because McDonalds is publicly traded, there’s no such thing as “insisting” that performance is fine when they’re not, the sales facts are made public. The company indeed has seen profits recently that were missing from 2014-2020. https://www.macrotrends.net/stocks/charts/MCD/mcdonalds/reve...
It is entirely possible for the number of hamburgers sold to go down while the price goes us, and for MCD revenues to stay even or earn more money. That might lead to a hollowing out of their customer base, and could lead to eventual decline, but there’s no guarantee of that.
McDonalds also has a lot of incentives to try to escape the rock-bottom commodity pricing, if it can, and regardless of quality, some companies do charge “market rates”. Apple and Starbucks come to mind. Starbucks is a good example of a company that took a cheap commodity product and pushed the price up considerably without suffering decline; the primary consequences were mountains of profit.
30% profit for a fast food restaurant is not credible. It's too competitive. I worked for McDonalds (a long time ago, but...) the best store in the market made a little over 10% profit. Others made less, or even lost money at certain times of the year.
you make it sound so bad to own a mcd's franchise, but most people would be ecstatic at the chance. $150k roughly puts you in the top 10% by individual income. most people are quite happy working hard for that amount of money.
and raising prices as a result would be fine since other minimum wage earners (i.e., customers) would now have more money to spend on fast food. (estimating based on your numbers, prices would have to increase about 10%)
If McDonald's paid their workers like software engineers, they'd have to charge at least $50 a burger, assuming the sales volume stays the same. But if burgers were $50, the sales volume would drop to zero, and the business would collapse.
> Most fast food restaurant franchisees probably don’t have margins much above 5%
If we follow your train of thought, we shouldn't see employers paying minimum wage with higher margins because those higher margins would have transpired to lower prices for consumers.
McDonalds corporate profit margin is 20%! People might say, "Well most margin comes from franchise fees and McDonalds doesn't directly own most restaurants or own that cost base" - but while some franchisees earn 12%+ profit, they don't even have a mechanism where they are even ALLOWED to reduce prices so how exactly are higher profits supposed to get passed back as lower prices?
The reality is that if a companies goal is to profit-maximise, "cost plus margin" is not a particularly effective strategy. From an economics perspective, you would work out what your demand curve is, plot that against your cost base to produce a profit figure for each point on the demand curve, and pick where maximises profit. In reality this will be less of a formal process, but this is the microeconomic theory.
"McDonalds only has 14,339 franchises in the US [1] -- where the pay raise debate is happening."
As I mentioned in another reply, the point was more to recalibrate understandings of the money size involved than to specifically speak to this discussion.
I'm not sure how you "corrected" for the number of franchises, then... if you did it by accounting all worldwide profit as for US franchises that is not a "correction". And regardless of the correction remember not to party too hard with "profit" amounts right now when McDonalds may very well go negative in the near future; the point I'm trying to make survives that, but it would make hash of yours. Profit is not guaranteed!
Somewhere online I saw a list of the profit margins of all the Fortune 100. Single-digit percentages were the norm. I was unable to google it up for this.
"> Capitalism is very efficient...
People are not. People making minimum wage don't always have the flexibility to take risks that would allow them to advance. "
That's a complete nonsequitor. And moreover it's a frankly stupid accusation of me you're trying to implicitly make. Give me the button to push to make everyone in the world effectively as rich as billionaires and somehow it all works out with no negative effects, and I'd push it in a heartbeat. I'd love to manifest Iain Bank's Culture. It sounds great.
But in the real world, we have to work with what resources we have, and we don't actually have anywhere near as many as people think. The rich may be rich, but divide their riches up somehow perfectly efficiently amongst everybody, and we all get a lot less than our generally-innumerate intuitions are telling us we would.
What about franchise fees? Independent fast food restaurants basically don’t exist in the U.S. anymore. An individual McDonalds may be scraping the boundary of profitability, but corporate had a net income of $1.5B last quarter[0], or about $7,500 per employee per quarter[1]. That’s net income, not revenue.
If McDonald's arbitrarily raised wages, could they do that without increasing the costs of their products? Would that then make them less competitive against the horde of other fast food shops, and therefore reduce their sales dramatically in what may (or may not, I really don't know) be a hyper-competitive industry.
These are the types of considerations I'm sure are important.
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