Commenting on the same study I mentioned yesterday, the one about the impact of increases in wages at McDonalds on the Big Mac, James Taranto points out:
It turns out it was an exaggeration to describe Morelix as a “researcher”; he is in fact an undergraduate. The reference in the story has been corrected to “student,” and a correction has been appended.
But there are other problems here. Morelix’s “study” has a back-of-the-envelope quality to it. He looks at the company’s 2012 annual report and observes that its labor costs amounted to 17% of its total revenue. Therefore, he concludes, the consequence of doubling wages would be a 17% price rise–17 cents on a Dollar Menu item, times 4 for the $4 Big Mac.
There’s a let-them-eat-cake quality about Fairchild’s dismissive reference to a 17% increase in prices. Sixty-eight cents may not amount to much, and the hypothetical increase in the cost of a single meal, even adding fries and Coke, would break hardly anybody’s bank.
There are other, greater problems with the “study”. Mr. Morelix clearly does not understand how the McDonalds corporation works. As I’ve shown here before, the labor costs in the franchises aren’t reflected on the corporation’s financial statement and the corporation’s revenues are derived from multiple sources, both company-owned stores and franchise fees so there’s really not much of any relationship between corporate’s cost of labor and the price of a Big Mac.
Note that I’m not taking a position one way or another on the subject. Just trying to ferret out the truth. The income statement for an “average” McDonalds store might be a good place to start. Crew payroll presently comprises about 20% of the operating expenses of the store and net revenues are about 5.7%. My gut level reaction is that doubling crew payroll would cause the store to close.
McDonalds, the Corporation, does not set the price of a BigMac for its franchises. In 2006, the price of a Big Mac Meal in Santa Clara County ranged from $4.29 to $5.09. What the corporation does is promote one dollar menu items, which act as flexible restraints on the ability of the franchise to raise the price of other menu items. The price of a Big Mac cannot greatly exceed the price of a one-dollar cheeseburger, else the customer will substitute with multiple cheeseburgers. The dollar menu was introduced as an aggressive value tactic to counter poor sales performance in the early oughts, but this study shows that it also substantially serves the corporation’s interest in limiting franchisees from degrading the brand by taking excessive profits. Interestingly, franchises are not required to offer the dollar value meal, so train stations/airports don’t.
I think its an interesting setup, but the whole think shows how price sensitive the McDonalds customer is. A franchise doesn’t have to offer a one dollar item, but they do. A franchise doesn’t have to set any particular price, but the standard deviation for a Big Mac meal was about 17 cents. I don’t think lack of familiarity with the Big Mac is the problem, its whether people can imagine going to a McDonald’s and comparing the cost/benefit of ordering a BigMac versus one or more one dollar items.
Somehow, the people who know how to improve a company never start one. If McDonalds could raise prices, pay workers more, and increase its sales, another company could provide that product and service, but these geniuses never do it. If it can be done, do it, and they can donate the profits to charity.
Costco is the “poster child” for how to run a kinder and gentler company. Costco’s business model would put Walmart out of business. The fact that Costco never actually puts Walmart out of business should indicate that there is no possibility of the Costco business model working outside of its niche.
There have been a few instances where the kinder gentler model has been implemented, but it ain’t working so well. Detroit is this years example, but there are more to follow. Amazingly, this utter failure will be overlooked. We are soon to find out how correct they are about healthcare.
Tasty:
There is another company providing superior service, superior product, same price. My local In-N-Out is about a quarter mile from my local McDonalds. In-N-Out starts their employees at $10.50 with benefits. Their Double Double is often cheaper than the vastly inferior Big Mac. Their stores are also spotlessly clean and their employees are happy and motivated.
So, see? It can be done. Identical employee pool, identical location. Which makes the predictable Republican pushback b.s.
Maybe In-N-Out doesn’t pay their CEO $20 million a year plus stock options, private jet, etc…. Maybe they’re just making a decision to treat their employees like human beings. Which may be why In-N-Out has lines out the door while the McDonalds down the street survives only by virtue of its eternally incompetent drive-thru.
@michael, so your preference is a model in which the company serves very few people?
Serves very few people? Lines every hour they’re open. In-N-Out is growing like crazy. My local In doesn’t have a drive-thru but that’s more the zoning and location than anything else. Other stores do have drive-thru and again, long lines.
By the way, have you noticed how well McDonalds does in countries that don’t allow employees to be paid below-survival wages? Like Japan? France? Germany? The decision to treat employees like crap is an American thing that is in no way necessary and probably contributes to McD’s slide down the economic scale from being a middle-class haunt to being increasingly identified as the poor person’s shop.
The only interaction I have with McD is that my OCD son was into them for a while. Then I introduced him to In-N-Out – fresh ingredients, employees who don’t stare blankly at you and screw up your order, clean bathrooms — and now we’re once again done with Mac.
And it’s cheaper. Fries are not as good, though.
I honestly don’t give a damn about McDonalds. I’m just trying to explore the issue.
One thing to keep in mind: corporate doesn’t pay most of the employees of McDonalds stores. The CEO gets his $14 million from corporate; it’s the franchisees that pay most of the crew employees. As I’ve pointed out, the franchisees aren’t making enough to double the pay of their employees without substantially increasing prices. I don’t know what increasing prices would do to their business. That’s what I’d like to find out.
I’ve posted on In-N-Out before. It’s not a franchise operation–all the stores are owned by corporate. Very different situation.
@michael, McDonalds is in a high volume, low margin business, having lines out the door is like having people wandering through a Wal-Mart with empty shelves. They will leave and not buy anything.
In-and-out (family owned) has previously said it has no interest in expanding or franchising; they want their stores to be close to a food distribution center and they want to be able to exercise direct quality control over individual stores. They are limiting supply of their own goods, creating lines for young men with disposable income who enjoy leisure and status goods.
I am reminded of one of my favorite beer companies, New Glarus from Wisconsin. They used to distribute in Illinois, but one day announced they would not anymore because of the size of the Chicago market meant that they risked loss of quality control over their product. I was saddened that they decided to be a niche product and both I and my brother have taken road trips to get some NG for each other, but I never wondered why Anheiser Busch doesn’t make a beer as good as a New Glarus Spotted Cow. They are not in the same business and I know most people think spending a few extra dollars for a beer isn’t worth it.
@michael reynolds
If In-N-Out is that much better, their competition will respond. Like Costco, I suspect they produce a niche product, but if not, they will overtake McDonalds.
You could invest in either company, and you could help them to expand. I fail to understand why people who complain about these companies do nothing.
CEO pay is a different issue, but the Clinton millionaire tax caused a shift from salary to stock compensation. It “seemed like a good idea” at the time, but as with all “good ideas”, it went horribly wrong.
There is a problem with corporations, but that is also a different issue. You can start with why the incorporate in Delaware.
Good service is mostly non-existent in all industries and companies. It is better in newer companies and stores, but it quickly declines.
Artificially raising wages never works. If it did, there would be no calls for a higher minimum wage. Forty years ago, $8.50/hour was a really good wage, but now it ain’t. Increasing the minimum wage produces fewer minimum wage jobs, or it causes more robots to be employed.
As to Dave’s original inquiry about the effect of raising wages, I would expect there to be fewer employees, higher prices, more automation/labor saving devices, and another call for higher wages, shortly. If it is possible to raise wages and still make a profit, somebody will do it unless there are additional barriers to entry.
“I don’t know what increasing prices would do to their business. ”
I can think of three possible outcomes:
1. Wages increase, employee productivity does not improve. This would be because fast-food is not an attractive occupation. The labor pool is still fairly limited. Even In-and-Out sees its labor pool as young, inexperienced adults that will eventually go somewhere else, its just that the economy has extended that.
2. Wages increase, number of employees are reduced. The higher paid employees are more productive, the increased cost of the merchandise has had at least a marginal reduced the number and types of customers. More technology is utilized to take orders, prepare food and receive payments. Unclear what occupations these employees are essentially shifted from — depends on the extent of the new mandate.
3. Stores close. McDonalds in lower income areas close because price sensitivities of customers and lack of quality labor pool. Businesses that michael likes locate in high income areas, not just for the customer base, but the labor pool. There are no In-and-Out Burgers in Compton, there are four McDonalds. Raise prices and there are likely to be none of either.
Right, so what we’re all saying is we need slaves. We can’t possibly pick the cotton without slaves. Because business model, that’s why. Why, if we freed the slaves pretty soon there’d be no cotton and then what would the slaves wear for clothing?
Amazing how technological change is suddenly invoked where previously dismissed, and corporate greed is dismissed, and we are all supposed to credulously buy into the McDonalds corporate b.s. about the independence of their franchisees so that we can reach the conclusion that American citizens should work a 40 hour week and live in a cardboard box, collecting food stamps. The skepticism you all so quickly deploy elsewhere is suddenly absent in the face of Big Mac’s assurance that they can do nothing because: business model. Franchises.
And yet, where does McDonalds make their money? Here’s a convenient Wiki link to where McDonalds operates. http://en.wikipedia.org/wiki/International_availability_of_McDonald's_products
Do you think they pay starvation wages in Denmark? Finland? France? Japan? Germany? Netherlands? Do they survive in states with a higher state-mandated minimum wage? Why, looky there, they do.
Gosh, it’s almost as if they can adapt their holy business model to fit the circumstances imposed by various cultures and governments. It’s almost as if they can still make money not treating employees like crap.
But why would they when there’s such a community of eager apologists for bad behavior here in the US?
@michael reynolds
I am not aware of anybody being forced to work at McDonalds, but I could be wrong. In a free society, technology will be developed to automate low paying jobs if it is profitable. Presently, farm machinery is being developed to require fewer workers.
As to greed, we are all greedy. Anybody who has more than they need is greedy. The problem is who gets to decide what the needs are. I can assure that by many people’s standards you are greedy. Corporations are trying to maximize profits. That is not the problem. The problem is that they are able to erect barriers to limit the competition.
Raising wages to increase living conditions has been tried for several decades, and each attempt has been a failure. This will be no different. It does not matter how high you raise wages. You will never be able to afford a middle income lifestyle on a lower income wage.
Actually, it does work, but the lifestyle keeps changing. Many of today’s standard amenities were luxury items 40 years ago. In 40 years, today’s minimum standards will be substandard.
The solution that has a chance of working is to get minimum wage workers moving up the ladder faster. This has been proven to work. Few people at the top began at the top. There are few CEO’s whose first job was CEO. Ditto for middle and upper management.
This would require a different approach. Getting people out of poverty requires getting them out of the poor areas, but nobody who is concerned about their wages wants to live next to them. It is always interesting that the people who are outraged by the wages of the poor are never the poor. It is almost as if they are acting upon feeling guilty about their greed.
McDonalds will survive any changes forced upon it. They will change their business model as needed. The franchise owners and workers will be impacted not the corporation, but the actual goal is to feel good about oneself.
I would suggest that since there is a proven business model of paying higher wages and still profiting start a company. This would be an opportunity to “give back to the community”. Instead of wasting time writing about the concept, the advocates should implement it and hire people.
McDonalds will not be able to hire anybody, and they will soon go out of business. Costco is putting Walmart out of business, and you can do the same for fast-food companies.
I am not aware of anybody being forced to work at McDonalds, but I could be wrong.
Yes, you are wrong. People at the low end don’t work for fun, they work to eat. So long as massa won’t pay a living wage and the alternative is actual, literal starvation, the choice is rather forced upon you, wouldn’t you say?
Corporations are trying to maximize profits. That is not the problem. The problem is that they are able to erect barriers to limit the competition.
Why isn’t that the problem? Because your personal preferences say it isn’t. You chose to assert it, but that’s meaningless except as a statement of your personal beliefs. And the barriers to competition such as they are are erected by McD’s underselling everyone else because the government allows them to pay slave wages. In other words: the dreaded rent-seeking, no? I mean, every other civilized nation has limits on how badly you can screw employees, but ours doesn’t. Wonder if that’s connected to lobbying by McD’s an their ilk?
Raising wages to increase living conditions has been tried for several decades, and each attempt has been a failure.
Oh? Where? When? Denmark? Another assertion of unsupported faith.
The solution that has a chance of working is to get minimum wage workers moving up the ladder faster. This has been proven to work.
Baloney. The US has some of the lowest social mobility in the developed world. The “socialist” countries often do much better. The buy-in for a McDs franchise is between a million and 1.8 million according to their site, and you can’t borrow from McD’s. How long do you have to flip burgers at $7.25 an hour to save up a million dollars?
It is always interesting that the people who are outraged by the wages of the poor are never the poor.
Do you even hear yourself? The darkies are happy down on the plantation, why it’s them there agitators got ’em all worked up. Jesus H. Christ. Yeah, poor people love choosing between food and medicine.
McDonalds will survive any changes forced upon it. They will change their business model as needed. The franchise owners and workers will be impacted not the corporation, but the actual goal is to feel good about oneself.
Riiight. The franchisees will be affected, not the corporation that lives on their franchise payments and ad buy-in and by selling them patties and buns and fries. Honestly. Really.
In the comments to my earlier post on this subject jimbino makes a very good observation:
I think I agree with that. I have no philosophical opposition to a minimum wage. I just think that it should be empirically grounded. If people now earning the minimum wage are injured by an increase the minimum wage, is that a good idea? I don’t think so.
That depends on a lot of things I honestly don’t know like (in the case of McDonalds) the elasticity of demand for labor and the elasticity of demand for Big Macs.
The example that Michael has been citing, Denmark, has no minimum wage so it’s pretty hard to compare the United States and Denmark. It has contractual wages agreed upon through collective bargaining. That’s true in much of Europe.
Michael,
I don’t think you can simply dismiss the franchise argument with outrage and hand-waving. And McDonalds (really fast food and retail generally) have been long been low-wage employers. Is there something new that’s outrageous here?
When I was 16 I got my first job outside the family business at TJ Maxx, the discount retailer. I started at minimum wage ($3.25) and after three years I was the highest paid hourly employee in the district at $3.75 an hour. I was so well compensated, in fact, that management couldn’t afford to put me on the schedule for Sundays or holidays when I would get time-and-a-half. The personnel budget from corporate was that tight. I saw the numbers myself, they were that tight. I was unusual for staying three years and the only place for me to go was somewhere else or into management. I went “somewhere else” – college. Interestingly, had I gone into management, I my “hourly” wage would have dropped considerably – The larger salary comes with a much long work schedule. What should we do about the low-level managers who make $20k a year working 60+ hour weeks?
Anyway, the difference today is that the economy is in the shitter and now teenagers are unemployed because desperate adults are taking the low-wage jobs. I see little use in trying to shame individual companies into changing their long-standing labor practices – it’s simply not going to work. I also don’t think attempting to enforce some kind of “living wage” on all full-time employment will work either.
The solution is, IMO, a combination of an across-the-board modest rise in the minimum wage along with policies that will result in fast-food and retail returning to their historical position as youth employers.
Andy, I think that what has changed is that when the fast food model was getting off the ground the crews were part-timers, mostly young people in their first jobs. Now there are many more adults trying to a earn a living by working there. According to the Bureau of Labor Statistics, those earning minimum wage are mostly young and disproportionately black or Hispanic.
Dave,
Yes, that was the point I was trying to make, though I don’t think the model was “getting off the ground” in the mid-1980’s when I worked as a teen. I have noticed a lot more adults working fast food lately and I think that’s driven by the current employment situation generally.
Back on topic, if the minimum wage was changed to $15/hour, I think MacDonalds would survive. Using Dave’s 20% number I guesstimate about a dollar increase in that Big Mac meal. All of their competitors would also be paying a higher minimum wage. Their prices will increase also. MacDonalds has shown it can be successful at competing for the fast food dollar. I think the question would be in what form it survives. At some point, people will make their own food if MacDonalds costs too much. Maybe they just go to one of the places that already charges more. I would expect some marginal stores to fail.
Steve
Or we could ask whether a particular individual working the fries station at McDonalds is better off with $10 an hour as opposed to $7 an hour. Anyone want to hazard a guess? Because I think he’s better off with $10. I think he’ll think he’s better off with $10 as well. Which would be why those collective bargainers in Denmark ask for more as opposed to less.
Maybe we should ask the McD CEO whether he’s better off with the 17 million he makes as opposed to the $7 his workers make. I think he probably is. But I wonder whether “average income” or “average opportunity” is helped by that? But shhh: don’t ask. Because the real greed problem in this country is fast food workers and school teachers. Those bastards!
Maybe we should have a race to the bottom in wages. Maybe we should see whether McD’s can bargain desperate workers down to $5. Or $2. Maybe they can pay people with a free Big Mac and a Diet Coke for an 8 hour day. Would that harm “average opportunity?” Is there really anything wrong with billionaires paying people in cigarette butts and pocket lint? Because that’s the way all our economic peers around the world behave, right?
Now that I think about it, you know who would salt those fries for a few pieces of hard candy? Children. We should eliminate those pesky big-government, socialist regulations against child labor. When you think about it, why shouldn’t a six year-old be flipping burgers in exchange for used Happy Meal toys? I don’t see how that could in any way harm society.
You know, I’d say to you all what I would say to Islamic extremists, communists, Scientologists, white supremacists, Randians and every other species of ideologue: When your faith or your ideology tells you to treat another human being like shit, it’s time to drop the faith and act like a human being yourself.
Let me guess: you’re all Christians, right? That was Christ’s message, wasn’t it? “Screw the poor, screw ’em good and hard.” One of the Beatitudes.
I suggest a codicil to Godwin’s Law called Reynold’s Law, it relates to how many comments before michael accuses someone who disagrees with him of racism. Extra points here for michael using the “wage slave” arguments of Southern apologists like George Fitzhugh.
Now, now, people. Michael goes to In-N-Out. He likes In-N-Out. Therefore it is manifestly true, like the law of gravity: we need the minimum wage for great service and lines out the door, and to not engage in slavery (slavery I tell you !!)…….and Republicans are full of it. Get with the program.
I’m recommending him for the Nobel Prize in Economics. After all, Barack Obama got a Peace Prize for similarly, ahem, “deep and insightful” contributions to mankind.
For those who pointed out the different business models and dynamics….and consumer buying behaviors (the famous market triangle), congratulations.
But stay tuned. Soon to come is “Michael on Running a Successful Pizza Joint.” I hear the $20/hr for the delivery guy keeps the pizza warm and the pepperoni from giving you gas.
I don’t think it’s so much a question of McDonald’s fast-food competitors today, but what new competition McDonalds would face as the price of it’s food increased. Or would McDonalds cut costs elsewhere to try to keep the price as low as possible?
@michael reynolds
In addition to being disrespectful, you are trifling. I am sure that a slave would agree that being property with no rights is no different than having a minimum wage job. Actually, the slave is far better off. He gets free food, housing, and clothing.
In the US, the minimum wage has been raised many times in an attempt to raise the living standards of the minimum wage workers, and each time, it needs to be raised again. Everybody cannot have a middle class lifestyle.
The only reason liberals want to provide a “living wage” to poor folks is to keep them out of their neighborhoods, schools, shopping areas, and life. The poor have been warehoused in the sh*t holes by liberals, and all schemes to help the poor are designed to keep them there. Conservatives are no different, but they do not claim to “care” about the poor.
Keeping a minimum wage worker in a minimum wage job accomplishes this. Make them happy, and they will never want to move up. This also allows the upper & middle class to have exclusive access to the managerial jobs.
I would really suggest you stay away from your insinuations of my racial animosities. I will put my experiences against yours any day. You do not have a clue about the crap that you spout off about. You have chosen to remove the “darkies” from your life. You live a racist lifestyle.
Frankly, you are a spoiled child acting out. You are part of the problem, but like a child, you are blaming everybody else. You have far more money than you need, but you think acknowledging it makes it OK. You point a finger at those with more than you and claim they are the problem. You are no different than the greedy CEO’s.
I think there are conditions under which everybody could. For example, they’ve done a pretty good job of that until relatively recently in Sweden, Denmark, Finland, etc.
I attribute that to conditions of great ethnic, cultural, and political homogeneity. That provides a cultural and political framework for policies that move in the direction of a “middle class lifestyle” for all.
Recently, that homogeneity has been eroded and as it as so has the social support structure. Sweden, for example, has stepped back from its cradle-to-grave welfare state. I think that’s partially for economic reasons but mostly for social ones.
I don’t think the question is whether it could be accomplished but what conditions would be necessary to accomplish it?
@ Dave Schuler
I don’t think the question is whether it could be accomplished but what conditions would be necessary to accomplish it?
The conditions keep changing as more luxuries become affordable. Cellphones, cable, microwaves, security systems, air travel, vacations, granite countertops, huge walk-in closets etc. were once luxury items, and the present minimum wage was once a high wage.
Trying to raise everybody’s standard of living is not the problem. The problem is the method being employed. For forty years, the US has been trying to increase the middle class and to decrease the lower class. The policies have been the exact opposite, and the middle class wealth has moved to the upper class.
You have had numerous posts on this subject. You also have numerous posts on why the US is not like other countries. You are consistent in your applications. Unfortunately, it makes no difference. Public policy is controlled by politics, and politics is controlled by partisans.
Anybody who advocates for doing more of the same is either an idiot or is intentionally trying to impoverish people. When the people advocating for these policies are the people who have benefited from them, I am suspicious.
Would the fact the more and more McDonalds (and Burger Kings, etc,) are being owned by one umbrella company make a difference to the argument one way or the other? See, WSJ, The Big Get Bigger -When awarding new outlets, restaurant chains are giving preference to franchisees who already own a bunch .
This got my attention:
And this:
Would any of this make a difference to anyone’s argument?
@sam
Would any of this make a difference to anyone’s argument?
Not unless there are additional corporation shenanigans involved. These could include: zoning changes, street upgrades, additional taxes, reduced taxes, special labor rules, special food safety rules, etc. It does not take many changes to put the local or smaller guys out of business. McDonalds can afford to teardown a store and replace it with one that meets the new regulations.
I would not be surprised to find something amiss by digging deeper.
sam, my impression, noodling around on this topic about a year ago, is that McDonald’s is growing and expanding, and the rest of the burger chains are flailing and contracting. So, I kind of operate from the assumption that McDs has obtained a very dominant position in its business. But as far as employment opportunities are concerned, there are still tons of jobs for unskilled workers in the food industry in almost any city of a given side: Subway (more locations than McDs and BK combined), pizza places, fried chicken, diners, higher-end burger places.
When a company obtains a certain dominant position, one does need to watch whether it tries to use the law to pull the ladder up behind them. McDonalds does offer some sort of benefit packages to its employees. I’m not sure how good they are, but it would be in McDs interest if it could use the law to require thse as the minimum benefits package for all of its competitors to drive them out of business.
I remember a piece in the Nation about 30 years ago that called out Ted Kennedy as a Corporate liberal — his modus operandi was to find things that large corporations were doing for their employees and mandate it for all businesses, and in the process we tend to get bigger corporations and fewer small business. I’ve looked for that article in their archives a few times and would love to read it again.