Hiking wages to $15 hour—as protesters around the country demand—will have a mixed impact on McDonald’s.
On the one hand, it will help the company hire and retain better-skilled employees, and do a better job serving burgers and fries. On the other hand, it could fuel a “civil war” between the parent company (the franchiser) and the franchisees which may break the iconic franchise.
For years, low-pay labor helped McDonalds ascend to the position of the world’s largest fast food franchise; enjoying hefty profit margins that made the company’s stock a stellar performer on Wall Street.
McDonald’s, Chipotle’, Noodle & Company And Shake Shack’s Key Statistics
Return on Assets
Qtrly Revenue Growth (yoy)
Noodle & Company
But recently, low-pay labor has turned from an advantage to a disadvantage for McDonald’s.
For several reasons.
First, it has limited the company’s efforts to improve the menu and services to compete efficiently and effectively against new competitors like Chipotle, El Pollo Loco Holdings, Inc., Panera Bread, and Yum Brands—to mention but a few.
Second, the proliferation of competing franchise chains has been exerting an upward pressure on industry compensation for qualified labor.
Third, McDonald’s has been facing labor protests, strikes, and unfavorable legal rulings that are changing the rules of the game altogether for the company franchise.
McDonald’s labor issues have undermined sales and earnings growth — and taken their toll McDonald’s stock – in sharp contrast to the company’s close competitor Chipotle, which has seen its earnings, revenues, and stock soar.
Will a considerable wage hike solve McDonald’s problems?
It will certainly ease them, as it will help the company recruit and retain more qualified employees. Most notably, it will help the company introduce a new menu and capitalize on its most important advantage – location – especially when better recruitment and retention is supplemented by better training.
At the same time, a considerable wage increase will likely fuel a “civil war” between the parent company and the franchises that could threaten breaking up the iconic franchise. In contrast to the parent company, which is the franchise collector, franchisees are the franchise payers. That means that they have less of a cushion to absorb substantial wage increases than corporate-owned stores.
Unless, of course, the parent company is prepared to buy out marginal franchises – or install robots to flip burgers, as discussed in a previous piece here.
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