Some U.S. fast-food workers are striking today for the second time this year with hopes that the likes of McDonald’s (MCD), KFC, Taco Bell, YUM Brands’ Pizza Hut (YUM) and Wendy’s (WEN) will raise their pay from an average $9 hourly to $15 an hour.
The united effort in 100 cities is indeed admirable but unlikely to spur changes in this thinly margined industry. The August version certainly didn’t.
This isn’t a matter of whether fast food workers deserve to be paid more, rather its whether the industry at large would or could survive paying employees $15/hour. And, if companies were forced to do so, what would the impact be on jobs and food prices?
Will investors see will any of this affect their portfolios?
A wage increase to $15/hour would force restaurant owners to increase total sales by 24% to make up for the estimated labor expense, according to IBIS World. That means by using the average industry profit or EBIT (earnings before interest and tax) of 23.6% that decrease in operating margin would put many restaurants in the red and lead to either layoffs or higher prices.
Let’s use McDonald’s as an example. In 2012, it generated $4.5 billion in revenue from U.S. stores. A wage increase like the one proposed would leave an operating income of $883 million. If McDonald’s didn’t raise prices substantially, it would be forced to shut down many locations.
A 2006 study showed that one 10% increase in the minimum wage would boost menu prices by 1.6% and could reduce industry employment by as much as 2.5%. Using those figures to project the impact, a hike to $15 would cause as much as a 17% surge in fast-food prices and a nearly 27% slide in the industry’s employment.
On paper, it sounds like a lose-lose situation. So, unless Uncle Sam ties Ronald McDonald’s hands, this sort of wage hike isn’t likely to happen.
Even with wages at current levels, a few of the fast food chains are seeing a slowdown in sales. That may not have striking employees concerned, but investors and potential investors ought to be.
Here’s the lay of the land for three fast-food giants and their shares: