The Dollar (and 26 cents) Menu

I try to avoid discussing politics in this space on Fridays, but a moment of economic stupidity took place earlier this week.

I wrote earlier this week about New York Post columnist Kyle Smith’s claim that a McDonald’s McDouble, for $1, is “the cheapest, most nutritious and bountiful food that has ever existed in human history.”

That corresponded with a series of strikes, including in Milwaukee, by McDonald’s workers (led by a $130,000-per-year labor leader) who want their pay doubled from the federal minimum wage of $7.25 per hour. (Which is not McDonald’s average salary.) Some threatened to contaminate food, which is an excellent way to make sure no one eats fast food, which would result in higher unemployment among minimum-wage workers, wouldn’t it?

Regular readers would rightly conclude I am skeptical about the minimum wage anyway. The New York Times took the correct position in 1987 that the proper minimum wage is zero. Businesses pay their employees as little as they can, because a business’ first responsibility is to make a profit; no profit, no business. Labor is generally the largest expense for a business, and businesses that pay their employees more than they can afford end up with higher prices than their competitors and lose business as a result. Ultimately, an employee is paid based on the costs — mostly, but not all, financial — of replacing that employee. That’s why valued employees make more money than less-valued employees.

The majority of minimum wage workers are teenagers and young adults, people who are paid what they are because they are new in the workforce and therefore have few provable workplace skills, and because there is a lot of available labor for that salary in the workforce. (I got hired for my first part-time job 32 years ago right about now, a bus boy at the late Bridgeman’s Restaurant and Ice Cream Parlour near Fire Station 5 in Madison, for $3.35 per hour. It took me about eight months to get that job, two months after my 16th birthday, a traditional hiring age.) The average family income of a minimum-wage worker is not $15,080 per year (what you’d make in a year of full-time work at $7.25 per hour), it’s more than $53,000 per year.

The Huffington Post earlier this week reported claims from University of Kansas student Arnobio Morelix that if McDonald’s doubled its employees’ pay, the price of their food would increase only 17 percent.

That got noticed by self-admitted Big Mac eater Adam Elliott of WOLX in Madison:

68 cents is literally chump change to me. 17 cents on top of a Dollar Menu item is even less of a concern to me.  If the research in this article is valid, then Isay we should just chalk up the extra cost as a personal tax for eating food that we know isn’t very good for us. Jeesh!  68 cents?!  Give those poor workers a raise already.

The first problem with Elliott’s opinion is based on those eight words, “if the research in this article is valid.” It isn’t. The Wall Street Journal’s James Taranto begins:

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 [Puffington Host writer Caroline] 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.

But people have to eat several times a day, every day. “Working- and middle-class families make up the bulk of McDonalds customers,” as blogger Tom Maguire notes. A 17% increase in one’s food budget would be much harder for them to bear than for a comfortably salaried professional journalist or for someone who is independently wealthy and thus can afford to write gratis for the Puffington Host …

The aforementioned Tom Maguire picks up from there by actually reading the entire McDonald’s Corp. annual report:

From the Consolidated Statement of Income (p. 30) we see that “Payroll and Employee Benefits” came to $4,710.3 (in millions, or $4,710,300,000, which is even past A-Rod territory.) Total Revenue was $27,567 (in millions). Dividing 4,710 by 27,567 yields 17.1%, which we take to be the 17% used by Morelix.

However! McDonalds reports a net revenue from both the stores it operates and its franchise fees. The McDonalds franchisors are separate businesses which pay a fee to McDonalds Corp and are responsible for their own payroll, as is discussed in the annual report (p. 13).

So Morelix has not included the payroll figure for the franchisees in this calculation. Is that a big problem? Huge, actually. From page 11 we see that their are 6,598 outlets run directly by McDonalds Corp and 27,882 franchised outlets. Sales from franchised outlets totalled $69,687 (in million) in 2012, which far exceeds the $18,602 (mm) revenue figure for company-operated stores. That $69 billion figure is condensed down to $8.9 billion of franchise revenue on the Consolidated Statement of Income (The rest of the $27,567 MM in total revenue comes from sales at McDonalds run stores).

Which leaves us where? Doubling all the salaries at McDonalds headquarters and in their 6,598 stores would be offset by a total revenue increase of 17%, but the franchisees won’t be agreeing to pay more in franchise fees and won’t be raising their payroll (the size of which we haven’t found in this report) in the 27,882 stores they operate. And yes, that slides right past the question of how to deal with their international operations.

If I were inclined to press down this road I would compare the $18 billion of revenue from McDonalds run stores with the payroll figure of $4.7 billion; that ratio is 26%. By that calculation, McDonalds would need to raise all its prices by 26% at its own stores in order to double all of its direct payroll expenses, which presumably includes a lot of non-hamburger flippers at headquarters. Hey, 17%, 26%, de nada – that is only a 50% error and it’s not my money anyway!

Or from a different tack – the McDonalds-operated stores average $2.8 million in sales per store. The franchisees average $2.5 million per store, so they are on average a bit smaller but close enough that maybe we can wave our hands and pretend they are the same. That suggests that if the franchisees cost structure looks like the parent company then they can double their payroll and recoup the additional expense by raising prices by 26%.

Of course, that is a big if. And it assumes that there are no elasticities – consumers don’t switch to Wendy’s, franchisees don’t finally buy that expensive whiz-bang machine that eliminates two jobs, and so on. One might argue that if minimum wage legislation obliged Wendy’s and other fast food chains to also raise payroll costs that all of them would be obliged to raise prices and some of the consumer substitution would be mitigated. One might also wonder why McDonalds and their franchisees have been so beneficient as to forebear a 26% price increase, taking all that new revenue straight to the bottom line. Have they forgotten to be greedy, or are they already charging as much as they think consumers will pay?

Moreever, there is yet another problem. The fundamental premise is that McDonalds customers will pay more, thereby raising the living standard of the McDonalds employees. That would be fine if Mitt Romney and his sons were over-represented in the McDonalds demographic, but I bet they aren’t. My guess is that working- and middle-class families make up the bulk of McDonalds customers, which means the working class and middle class will be reaching into their non-capacious pockets to elevate the lifestyle of McDonalds workers, not all of whom are themselves in the working class. …

House Representative Keith Ellison (D, MN) loves the idea of McDonalds charging more to pay more. …

“I would pay $0.17 for somebody to be able to feed their family,” Ellison stated.

Seventeen cents?!? Big spending from a Congressman making well over $100K. But here in reality, we are asking Joe Walmart to pay an extra dollar on a four dollar tab to boost the fortunes of Jane McDonald. Since a Big Mac meal already runs more than that, well, mangia!

Smith also noticed that most of McDonald’s customers are of the working class and middle class, defined for purposes of today’s blog as someone who makes less money than a government employee in Madison. To actual working people with families, a 26-percent more expensive trip to McDonald’s is, to quote Vice President Joe Biden out of context, a big f—ing deal. It’s not as if a McDonald’s McDouble that formerly cost you $1 will cost you $1.26 (plus tax) tomorrow; it’s that it will cost you 26 percent more every single time you buy it.

And forget Elliott’s occasional Big Macs. If I get a McDouble ($1), small French fries ($1.19), and sweet tea ($1), the total with tax will be $3.37. If the Dollar Menu becomes the $1.26 Menu, my two Dollar Menu-and-small-fries meal now costs $4.24. If I ate that every weekday for lunch, I would have to pay an additional $226.20 over a 52-week year. Given what I know about the salaries paid in radio, I doubt $226 per year is chump change for Elliott or his WOLX colleagues.

When the $20 trip to McDonald’s for your family of four becomes a $25 trip to McDonald’s, you will be making fewer trips to McDonald’s. You may go to Burger King, Wendy’s, or some place where the food costs less, or you may not go out at all. Either way, less business for McDonald’s means less employment by McDonald’s.

Which the Huffington Post had to admit Wednesday:

On Monday, The Huffington Post published a story entitled “Doubling McDonald’s Salaries Would Cause Your Big Mac To Cost Just 68¢ More.” HuffPost has since learned that the research used as the basis of the story contains significant errors that cast doubts on its claims. This story has replaced the one originally published in this space. …

A typical fast-food restaurant spends 30 to 35 percent of its income on labor, according to a recent release from the Employment Policies Institute, a research organization whose work is often cited by those who argue against increasing the minimum wage. The institute estimates that small-business owners who run McDonald’s franchises spend about a third of their income on wages, which would mean the price of a Big Mac would go up by $1.28 to $5.27. …

By the reckoning of Bonnie Riggs, a restaurant industry analyst at market information and advisory firm the NPD Group, a doubling of wages for all McDonald’s workers is “not even in the realm of feasibility.” With fewer and fewer Americans eating out at restaurants due to factors like the payroll tax hike and increases in gas prices, Riggs said restaurants like McDonald’s are trying to discount prices as much as possible to get customers through the door. This means the company’s profit margins could not withstand a labor cost increase of this magnitude, she added.

While we’re on the subject, let’s also repeat a point Smith made:

Driving up McDonald’s wage costs would drive up the price of burgers for millions of poor people. “So what?” say activists. Maybe that’ll drive people to farmers markets.

For the average poor person, it isn’t a great option to take a trip to the farmers market to puzzle over esoteric lefty-foodie codes. (Is sustainable better than organic? What if I have to choose between fair trade and cruelty-free?) Produce may seem cheap to environmentally aware blond moms who spend $300 on their highlights every month, but if your object is to fill your belly, it is hugely expensive per calorie.

Junk food costs as little as $1.76 per 1,000 calories, whereas fresh veggies and the like cost more than 10 times as much, found a 2007 University of Washington survey for the Journal of the American Dietetic Association. A 2,000-calorie day of meals would, if you stuck strictly to the good-for-you stuff, cost $36.32, said the study’s lead author, Adam Drewnowski.

“Not only are the empty calories cheaper,” he reported, “but the healthy foods are becoming more and more expensive. Vegetables and fruits are rapidly becoming luxury goods.” Where else but McDonald’s can poor people obtain so many calories per dollar?

And as for organic — the Abercrombie and Fitch jeans of food — if you have to check the price, you can’t afford it. (Not that it has any health benefits, as last year’s huge Stanford meta-study showed.)

Moreover, produce takes more time to prepare and spoils quickly, two more factors that effectively drive up the cost. Any time you’re spending peeling vegetables is time you aren’t spending on the job.

“Any time you’re spending peeling vegetables is time you aren’t spending” doing anything else. McDonald’s got to where it is today because it conveniently provides inexpensive food of consistent quality. (That’s why they call it “fast food.”) If you have little money in your pocket, you’re away from your home and you have limited time, you know what you are likely to get from the McDonald’s near you anywhere in the U.S.

And for those who do, try something that isn’t on the visible menu — a McGangBang (double cheeseburger and McChicken in one sandwich) or a Land, Sea and Air Burger (Big Mac, McChicken and Filet io’ Fish) or a Monster Mac. Add a McLeprechaun (Shamrock and chocolate shake) or Neapolitan (chocolate, strawberry and vanilla), and make sure your next physical is at least a month out.

2 thoughts on “The Dollar (and 26 cents) Menu

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