[UPDATE: The Huffington Post has now withdrawn their original story, with an admission of the error described below]
Doubling McDonald's Salaries Would Cause Your Big Mac To Cost Just 68¢ More: Study
McDonald's can afford to pay its workers a living wage without sacrificing any of its low menu prices, according to a new study provided to The Huffington Post by a University of Kansas researcher.
Doubling the salaries and benefits of all McDonald's employees -- from workers earning the federal minimum wage of $7.25 per hour to CEO Donald Thompson, whose 2012 compensation totaled $8.75 million -- would cause the price of a Big Mac to increase just 68 cents, from $3.99 to $4.67, University of Kansas research assistant Arnobio Morelix told HuffPost. In addition, every item on the Dollar Menu would go up by 17 cents.
And how did he come to this conclusion?
Morelix looked at McDonald's 2012 annual report and discovered that only 17.1 percent of the fast-food giant's revenue goes toward salaries and benefits. In other words, for every dollar McDonald's earns, a little more than 17 cents goes toward the income and benefits of its more than 500,000 U.S. employees.
Thus, if McDonald's executives wanted to double the salaries of all of its employees and keep profits and other expenses the same, it would need to increase prices by just 17 cents per dollar, according to Morelix.
I don't suppose we can expect Huffers to actually read the annual report in question, but here it is. And what do we glean?
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. I don't want to say "Voodoo economics", but a regressive 'tax' to help those with jobs may not be the path to prosperity.
Get back to me when the workers are striking at Le Bernardin. And bring the real math.
I adore this from Think Progress:
Currently, a minimum wage McDonalds employee makes $7.25 per hour. The CEO makes $8.75 million. But if the former were raised to $15 and the latter to $17.5 million, the dollar menu would only have to become the $1.17 menu and the Big Mac would go from $3.99 to $4.67, Morelix found.
If the CEO’s pay remained the same but low-wage workers earned more, the price difference for customers would be negligible.
We are talking about doubling a $4.7 billion payroll but in their estimation, saving $8.75 million by not raising the CEO pay would make room for negligible price hikes. Ok.
Back in reality, if we double the CEO pay then the reported "Payroll and Employee Benefits" as shown in the annual report would rise from $4,710.3 MM to $4,719.0 MM. Not quite a rounding error.
COLOR ME SHOCKED: A HuffPo correction:
CORRECTION: An earlier version of this story misrepresented Arnobio Morelix as a researcher for the University of Kansas. Morelix is registered as a undergraduate student at the university, according to University of Kansas School of Business Communications Director Austin Falley.
MORE ILLUMINATING MOMENTS IN NUMERACY: House Representative Keith Ellison (D, MN) loves the idea of McDonalds charging more to pay more:
Advertising executive Donny Deutsch pointed to a new study by Arnobio Morelix, a research assistant at the University of Kansas, who found that McDonald’s could pay its workers $15 an hour if it increased the price of its Big Mac by 68 cents ($3.99 to $4.67) and increased its Dollar Menu items by 17 cents.
“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!
OVER AT CJR: Ryan Chittum gets a link from Matt Drudge for this well-researched debunking at CJR:
A Big Mac miss by The Huffington Post
This affirms my faith in the power of positive hand-waving:
Worldwide, those franchisees took in $70 billion in revenue last year, and US stores took in $31 billion of that. McDonald’s Corporation doesn’t break out similar expense numbers for its franchisees, so the best I can do is research from Janney Capital Markets. It puts labor costs for US franchises at 24 percent of sales, which gibes with McDonald’s company-owned stores. Janney estimates franchisee operating income at just 5 percent.
If Janney is right (and I’m a bit skeptical. Five percent margins seem awfully low), McDonald’s franchisees in the US pay out, very roughly, $7.4 billion in labor costs a year and make about $1.6 billion in operating profit. Doubling pay without dipping into profit would mean menu prices would have to rise 24 percent—and that’s assuming such price increases wouldn’t hurt sales, which they would.
24%, versus my estimate of 26%. Confidence-enhancing.