NOT SO “HAPPY NEW YEAR” FOR THE FAST-FOOD INDUSTRY
Fast-Food leaders had a hard time ringing in the New Year as minimum wage increases went into effect in a record number of 20 states.
The largest of the increases, initiating a gradual hike until 2021, include: Washington (up $1.53, to $11 an hour), Arizona (up $1.93, to $10 an hour) and Washington, D.C. (up $1, to $12.50 an hour); combined, about 4.4 million low-wage workers in the United States will receive a raise in their pay.
These increases create a large area of concern for fast-food giants such as Wendy’s (WEN), McDonald’s (MCD), Dunkin’ Donuts (DNKN), and Buffalo Wild Wings (BWLD). According to Stockton Professor of Finance, Michael Busler, “the consequences that follow the increase in wages will come in the form of higher prices of food items as well as a possibly significant drop in sales”.
In an attempt at gaining the lead with these wage increases, Dunkin’ Brands worked with franchisees during the entire year of 2016 on simplifying operations, acquiring supply-chain and energy-management cost savings as well as lowering their capital investments for remodels.
Wendy’s plan-to-action includes state-of-the-art touchscreen ordering systems in its restaurants in an attempt at minimizing wage inflation. Buffalo Wild Wings is on the verge of raising its menu prices in California to help balance out the 50 cent wage increase to $10.50 an hour that just became effective January 1, 2017.
Michael Busler offered a look into the current situation:
“Many fast-food restaurants currently have a $1 menu, making it affordable for many lower-income earners to eat at these restaurants,”. He adds, “The $1 menu would increase to the $1.39 menu, putting pressure on consumers, and many lower-income earners would not be able to afford to eat there”.
“1.54 million people working in food preparation and serving related occupations make at or below the federal minimum wage of $7.25 an hour”, according to a study by Purdue University’s School of Hospitality and Tourism Management.
An increase in hourly wages to $15—a 107% increase—would cause food item prices to rise an estimated 4.3%.
Just as well as if fast-food workers received $22 an hour —which is the average wage for Americans in the private industry, according to the Bureau of Labor Statistics—restaurant prices would rise 25%.
The Heritage Foundation recently estimated how a $15-an-hour minimum wage would affect fast-food prices. That report used data on average fast-food balance sheets, relied on BLS wage estimates, and accounted for customers’ price sensitivity.
This model found results such as: Prices would have to rise 38 percent to cover the higher wages, while sales and employment would both fall by over a third. The price of a Big Mac would rise from $3.99 to $5.50.
In the long term, fast-food restaurants would almost certainly react by replacing humans with machines. California inventors have developed a robot that cooks 360 hamburgers an hour. According to the Heritage foundation, “Mandating higher wages guarantees restaurants will implement this technology more quickly and automate more jobs sooner than they expected,”.
Milton Friedman is quoted for saying “there is no such thing as a free lunch.” He should’ve added “or a free burger.” Increasing fast-food wages by over 50 percent will substantially raise fast-food prices — until those jobs get automated.
