Former McDonalds CEO Warns Minimum Wage "Will Wipe Out 1000s Of Jobs"

Zero Hedge ^ | 29 April 2016 | Tyler Durden

[Lorianne]

While this should be no surprise to any rational non-establishment-teet-suckling economist, former McDonalds' CEO Ed Rensi exclaims, in a recent Forbes Op-Ed, that "a $15 minimum wage won’t spell the end of [fast-food brands]. However it will mean wiping out thousands of entry-level opportunities for people without many other options." The $15 minimum wage demand, which translates to $30,000 a year for a full-time employee, is built upon a fundamental misunderstanding of a restaurant business (and we add simple supply and demand fundamentals) - just "do the math" Rensi rants...

“They’re making millions while millions can’t pay their bills,” argue the union groups, suggesting there’s plenty of profit left over in corporate coffers to fund a massive pay increase at the bottom.

In truth, nearly 90% of McDonald’s locations are independently-owned by franchisees who aren’t making “millions” in profit. Rather, they keep roughly six cents of each sales dollar after paying for food, staff costs, rent and other expenses. I>Let’s do the math: A typical franchisee sells about $2.6 million worth of burgers, fries, shakes and Happy Meals each year, leaving them with $156,000 in profit. If that franchisee has 15 part-time employees on staff earning minimum wage, a $15 hourly pay requirement eats up three-quarters of their profitability. (In reality, the costs will be much higher, as the company will have to fund raises further up the pay scale.) For some locations, a $15 minimum wage wipes out their entire profit.

I> Recouping those costs isn’t as simple as raising prices. If it were easy to add big price increases to a meal, it would have already been done without a wage hike to trigger it. In the real world, our industry customers are notoriously sensitive to price increases.

[GOPJ]

I’ve been to McDonalds... robots would be an improvement.

[HamiltonJay]

http://www.bluemaumau.org/sites/default/files/MCD%202013%20FDD.pdf

See Page 36.

Typical margin is 26-27% of gross sales (570-720k). From that number you have to deduct “rent, service fees, D&A, interest, and income taxes”

Interest would not be applicable for an all cash purchase, which is what I have assumed from the start.

So, you may not make a 50% return, but you sure as hell are not making a paltry 7-14% return. If all you are seeing is a 7-14% return on that income its because you didn’t have the 1-2MM and financed it, and if you did that all are doing is boring money to give yourself a job, not investing.

[VietVet]

Raise the minimum wage, and you end up raising everyone’s wages/salaries. Soon everyone is making more $, but each $ will buy less, because there are still the same amount of goods and services. The minimum wage buys a minimum lifestyle.

Meanwhile, those of us on fixed incomes, which include SSA recipients and those investors who put their capital into “safe” fixed annuity investments (as HamiltonJay suggested) find that we are robbed of the value of our pensions/savings/investments.

[StCloudMoose]

robots technology has been around for sometime. I have seen warehouse that are completely robot run to load and unload trucks, stock shelves. the auto industry has used robots for more than 20 years now to replace humans. FMC Technologies is a leading builder

[HamiltonJay]

Lets start at a simple 5% scenario:

Muni tax free bond paying 3%-4%, if you are in the 33-39.5% tax bracket you are in the 4-5% range with little to no risk.. on 2 Million bucks that’s 100k a year, are you going to become an active owner of a restaurant tying up that much capital for another 50k annually? I sure wouldn’t.

As to the 10% average returns one of the obvious, although they do have some wild swings, even after the collapse in 2007/8 REIT’s still average 10% or more over the long term. Hell even the S&P has managed close to that even if you start with the big loss year of 2008.. its still up about 8-9% per year on average. And those are about as passive as you could get.

Me personally if I had 2 Million I wanted to maximize returns on, I’d probably put most of it into real estate if I felt I had to invest for return, and if I was going to be an active investor, finding commercial apartment complexes with cap rates in the double digits are not hard to find at all.

[kearnyirish2]

Beyond what you describe, the government also gets a cut in terms of payroll and income taxes - basically passing more employer dollars through the employees right into government coffers...

[sagar]

I am taking the $150K of earning per McD store at its face value, which may or may not be. It is really does not matter for the argument I was trying to make.

You, however, are saying that a $150K of return is too low for any sane investor (of 2MM). My point is that the true return is likely far north of $150K, which will blow the 6% annuity out of the water. Sure, with annuity, you get a hassle-free steady stream but the payout is much lower. Assuming $150K earning McD, the franchisee will get their income separate (reported as an expense) and gets to build assets. The annual taxable income is just noise in the grand scheme of things. A loud noise, but still just that. Creative accounting is survival, or else the pay to the moochers would be too high to sustain.

With automation looming, most of these “$15/hr good paying jobs” would be obsolete. About time.

[sagar]

Also, it is not PC and avoided by all politicians, but ALL EMPLOYEES are expenses to a business. Businesses don’t exist to “create jobs”, so this talk of “jobs” blah blah is just sickening to hear from the populists.