America's fast food industry could see much skinnier profits if a President Hillary Clinton becomes reality on Election Day.
"We also have to make the economy fairer. That starts with raising the national minimum wage," Clinton boasted to a packed house at Hofstra University during the first presidential debate. Clinton hasn't exactly hidden her displeasure with the current federal minimum wage of $7.25 an hour while on the campaign trail.
On her website, Clinton stresses that someone earning the minimum wage spread out over 40 hours--which is about $14,000 a year -- simply is unable to make ends meet given the higher cost of living. The former First Lady and Secretary of State proposes raising the federal minimum wage to $12 an hour, and supports efforts by cities and states to raise their own minimum wages even higher.
At an event in April, Clinton said she would sign a $15 minimum wage bill if a Democratic Congress were to place it on her desk as president.
"Well, of course I would," Clinton responded to a question on the wage topic. She added that she has "supported the Fight for $15" -- the union-backed campaign that has held rowdy protests dating back to 2012 demanding higher worker wages outside of fast food restaurants.
Should Clinton get elected and push through a $12 minimum hourly wage, and encourage states to hike hourly wages to $15, it could have far-reaching effects on the fast food industry.
A President Hillary Clinton could cause a ton of stress for the fast food industry.
One of the more obvious aftershocks is that profits for fast food heavyweights such as McDonald's (MCD) - Get McDonald's Corporation Report , Dunkin Brands (DNKN) - Get Dunkin' Brands Group, Inc. Report , Chipotle (CMG) - Get Chipotle Mexican Grill, Inc. Report and countless others get whittled away over time.
"If a worker is now paid $8 an hour and the new minimum wage goes to $12 an hour, the increase in wage would mean the cost per full-time employee would increase about $9,000 per year. If the restaurant had 10 employees in this situation, the cost would increase by $90,000 per year," explains Stockton University Professor of Finance Michael Busler, who added that the higher costs may cause some operators to close their doors. After all, why run a chaotic business like a restaurant if the profit potential is virtually nonexistent.
The natural response to higher costs -- raise menu prices to compensate -- could be no magic elixir as it would likely cause lower-income diners to pull back on their visits. Points out Busler, "Many fast food restaurants currently have a $1 menu, making it affordable for many lower-income earners to eat at these restaurants. The $1 menu would increase to the $1.39 menu, putting pressure on consumers. Many lower-income earners would not be able to afford to eat there." A McDonald's franchisee TheStreet talked with flat out admitted that a $15 an hour minimum wage would be "catastrophic," as he would be unable to raises prices enough to offset the higher expenditure.
According to a study by Purdue University's School of Hospitality and Tourism Management, 1.54 million people working in food preparation and serving related occupations make at or below the federal minimum wage of $7.25 per hour. Raising their hourly wages to $15 -- a 107% increase -- would cause prices to rise an estimated 4.3%. That means a $3.99 Big Mac would cost around $4.16, and an average fast food meal costing $7 would go up to $7.31.
If fast food workers received $22 per hour (an epic 203% pay raise) -- which is the average wage for Americans in the private industry, according to the Bureau of Labor Statistics -- restaurant prices would rise 25%.
For the fast food space, a Clinton win on Tuesday -- and the passing of higher minimum wages on the docket for several states -- would be the short-term climax of a tumultuous 18-month period on the wage debate front.
Thank President Hillary Clinton for pricier wings?
Last September, the state of New York approved a measure to increase the minimum wage for employees of chain fast food restaurants to $15 an hour over the next few years. The law gradually raises the minimum wage to $15 in New York City by the end of 2018. On Long Island and in Westchester County, the wage would rise to $15 by the end of 2021. The minimum wage only would rise to $12.50 in the rest of the state by 2020, with further increases tied to inflation and other economic indicators.
Earlier this year, California Gov. Jerry Brown signed a law raising the state's minimum wage to $15 by 2022. The statewide minimum wage will increase from $10 an hour to $10.50 an hour on Jan. 1, 2017, then up to $11 an hour on Jan. 1, 2018. From there it will increase by $1 annually until reaching $15 an hour on Jan. 1, 2022.
Arizona, Colorado and Maine all have ballot measures to jack up local wages to $12 an hour, while voters in the state of Washington will decide on whether to lift wages to $13.80 an hour. All of the increases would be phased in gradually by the year 2020.
To try to get out in front of the headwind, Dunkin' Donuts is working with franchisees on simplifying operations, finding supply-chain and energy-management cost savings and lowering capital investments for remodels.
But, Dunkin' has seen mixed traffic since the New York City law was announced as scared franchisees hiked prices in advance of the wage increases. Further, some franchisees have been cautious to open new restaurants amid fear of lower returns on their investment.
"Clearly in our view it was discriminatory against our industry [New York City's minimum wage hike], and that affected franchisee sentiment. I did hear one franchisee comment which was, look, I've opened a store recently in New York. I'm about to think about another store somewhere else -- it was actually California--but I've got to hold off on that because I want to see what happens in New York [with wages]," Dunkin Brands Group CEO Nigel Travis explained to analysts on an Oct. 20 conference call.
Meanwhile, struggling wing joint Buffalo Wild Wings (BWLD) is preparing to take menu price increases in California to help counteract an expected minimum wage rise in 2017. "I do know certain areas, such as California, you've got a significant minimum wage price increase taking effect in the middle of next year. So I would anticipate in that scenario we'll look at taking some pricing," warned Buffalo Wild Wings Chief Operating Officer James Schmidt on an Oct. 26 conference call. Similar to what happened to Dunkin' Donuts in New York City, the minimum wage driven price increases may turn off customers.
Enjoy Election Day coverage, McDonald's.