Could McDonald's and Wal-Mart Survive a $15-An-Hour Minimum Wage?


NEW YORK (TheStreet) -- McDonald's (MCD), Wal-Mart (WMT), Target (TGT) and other large employers have been voluntarily boosting wages as the labor market tightens, but could they handle a mandated jump all the way up to $15 an hour? 

It's a question being asked now as several major U.S. cities, including San Francisco and Seattle, have approved just such a jump, while others, such as New York City and Washington D.C., are considering them. Los Angeles, the second-largest city in the country, recently approved a jump in the city's minimum wage from $9 an hour to $15 an hour by 2020.

The federal minimum wage now stands at $7.25 an hour, less than half that level.

For food-service and retail companies that rely heavily on minimum-wage employment in these cities, "Time will tell," said Bob Schulz, managing director, Retail Ratings Team at Standard & Poor's.

"Usually these sorts of things land in the middle, where there's some negative impacts, some positive, some costs passed on to consumers, and it depends on each company's specific situation whether they're net better off," Schultz said.

He added that in the broader national picture, for the companies S&P rates, which include about 120 of the largest retailers and restaurants, there will not be any specific ratings changes due to the required higher minimum wages in certain cities.

"If it was a federal scale, that would have a bigger impact," he said.

For a retailer such as Wal-Mart, the impact of a specific city's higher minimum wage on the company as a whole is less significant, since Wal-Mart and similar retailers are spread across the country.

A food service giant such as McDonald's that's highly franchised wouldn't be as affected as directly by higher wages, although in the longer term the profitability and health of franchisees are obviously important.

For franchisees and stores within the higher-wage cities, the impact would be more direct.

"It does seem like it could, at least initially, cause a pause in further hiring, potentially," said Schulz. "If someone is facing a sharply higher wage pace, they'd look at productivity first, and a lot depends on how much of that gets passed on to the end customer."

However, there are also potential cost savings associated with a higher minimum wage. Economists point to lower turnover with higher wages, which reduces hiring and training costs. Studies examining minimum-wage increases often point to this benefit as a counterbalance to the negative-cost impacts.

Many large national companies in industries that typically rely on minimum-wage labor are already adapting to higher-wage environments throughout the country as they voluntarily raise their wages, albeit not to the $15-an-hour level.

Wal-Mart and McDonald's recently announced wage increases (although, for McDonald's the increase only applies to company-owned stores; not the majority franchise-owned locations).

Starbucks  (SBUX) and Costco (COST) have also raised wages or already pay above minimum wage. These companies have also added education-related and other benefits to attract workers and lift their brand image as debates over compensation intensify nationwide.

McDonald's and other established fast-food players have also had to contend with growth-focused competitors such as Smashburger and Shake Shack (SHAKthat pay up to 25% higher than minimum wage and feature appealing menus.

But some see a difference between organically rising wages around the country and sharp increases through legislation and regulation in certain cities.

"Certainly, in some markets there's some tightness in the labor market," said David French, senior vice president for Government Relations at the National Retail Federation. "Companies like Wal-Mart or McDonald's are interested in raising their entry level wages. But regulations that don't reflect what labor-market conditions are will likely be very disruptive."

French said the impact of a $15-an-hour wage on prices could be dramatic, and force some firms to close or relocate out of high-wage areas.

He cites anecdotal stories in news reports from Seattle, such as one from National Public Radio that mentions a larger, higher-end chain that raised prices and eliminated tips to adapt, and a smaller pizza shop that decided to close.

"I think it really depends on what your target market is and who your clientele is, and how much you can raise prices," French said.

However, Paul K. Sonn, general counsel and program director, National Employment Law Project, said the restaurant industry has adapted in areas like San Francisco and in San Jose, where a $2 minimum-wage increase was implemented two years ago.

"Raising the minimum wage at a significant level acts as a labor standard that raises pay for everyone across the bottom half of income distribution," he said. "That's actually a good thing, and if it raises people up and down the scale, our economy needs more of that; not less of that."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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