McDonald's outlook bleak in face of minimum wage hikes

The Golden Arches are looking a little less shiny this year and McDonald’s franchise owners see hard times coming. This time it has nothing to do with the raging national debate over whether or not the McRib is awesome or awful, however. The vast majority of their fast food outlets are not owned by the corporation, but by franchise operators. Those entrepreneurs are regularly polled about their outlook for the coming year and most of them aren’t putting on their happy faces. (From CNBC)

Just when you thought it couldn’t get much worse for McDonald’s, it did.

The six-month outlook for franchisees is at an all-time low, according to a small survey by Mark Kalinowski, a long-time restaurant industry analyst. (Tweet this).

Some 29 franchisees, who collectively own and operate 208 McDonald’s restaurants in the United States, were asked to give their six-month forecast from 1 (poor) to 5 (excellent). The average response was 1.69, the lowest in the survey’s 12-year history.

Previously, the lowest rating was 1.81, which was recorded three months ago.

There are two primary culprits being blamed for the ongoing downturn and one of them will be very familiar to regular readers.

“My numbers are not good due to new competitors,” one franchisee said. “Overall, sales are still in a slump and I don’t see much to get excited about in 2015.”

Another respondent said, “At least half of the operators in my region are on [the] verge of collapse. With minimum wage for fast food workers potentially increasing to incredibly high levels, we are facing a crisis situation.”

As we’ve discussed in the past, you don’t need to increase the minimum wage very far in a market space with such thin profit margins for it to become a crisis situation, as one of the franchise owners put it. Wall Street has already reacted, with McDonald’s shares dropping almost two percent this week. Sales are already off, with franchises reporting a drop of 2.9% in June.

In the end, though, there should be some sort of leveling out point where minimum wage laws will stop affecting individual players in the fast food market. That’s because the rules apply to everyone in a given area. If McDonald’s is forced to raise their prices, odds are that their competitors will have to do so also. When all is said and done it will be the consumers who probably pay the bigger cost than the retailers.

Obviously not all of this is being caused by labor costs which haven’t even surged to peak levels yet in many locations. The fast food giant is facing a lot of robust competition, with owners citing Shake Shack, Whataburger and Sonic as some of the biggest threats. These companies are fighting for the same slice of the market and none of them can afford to be turning away business. I’m guessing that news like this has a lot of them thinking about how they dip their toes into contested social issues and whether it’s worth it or not. Taylor recently wrote about the backlash Whataburger ran into when they allegedly moved to ban open carry in their eateries. That sword could cut both ways if you think about it. The company isn’t in business to fight a battle for or against Second Amendment rights or income inequality or abortion. They exist to make a profit and their only real avenue in achieving that goal is by moving as much product as possible. Gun rights supporters may choose to take their business elsewhere when the company takes a stand like that, but if they had come out and proudly encouraged patrons to carry in their stores, the anti-gun crowd would be pushing people not to go there just as loudly. (Or more likely louder.)

Given how tight the market is, Whataburger can’t afford to lose either of those demographic groups. Neither can McDonald’s or Sonic. Exit question: are we approaching the point where retail businesses are just going to start shutting up on all divisive social issues and telling people to decide for themselves? And would it be so terrible if they did? I’m not sure many of us really need Ronald McDonald guiding us on how our representatives should vote on the Ex-Im bank. And when it comes to the minimum wage fight, rather than screaming about the political side of it, the hardest hitting message Sonic and others could deliver is to simply jack up their prices however far they must to maintain profitability. When their customers ask why the dollar menu is now the two dollar menu, they can simply point them to the wage laws in question and let the customers deal with the government.

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