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McDonald’s $15 Wage Debate Isn’t About Profits, It’s About Their Business Model

Raz Godelnik
| Wednesday August 7th, 2013 | 49 Comments

Mcdonalds mealLast week, we witnessed a new wave of one-day strikes of fast food workers fighting to achieve an ambitious goal: increasing the minimum wage to $15 an hour. These strikes brought back to public attention the debate over minimum wage and its economic and social impacts, as well as the unavoidable question: How much would a Big Mac actually cost if workers at McDonald’s were being paid $15 per hour?

While the answer to this question provides some sort of indication as to the level of change required of McDonald’s and other fast food chains to provide their employees with a decent paycheck, it probably doesn’t help us much in understanding the issue we’re facing.

Why? Because the issue here is not about pricing or even human rights, but about innovation and design thinking. The question we should ask is not if McDonald’s can adjust its pricing model to a new wage level or not, but in what way McDonald’s will choose to redesign its business model.

First, let’s get the Big Mac question off the table. The Daily Beast created a McPoverty calculator that lets you see how your extra cents could translate into real-life wages based on the work of economists Jeannette Wicks-Lim and Robert Pollin. Using this calculator, the price of Big Mac would need to increase by 22 cents to enable workers at McDonald’s to make $15.23 per hour, or $31,671.83 per year.

Another estimate comes from a group of 100 American economists who signed a petition last month in support of raising the federal minimum wage to $10.50 per hour. In the petition, the economists write: “On average, even fast-food restaurants…are likely to see their overall business costs increase by only about 2.7 percent from a rise today to a $10.50 federal minimum wage. That means, for example, that McDonalds could cover fully half of the cost increase by raising the price of a Big Mac, on average, from $4.00 to $4.05.”

So we can learn from these estimates that if McDonald’s (as well as other fast food chains) would like to raise the wage of its workers it can do so with a relatively small hike in prices – anywhere from one to five percent depending on what degree the wages would go up.

Yet, all of these calculations are nothing but a theoretical exercise with very little practical value because this is not the equation that McDonald’s has in mind. If anything, the changes its executives probably think about to compensate for a potential increase in wages is replacing employees with systems that allow customers to place orders through automatic ordering screens. As Economist Adam Ozimek writes: “It’s not hard to imagine McDonald’s switching to a system like this for credit card orders.”

The reason? It goes back to the way McDonald’s has been designed. It all started with Ray Kroc, the man who bought a chain of few restaurants from the McDonald brothers and transformed them into the most successful fast food operation in the world.

Kroc, explains Roger Martin in his book, The Design of Business: Why Design Thinking is the Next Competitive Advantage, refined the idea the McDonald brothers had of quick-serving restaurants with strictly limited menu options into a precise algorithm. He “simplified the McDonald’s system down to an exact science; with a rigid set of rules that spelled out exactly how long to cook a hamburger, exactly how to hire people, exactly how to choose locations, exactly how to manage stores, and exactly how to franchise them,” Martin writes in the book.

Kroc basically created a formula that could be replicated fast, providing McDonald’s with a powerful efficiency advantage that helped it take over the world in only 20 years. This success was also built on hiring unskilled labor that could be paid low wages as all they were asked to do was basically to follow the manuals Kroc and his successors developed.

Now, what happened is that employees at McDonald’s became part of Kroc’s formula – they were just another input in an assembly line that has aimed to perfect its efficiency and maximize its performance. This approach that codified workers into a factor in an equation is reflected in the absurd budget McDonald’s provided its employees showing them how they can survive on their McDonald’s income.

McDonald’s has now three options: the first is to look at the strikes as a bug in its code and search for ways to fix it by adding more automatic service systems that will replace some of its employees and increase efficiency. This option, to paraphrase Martin, emphasizes further exploitation of the algorithm.

The second option is exploration. The company could give innovation a chance and look for ways to reinvent the business. For example, McDonald’s could adopt a similar vision to Chipotle’s “Food with Integrity,” creating what BBMG called “an ethos that the way we cultivate and consume our food should be healthier and more ethical.” Hell, it might even decide to compensate its employees like Chipotle does.

The third option is the middle-of-the-road choice, balancing between exploitation and exploration. This integrative approach, explains Martin, creates a design-thinking organization that can both exploit existing knowledge and create new, gaining a cost advantage over its competitors along the way. McDonald’s could automate systems while revising its formula in order to ensure it takes into consideration the well-being of its stakeholders, including the employees.

What’s the best option for McDonald’s? What option is it going to choose from these three? Feel free to comment and share your thoughts.

[Image credit: Matt McGee, Flickr Creative Commons]

Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and Parsons The New School for Design, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.

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  • http://www.triplepundit.com Nick Aster

    One thing to remember is that McDonald’s is a franchise chain, so there are 1000s of franchise owners out there who have, to a certain degree, independence. I wonder what would happen if McDonalds gave them enough pricing freedom to set wages?

    Also, most of the studies I’ve seen say the Big Mac would go up more like 68 cents… but even that seems low. Not that I’m opposed to increasing the price on junk food :-)

  • http://www.triplepundit.com Nick Aster

    You know, another good comparison would be to In’n’Out Burger in California. It’s held in cult status even by people who don’t regularly eat fast food, is generally considered to be vastly higher in freshness and quality and every one I’ve been do is packed with customers and happy workers – who, i believe, start at $10.50

    • Paul S

      Fast Food Nation, which is a excellent book, makes the point that not only are the shift workers at McDonald’s lowly paid compared to In’n’Out, but the managers are as well. Off the top of my head, I remember him claiming something like that the average manager at McDonald’s has been working there for like 10 months and makes $30k, whereas the average manager at In’n’Out has been there 10 years and makes $70k.

      It would be great if the individual franchises could “experiment” a little bit, but I think McDonald’s Corporate turns the screws pretty tight on the franchise owners (as reflected by poor manager pay) and they might not have a lot of room

  • Susan

    I have to wonder how much does McD’s collect from its’ Franchisees. I’ve read a couple of articles and the figure of 25% of sales plus rent was being bandied about. ????

  • ssj12

    You do realize you are basically trying to make flipping burgers a career for people right? Working fast food, or basic retail like Walmart, is supposed to be experience gaining jobs to introduce people to the workforce while they apply themselves to broaden then horizons towards real careers. Why exactly do we want to perpetuate permanent employment at these places?

    • 6semitones

      I do not think that the idea is to perpetuate permanent employment at
      “these places” as you phrase it as much as to allow the individuals who
      work these jobs enough economic stability to entertain and appreciate
      the innovative ideas of capitalism. An individual who is constantly
      fixated on how to sustain their physical life because their wages are
      too low has little to no opportunity to entertain how to enrich either
      their lives or those of others in their political/socio-economic
      community through creative thought, because that process is generally a
      luxury of those not threatened by economic instability.

      • ssj12

        You do know the reason that prices are so high are because of inflation by the federal reserve right… if interest rates would be allowed to freely rise and fall and money would stop being “printed” then the economy would balance out and prices would probably fall once the currency starts to deflate and increase its value.

        • 6semitones

          if i recall correctly, the original debate was not about high prices but about low wages.

        • ssj12

          they wouldnt be considered low if costs were decreased.

        • 6semitones

          so your argument is that if costs were decreased, then corporations would channel that money into wages instead of into higher profits?

        • ssj12

          No, Im saying if costs decrease, prices decrease, and there is zero need to raise wages as real wage values have increased.

        • 6semitones

          Except aren’t you asserting that within a capitalistic environment prices should decrease in direct proportion to cost decrease?

        • 6semitones

          What I am suggesting here is that the cost in price will not necessarily reflect a decrease in cost because capitalism exploits the profit margin.

        • ssj12

          there are many factors involved with prices and cost, but yes, usually a short time either prices are decreased or increases in profits are reinvested into a company to increase production which after a period of time reduce prices due to increased productivity and availability of a product.

        • 6semitones

          i understand that your assertion is the theory, but i think the issue in debate was created because theory does not reflect reality.

        • ssj12

          The theory very much reflects reality when you eliminate government intervention in the market. Capitalism’s definition is “a free and unregulated market without government interference.” Therefore, we haven’t had capitalism in this nation in any true regard. Marx was the one to coin the term in the first place. While there have been instances in various industries and regions in this nation’s history that has seen capitalistic tendencies without government intervention and with free market whims, really even that hasn’t existed since the 1860s. What we have had was entirely a seriously reduced form of mercantilism, today known as neo-capitalism. Sadly, with the help of people like Keynes, we are drifting closer and closer to pure mercantilism.

        • 6semitones

          Yea capitalism is not a system that reflects modern concern for humanity, hence your romanticization of that former glory. The problem with the capitalism of the 1860′s was muckraked by Upton Sinclair in the early 20th century, and then steps to correct that inhumanity of capitalism were furthered with the New Deal.

        • ssj12

          The New Deal was horrible for the USA……

        • 6semitones

          That is not a an appropriately critical response, especially given that many of the historical ramifications of the New Deal were especially beneficial to the security of US citizens.

        • ssj12

          what beneficial ramifications? It destroyed the economy. It perpetuated the Great Depression..

          https://mises.org/daily/1623

        • 6semitones

          ok we are clearly focused on different values here. you want a pure free market, where i think that regulation is necessary either from the government or from the heads of industry to both help their own employees and their consumers. a pure free market has the value of pure profit; that is not humane to most workers or cost efficiency to consumers.

        • 6semitones

          and in support of that last statement, i would posit the existence of market bubbles, which should not exist should heads of industry have the control of the market which you are claiming.

        • ssj12

          And the market will always have its ups and downs. That is how it is supposed to work. The market is up when business is trending properly, investing steadily, and in general functioning in a manner aiming towards “equilibrium” of full employment. The downs are present when bad decisions are made and bad investments are needed to clear out of the market. The business cycle is constantly in flux. It is only when government tries to perpetuate a boom by keeping businesses in businesses, forcing reduced interest rates, inflates the currency, etc is when we get long, painful busts like the Great Depression and Great Depression.

        • ssj12

          That is where you are drastically wrong. In a free market businesses care about productivity. Treating employees like crap and overpricing merchandise does not translate into productivity, or demand, it reduces it. Sure some profits are still left for those that created and built the company up; but, smart businessmen look at ways to increase productivity and profits all together.

        • 6semitones

          Again, that idea is based on theory, not historical reality. If your assertion was true, slavery would have never existed either in America, Brazil, or Africa.

        • ssj12

          Slavery existed throughout human history, not simply just in America, Brazil, and Africa. It existed in Ancient Roman, Britain, Germany, etc. The reason was that certain people – tribes in more recent years – were willing to sell off or trade their more “useless” people or debtors for increased power (firearms) and wealth (gold).

          Note: Hundreds of nations ended their slavery peacefully through peaceful emancipation with zero blood spilled.

        • 6semitones

          None of these statements in any way address how “treating employees like crap” (as you said it) “and overpricing merchandise does not translate into productivity” is incredibly untrue when the market is unregulated. You took the debate back to the 1860′s; I am only following that logic to its conclusion.

        • ssj12

          So how exactly in your Keynesian, mercantilist fairytale land is forcing employers with threat of government violence and takedown if they do not follow the rules a benefit to anyone? You are taking away employers freedom when you regulate how they can run a business. What is the point of wanting to own a business when you can, and probably will, likely be destroyed by forthcoming government regulations?

        • 6semitones

          I actually have less of a “mercantilist fairytale land” fantasy than you might imagine because I don’t want to tax citizens in order to finance the military. That seems to have been the motivation of the so-called Neo-Con’s. Operating a business within the government of which I established the business I think requires that I recognize the infrastructure which allowed me to think how I could own a business and therefore be more than happy to pay the taxes which will allow others to do the same.

        • ssj12

          Government does not give you the infrastructure to build a business. You do. You raise the capital. You research the location. You layout the business plan. You hire the employees. You grow the business through business investments made by yourself by your own choosing.

          The only place government places itself is in the way of starting the process by requiring permits and licenses to start a business, even in a preexisting building, that cost thousands of dollars and can take months to get. They enact taxes upon you because your company is making money. They regulate you, because your competitors, a politician, or some humanitarian, imagines that it will help the employees or industry in some way.

          Taxation is theft. Government is immoral. That is why the constitution was enacted to bind government to follow strict rules, that was intended to prevent government expansion and keep it out of the market.

        • 6semitones

          Infrastructure includes the faculties like highways to provide you with resources and the public education that you likely received to speak in the manner that allows you to attack the governmental institution.

        • ssj12

          Not really. Private highways have always existed. Government do not need to provide for that. Actually, its unconstitutional except for postal routes.

          Public education taught me how to speak? Not really. I taught myself the verbiage and understanding of Libertarianism and Austrian Economics. My highest grade in English up to my college course (English Comp 1) was a C. My college class was an 98%. Why? because my English Professor was enjoyable, a great teacher, and taught me how to write properly. Considering I paid my own tuition, off a Walmart $8.55 per hour wage, that does not count as public education.

        • 6semitones

          I think your emphasis on your collegiate accomplishments are dismissive of the skills you upon which you were bestowed (despite your reportedly average grades) during your public education. You did not deny that you received a public education, only that you do not perceive that education to be important.

        • ssj12

          Government does not give you the infrastructure to build a business. You do. You raise the capital. You research the location. You layout the business plan. You hire the employees. You grow the business through business investments made by yourself by your own choosing.

          The only place government places itself is in the way of starting the process by requiring permits and licenses to start a business, even in a preexisting building, that cost thousands of dollars and can take months to get. They enact taxes upon you because your company is making money. They regulate you, because your competitors, a politician, or some humanitarian, imagines that it will help the employees or industry in some way.

          Taxation is theft. Government is immoral. That is why the constitution was enacted to bind government to follow strict rules, that was intended to prevent government expansion and keep it out of the market.

        • Candace

          Selling their “more useless people”? Foolishness… What an insipid judgement. It is historic fact that warriors, community leaders, royals, etc. were among those sold in the African trade, among others, because it was a way to eliminate political competition. Women and children then were also all useless in your equation.

        • ssj12

          Last time I checked rival warriors, royalty, leaders, etc of rival clans were useless to keep around if the tribe wanting me power wanted to expand. Why have prisoners around to feed and watch over?

        • Kaibob

          What high prices? Fast food prices are insanely low. They’re low because of government subsidies, primarily on corn.

        • Candy Axelrod

          A fine debate!

          ssj12 – I think you’re being a bit of a purist… don’t you think that at the end of the day there’s just no way a pure capitalism will ever exist? how can it ever be possible? Humans are just too flawed, too easily manipulated, too varied in intelligence and experience, etc, etc…..

          As much as I want to embrace a pure libertarian world, I know it’s just a tragic fantasy. Most people are just not capable of existing in one.

        • ssj12

          Im an anarcho-libertarian to be exact. I believe the end result of human society is a voluntaryist society.

        • ssj12

          As for humanity is to flawed, to easily manipulated. Yes and no, We can easily learn and evolve farther. Each generation the human mind expands farther. So as long as the roots of liberty is educated, which it isnt in public education (few students barely even know what the 1st amendment is past “freedom of speech”), we can move humanity forward.

          We just need leadership, and the drive to accomplish it. (Hence why I chair an LP affiliate and am running for US Congress)

  • Matt in CT

    McDonalds does pay more than $15 per hour to employees – Down Under – Minimum wage in Australia is $16.37. And burger prices are not out of line with those in the US. While an argument may be made that the exchange rate is a factor – consider the fact that the Australian dollar was higher than the US dollar only 4 months ago.
    Only thing keeping minimum wages so low – a massive dose of corporate greed (they never seem to have too much $$), political corruption (Best governments money can buy), and the fact that those making more care little about those who do not.

  • Rob Bryan

    With a $15/hr minimum wage, maybe we just don’d need McD’s any more at all.

  • Craig A. Ruark

    Perhaps the question is not how much extra to raise the cost of a Big Mac but rather how much money does a franchise need to make. The average annual gross revenue of a McDonald’s is $2.2 million of which an average of 12% is profit meaning that a franchise owner can pocket $264,000 a year. Most franchise owners have more than one franchise. Franchise owners of Wendy’s, Burger King, Taco Bell and KFC (due to lower costs from corporate), make an average of nearly 20% profit on slightly lower gross but average nearly $300,000 per year in their pocket.

    The question is, how much money does one person need. Most smart franchise owners are sheltering earnings through investment schemes and paying little to no taxes. So what would it hurt if a franchise owner accepted $64,000 less in profit to make sure that his employees could actually make a wage that would raise them above welfare status.

    The whole issue is corporate greed. Paying as little as possible to put as much as possible in the pockets of owners and shareholders. Not that there is anything wrong with that scenario as long as the workers are making a living wage.

    So you might say, how much skill does it take to flip a burger so that it is not under or over cooked? Or cook and dish out french fries at the proper temperature and consistency? Not much, I did it when I was 16 and after a week or two I could manage with my eyes closed. And at 16 what ever money I made was pure gravy. But times have changed and rarely do you see a fast food restaurant staffed full of 16 year old employees. Fast food has become the life blood job for those who want to work but do not have the capacity or desire to do any other job. And Franchises like McDonald’s are happy to hire these otherwise unemployable because it means less turn-over and training of employees. But the employee is essentially indentured and relying on a little money from the fast food chain and the rest from the government to survive.

    If we raised the wages that we pay these mostly hard workers for their minimal jobs then perhaps we could save millions of dollars in welfare costs.

  • Alex Yamach

    THE ACTUAL COST OF MCDONALDS FOOD

    Burger Patty depending on size – 18 cents, 48 cents, and 68 cents
    Grilled Chicken Patty – 66 cents
    Crispy Chicken Patty – 67 cents
    Sausage Patty – 13 cents
    1 McNugget – 6 cents
    1 Egg – 9 cents
    Filet O Fish Patty – 35 cents
    Candian Bacon Slice – 14 cents
    Hot Cakes – 8.3 cents
    French Fries – 3.44 a huge bag for multiple servings
    Yogart Mix – 4.14 a large bag for multiple servings
    Slice Of Cheese – 6 cents
    Hamburger Bun – 8 cents
    Bacon – 16 cents
    Tomatoes – 16 cents
    McNugget Sauce – 6 cents
    Paper Napkins – .001 cents
    Plastic Straw – 5 cents
    Ketchup Packet – 1 cent
    Biscuits – 10 cents
    Muffins – 10 cents
    12 oz Soft Drink no ice – 26 cents for Coke – 16 cents for others

    Info Link: http://imgur.com/R8OyA

    McDonalds profits are 20.4% or their revenue, which is double and triple
    that of some other businesses.

    Look at the chart: Profits as % of Revenues 20.4

    Link: http://money.cnn.com/magazines/fortune/fortune500/2012/snapshots/2262.html

    Walmart gets by on a 3.5% profit margin.

    Look at the Chart: Profits as % of Revenues 3.5

    http://money.cnn.com/magazines/fortune/fortune500/2012/snapshots/2255.html

  • Alex Yamach

    McDonalds makes 2/3′s of its profits from the 25% of the restaurants they own, and the rent they charge the franchise owners of the other 75% of their restaurants.

    If they would lower the rents on the franchise owners, then they would have enough money to pay a $15.00 an hour wage and still make a profit, with nobody losing their job.

    McDonalds has one of the highest profit margins of any business in America averaging 18 to 20%!

    The only people that would be hurt by lowering the rent fee to franchise owners would the be the wealthy investors and stock holders who don’t need the money to live on in the first place.

    • Dave

      The why would they choose to invest their money there for sub-optimal returns? This solution makes no sense at all.

  • akabillybob

    My son was denied employment at a local fast food chain.
    The Manager said that if he could learn spanish in three weeks, he could have the job.
    Manager insisted that this was only so he would be able to communicate with his team members.

    Liberal America is a pallid, sickly shadow of the way it used to be.

  • samantha

    I have worked for burger king in my high school years and yes I made minimum wage, I then worked at a grocery store makeing slightly more. I am currently a certified nursing assistant. Yup that’s right I wipe rearend all day get physicslly and verdally abused, and have a SKILL SET I am certified I had to go to college and guess what I do not make $15 an hour, this is why I am in nursing school. So I think it is absurd to think that a fast food worker who hits a couple pictures on a screen to be payed more than the ones taking care of your loved ones. And if you raise minumum wage our us dolllar only becomes more worthless as the caust of everything goes up. I also have a question, what are these people doing that they are not being premoted? Remember when I said I worked at bk well I was offered managment training while I was in high school. People who succeed do so because they work hard to be at the level of success they think they deserve.

  • samantha

    I have worked for burger king in my high school years and yes I made minimum wage, I then worked at a grocery store makeing slightly more. I am currently a certified nursing assistant. Yup that’s right I wipe rearend all day get physicslly and verdally abused, and have a SKILL SET I am certified I had to go to college and guess what I do not make $15 an hour, this is why I am in nursing school. So I think it is absurd to think that a fast food worker who hits a couple pictures on a screen to be payed more than the ones taking care of your loved ones. And if you raise minumum wage our us dolllar only becomes more worthless as the caust of everything goes up. I also have a question, what are these people doing that they are not being premoted? Remember when I said I worked at bk well I was offered managment training while I was in high school. People who succeed do so because they work hard to be at the level of success they think they deserve.

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