03 April 2015

Wages Of Min

McDonalds operates on a 32% food cost model. What that means is a properly managed Mac Shack should see the price of the food be 32% of the gross receipts. If there were no other expenses, that'd be 212.5% profit. But that's not the only expense. Overhead is scheduled at 30% and labor at 35%. So every dollar taken in gives the owner of the location 3 cents. So about 3.1% profit. A super well run and operated MacHouse can get food costs down to 25% and overhead down to about 27%. Most franchise owners actually reward their employees with a bigger chunk of the pie at this point and keep their end at about 3%. They understand that the food costs and utilities savings are from diligent hard work from the minions.

Now, going from $8 an hour to $15 an hour...

There's a bunch of ways to do this.

Increasing wages, without changing anything else, makes labor 51.42% of costs, dropping food to 25% and overhead to 23.51%.  But it now costs 27.63 cents per dollar of income.  To keep that 3.1% margin the owner has to raise prices 31.58%.

That takes a $4.80 Big Mac to $6.32.

The problem is that it doesn't end there.  Food costs will go up by about the same percentage, for the same reasons.  It raises prices about 42% from before to keep the same margin.  With food now at 29.65%, overhead at 21.13% (because these rates change more slowly they're almost the same in absolute dollars) and labor is now 44%.

And a Big Mac is $6.82.

They could decide that 35% is what the percentage of labor should be.  Since the cost per employee hour has a bottom cap on it, the only way to reduce labor costs is to reduce employees.  A ten employee store will fall to a five employee store.  So five people make almost double and five people make nothing.

It's already happened!

When I was a kid the back of a MacDonalds had a freezer, a fridge, a griddle and a fryer.

Been in the back lately?

Where the griddle used to be are racks of steamer/heaters.  These take frozen items and reconstitute them into a semblance of something prepared fresh.  They don't buy eggs to make McMuffins, they have egg patties.

There's no reason a person has to take the patties out of the freezer and into the proper bin of the rack.  That can be automated.

The really sad thing is the McDonalds of my childhood had already gone through one round of this, the patties came frozen when I was kid.  When my dad was a teen those patties were made on site from locally sourced ground beef.  The first rounds of minimum wages caused the supplies to become centralized and increasing so until it became cheaper to make the reheatable pre-cooked patties we have now than to pay someone at the restaurant to make them from raw meat.

I don't know why nobody learns the lessons from history here, since it's happened in living memory.


  1. Whenever people bring up "But it'd be so much better and fair and everyone deserves a living wage!", I point this out. http://www.businessinsider.com/momentum-machines-burger-robot-2014-8 At present, it's more cost and PR effective to hire people. At $15/hr? The changeover may occur. As I understand, a bunch of places in Europe have pretty much just turned the tablet touchpad that is the cash register interface around and done away entirely with the cashiers. Walk up, push some buttons, and get your food. Higher wages to less people.

    There are some interesting things to ponder on the vast increases in human productivity and the power of automation, but musings on the eventual breakdown of current economic models assuming that human participation is necessary or desirable for a lot of what used to make up the entire employment base is going to be a deeper discussion than "is X dollars/hr enough?"

    1. The other factor they never seem to consider is the buying power of minimum wage never goes up for long. The ones who get the raise because they have a job have a golden period where they're really making more money; then the inflation effects kick in and prices on everything goes up... Suddenly making $15 an hour is the same as making $8 an hour was.

      When I was making $4.25 an hour delivering pizza, gas was $0.919. Minimum wage is now $8 an hour, and gas is $2.499.

      Minimum wage sure seems to be a driving factor in the devaluation of our currency.


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