That McDonald's Salary Study Gets It Wrong

Much is being made today in various news reports of a study out of Kansas that claims a Big Mac would cost 68 cents more if McDonald’s doubled worker salaries. Perhaps, but most of those doubled salaries would not be going to fast food workers because McDonald’s doesn’t own most of its restaurants.

According to the Huffington Post, the study was a simple one: it looked at the percentage that McDonald’s as a corporation spends on salaries, about 17.1 percent, and then calculated the prices it would charge if that number was doubled. Thus, if McDonald’s doubled all salaries, all it would have to do is raise prices by 17.1 percent. Thus, the $3.99 Big Mac would cost another 68 cents.

That is completely wrong.

McDonald’s is an easy and frequent target of those who want to poke at QSRs for poor health and, now, low wages. And the company didn’t do itself any favors by posting a ridiculous budget that suggested its workers need second jobs to make ends meet and then neglected things like heating costs.

But lost in this discussion is a fundamental misunderstanding of McDonald’s business. The company owns just 20 percent of its restaurants. Most of the $27.6 billion in revenue it made last year came from franchise royalties and rent paid by franchisees. So a researcher can’t simply look at the company’s annual report, calculate the salary number, and then extrapolate that for an entire system. McDonald’s is a totally different business from the one run by franchisees.

Of course, as the franchisor, McDonald’s probably could force operators to double wages and increase prices  (though whether those operators would happily go along with that idea is another matter). And McDonald’s could lead the way by doing so at its own restaurants. But prices would have to rise a bit more than 17 percent, or 68 cents for a $3.99 Big Mac.

In general, McDonald’s franchisees pay about 20 percent in labor costs, according to Richard Adams, a consultant out of San Diego who works with McDonald’s operators.

Thus, doubling those salaries would push that Big Mac cost up 80 cents. For a Dollar menu item like a medium fry, it would go up 20 cents. That 49-cent cone deal the chain sometimes runs in the summer would be a 59-cent deal.

Would people $4.79 for a Big Mac? Probably not. This is McDonald’s, after all. Remember: customers were so turned off by the nearly $5 price for some of the chain’s new third-pound Angus burgers that the company got rid of the product just a couple of years after it was introduced. It’s tough to imagine they’d pay $5 for a Big Mac. Not when they could pay the same for a burger at Smashburger.


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