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Restaurant Finance Watch: Will Walmart's pay hike affect McDonald's?

Restaurant Finance Watch: Will Walmart's pay hike affect McDonald's?

NRN editor and restaurant finance expert Jonathan Maze breaks down what you should be watching in the industry this week. Connect with him on the latest finance trends and news at @jonathanmaze and [email protected]. RELATED: • 21 states to increase minimum wage in 2015 • Restaurant groups seek to change definition of ‘full time’ • More restaurant finance news

The ink on Walmart’s announcement this week that it would raise wages was barely dry before speculation turned to McDonald’s and whether it would do the same.

The retailer said on Thursday that it would raise wages to $9 an hour in April, and then $10 an hour in a year — an increase that would affect 40 percent of its workforce.

The move will no doubt send ripples among employers. The company’s decision automatically gave half a million Americans a boost in pay, and it raised the bar of what employers are expected to pay their lowest-compensated workers.

The move will clearly force Walmart’s rival Target Corp. to respond in kind. But it’s less certain whether it will lead quick-service restaurants to do the same.

The vast majority of quick-service locations are owned by franchisees who, at least for now, still control labor costs. Franchisees own four out of every five McDonald’s restaurants. They own nearly all of Burger King’s locations, as well as a growing number of Wendy’s units. That means the decision of whether to respond in kind is up not to a single organization in Oak Brook, Ill., or Miami or Dublin, Ohio, but to the owner of two units in Kansas City, Mo., or 50 locations in Charleston, S.C., or a single unit Brownsville, Texas.

The National Labor Relations Board has made certain that McDonald’s corporate headquarters won’t go near the pay issue any time soon by calling the franchisor a “joint employer” of its franchisees’ workers.

McDonald’s will likely be fearful of legal ramifications associated with any labor directive, perceived or otherwise. So while the company could suggest to operators that they raise wages to keep up with Walmart, that will likely not happen. Any pressure to raise wages in the quick-service business remains up to franchisees’ decisions, and operators are independent and market-focused.

The move by Walmart and other retailers could pressure quick-service operators to raise wages by increasing workers’ potential earning power. After all, it doesn’t take a rocket scientist to figure out whether a worker would prefer getting $10 pushing shopping carts and stocking shelves or the federal minimum wage of $7.25 flipping the proverbial burger.

If a huge employer offers that kind of pay, it would shrink the labor force and require operators to be more competitive on the pay front.

But it’s not that simple. Operators won’t match those pay rates as long as they think they can get enough employees. And quick-service companies typically employ workers with no experience, unlike large retail employers like Walmart or Target. They may be competing for different employees altogether.

Only about 6,000 Walmart employees are paid the federal minimum wage. The average hourly pay for a Walmart employee is about $11 an hour, compared with $9 at quick-service restaurants. Employees can already earn more by heading to that big-box retailer with the blue sign.

Wall Street’s reaction to Walmart’s move also illustrates how difficult it can be for low-end retailers and restaurants to raise labor costs. The company’s stock fell 3 percent on the news.

Restaurants are reluctant to cross Wall Street investors at a time when activist shareholders lurk around every corner — even if they were willing to risk the liability associated with making a franchisee pay directive.

But wage rate hikes are probably inevitable. It’s certainly a good argument for quick service to get ahead of the curve and raise wages now, before it’s forced upon them.

In the coming years, 13 states will have minimum wage rates of $9 or higher, seven of them higher than the $10 Walmart will pay its workers. Roughly half of all states have minimum wages above the federal minimum wage. And restaurant companies have reported higher labor costs in recent quarters.

Some of the hottest quick-service companies in the country currently pay higher wages and ensure they have a workforce culture that engenders loyalty among employees. Indeed, higher pay is only part of a strategy to hire and retain good workers.

“They have to address the culture,” the restaurant consultant John Gordon told NRN. “It’s not just about pay.”

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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