The McDonald’s Minimum Wage Increase and the Future of the Fast Food Franchise

Employees work at the counter of a McDonald’s restaurant located inside the company’s new headquarters on June 4, 2018 in Chicago, Illinois.

Scott Olson | Getty Images News | Getty Images

For Tom Locke, his tipping point on staff salaries returned in March, during a conversation with a tired store manager, Heidi, in Coventry Township just outside of Akron, Ohio.

Earlier that week, the McDonald’s store she managed for her family business, TomTreyCo, had a record $ 18,000 turnover in a single day, but as he sat chatting with her at a booth, Locke realized that despite his ten-year dedication to his business, staff shortages at the end of the Covid-19 pandemic were really taking their toll.

She described a 12-hour shift, sleeping for three hours in her car rather than driving home for half an hour, followed by another full day on your feet. “I could see the stress on Heidi’s face,” Locke recalls recently. And so he decided to make a change in the 45 McDonald’s stores that are part of his franchise business in the cities of Pennsylvania, West Virginia, and Northeast Ohio – he raised the wages of workers.

The most junior staff would earn a minimum of $ 13 an hour, and for managers it would rise to $ 20 an hour, well above what other local competitors were offering.

“We were in a pretty solid financial position,” Locke said of the April decision, taken after consultations with his management team and a thorough review of models looking at cost and margin implications. “I thought if at any time we could do that, raise the wages of all of our associates, it would be now.” he said.

Fast food pays under pressure

The pay levels of fast food workers have come under scrutiny over the past decade, with the help of pro-work policy makers and well-organized advocacy groups like ‘Fight for 15’ , who calls for a minimum wage of $ 15 an hour.

McDonald’s, perhaps more than any other brand, has been at the center of this criticism and controversy, even though its franchise model means that the vast majority of restaurants are in fact operated by independent franchisees, like Locke’s TomTreyCo, rather. only by the franchisor – McDonald’s itself. . But thanks to the intensely interwoven nature of the franchisor-franchisee relationship, a decision to raise wages on either side of the franchise equation can have complex implications.

In May, McDonald’s, just months after further tense disputes with franchisees over tuition programs and payment of tech fees, announced that workers at 650 McDonald’s-owned establishments would see their wages increase by On average 10% by the end of June employees will earn $ 11 to $ 17 an hour, and shift managers will earn $ 15 to $ 20 an hour, depending on location. The company says that means the average salary for employees in company-owned restaurants will be $ 15 an hour by 2024.

Although the salary increases only take effect at sites that McDonald’s Company owns and operates, the company has encouraged franchisees who run the other 13,000 or so restaurants to do the same for their more than 800,000 employees, provoking anger and dismay among some franchise owners. The fast food giant franchises 95% of its American restaurants.

What McDonald’s CEO Says About Salaries

McDonald’s is among the restaurant chains coming out of the pandemic with a strong financial position, similar to Chipotle, which recently increased wages – as well as in his case, menu prices by 4%. And he’s trying to send a message of financial support to independent restaurateurs.

In a recent interview with the CNBC Evolve Global Summit, McDonald’s CEO Chris Kempczinski said the company’s decision to pump roughly $ 1 billion in cash into its system earlier this year after the worst of the pandemic – and in addition to several years of record growth in the United States – was part of an effort to take the mindset of franchisees away from worrying about “am I going to be able to pay, you know, my mortgage or to pay off my loan that is due this month? … it’s that mindset going from being, you know, defensive to really a lot more aggressive. “

While he does not want to comment on the increase in the federal minimum wage, the CEO of McDonald’s said: “There is no doubt that $ 7.25 these days is not what you should or should pay for. to be competitive in the market … wages increase because the economy is strong. “

Labor experts say McDonald’s decision will put pressure on its franchisees.

“This will create a lot of public pressure on franchisees to do the same,” said Laura Padin, senior lawyer for the labor rights group, the National Employment Law Project. “When this campaign started in 2011 or 2012,” said Padin, referring to “Fight for 15,” a minimum wage of $ 15 was “seen as a ‘pie in the sky’ type goal.

The recent McDonald’s announcement is, Padin insists, proof of its effectiveness. “The fact that the companies themselves are taking this initiative shows you how much the movement has changed the discourse on what should be an acceptable minimum wage,” she said.

The franchise industry is in decline

The franchise industry has made its position clear: salary floors and ceilings should be set by individual restaurateurs. “Franchisees are in the best position to make salary decisions in their local communities,” said Matt Hauer, senior vice president of government relations at the International Franchise Association. He highlighted the cost differences between higher priced metro zip codes and more rural locations.

The current focus on salary levels, he says, is the product of a “union-led campaign” to achieve specific organizational or political results by persuading the public that the franchise business model is in fact. a business model. In terms of public perception, he says, this is designed to “transform a business like McDonald’s, Dunkin Donuts or Hilton Hotels, into a single business rather than a collection of many small businesses doing business under a common brand.”

A “Now Hiring” sign is displayed in the drive-thru of a McDonald’s restaurant on July 7, 2021 in San Rafael, California.

Justin Sullivan | Getty Images

McDonald’s corporate vision puts franchisees in the crosshairs of a battle with huge competitors over a larger landscape of low-wage workers.

“I think what’s going on is you see that a good economy is very helpful in increasing employee wages. And I think a lot of the changes that are happening from a wage perspective are happening because that companies like McDonald’s have to compete for the best talent, “Kempczinski said.” When you have Walmart and Amazon, Target… which all go up to $ 15, that’s definitely a talent pool that we’re competing with. “

How McDonald’s Employees Feel

Among workers arguing for higher wages, a distinction between McDonald’s corporate or franchisee may seem semantic.

“We don’t care whether or not we work in a franchise or a corporate store,” says Cristian Cardona, a 21-year-old who started working at a restaurant operated by McDonald’s in Orlando three years ago. years. “We all wear McDonald’s uniforms and we all deserve a living wage.”

Cardona was first employed at $ 9.25 an hour, only a dollar more than the Florida minimum wage at the time. Then, after a year, he became a manager and went down to $ 11, before McDonald’s recently raised it to $ 13. “If the McDonald’s company can control how franchises make their Big Macs and how they market, I know they can figure out how to pay every worker a living wage of at least $ 15.” he said.

For Locke, the franchise operator in Ohio, the introduction of higher wages was ultimately a business decision more than a moral one. “I’ll be honest with you,” he said in a recent telephone interview. “If it hadn’t been for a huge labor shortage, we might not have taken the necessary steps.”

We were just a virtual hamster on the hamster wheel: we weren’t going anywhere. The hard part is hiring, retaining and training great people.

Tom Locke, McDonald’s franchisee

At the start of the year, Locke had reduced his menu choices, improving his margins, but he was still struggling with staff shortages. Each month, around 250 employees leave and the same number need training. In the restaurant industry, turnover above 100% is common.

“We were just a virtual hamster on the hamster wheel; we weren’t going anywhere, ”he says. “The hardest part is hiring, retaining and training great people.”

But since his pay rise, introduced regardless of McDonald’s announcement the following month, retention levels have skyrocketed.

To compensate for the higher costs, he raised prices slightly, but believes customers “expected” as his team publicly announced the higher wages for his workers. “It’s a long-term look at the business versus a very short-term look at the business,” Locke said. “I think it’s a much better business model.”

It’s an approach that shows agreement rather than friction between McDonald’s business owners and independents and echoes the McDonald’s CEO perspective.

“We’re going to be transparent… We’re absolutely going to be making long-term decisions, so let’s not get caught up in the short-term here and now,” Kempczinski told CNBC.

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