Will New Minimum Wages Cripple McDonald’s?

McDonald’s Corp. (NYSE: MCD) is already fighting consumer perception that its food is too expensive. At the end of the second-quarter earning call, CEO Chris Kempczinski said the perception that it had high prices was undermining low-income customer traffic. Much of this had to do with food prices. Now, McDonald’s faces increases in the minimum wage, which in some states has gone above $15 an hour.

McDonald’s has already raised the pay of some store workers, but most of its stores are franchises. These operations have a broad ability to set their minimum wages. They face new pay levels, set at the first of the year, as high as $16.50 in parts of New York state, $16.66 in Washington state, and $16.50 in California. There is already a degree of friction between McDonald’s franchisees and the company.

McDonald’s has to balance costs with revenue. Its move into cheaper menus has grown considerably since Kempczinski’s comments. It created a “$5 meal deal” last year. That was followed by a “$1$2$3 Meal” menu, which will continue this year. It is a classic tradeoff between price and volume.

McDonald’s revenue rose 3% to $6.9 billion in the most recent quarter. But the damage was on the bottom line. Net income fell 3% to $2.3 billion. Franchise margins have been good, but McDonald’s now faces what could be an additional battle with franchisees due to menu and labor costs. Additionally, inflation appears to be hitting coffee and orange juice prices. It is a tough environment.

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