Higher minimum wages chomp into restaurants

June 12 06:00 2015

Labor’s victories in hiking minimum wages stand to “eat into” restaurant profitability, warns Moody’s Investors Service Thursday, confirming the fears of investors. Profit margins of U.S. restaurants could be hit by up to four percentage points over the next few years – a brutal hit to an industry that already sports thin profit margins. McDonald’s (MCD) has reported profit margins from continuing operation of around roughly 15% to 20% the past few years. And that hit could be “considerably higher” if the trend to boost minimum wages even further to $15 an hour takes hold, Moody’s says.McDonalds

Investors in companies that rely on large numbers of workers making the minimum wage are nervously watching the the trend taking hold to increase pay. The City of Los Angeles Wednesday was the latest major city, following San Francisco and Seattle, to push a plan to increase the minimum wage to $15 an hour. This is a potential major cost for restaurant companies to deal with since 22% of hourly workers in the food preparation and serving-relating occupations earn the minimum wage or less, according to Moody’s citing data from the Bureau of Labor Statistics.

The chart below illustrates how big the hit could be – assuming that wages rose 39% to $10.10 an hour, up from the current $7.25 an hour. A common situation might be a casual dining chain with 20% of its labor force affected by the minimum wage increases. Those companies would see their operating margin – the percentage of profit from a dollar in revenue – shrink from 12% to 9.7%, Moody’s found. In English that means rather than keeping 12 cents of every dollar of revenue after paying operating costs, the company would keep just 9.7 cents. Spread that lost 2.3 cents in operating profit over a few hundred million dollars – or billions – of revenue and you’re talking about real money.