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Fast Food Workers Strike! Industry Reacts

Labor demonstrations outside a McDonald's
A July fastfood strike in NYC. Photo by Annette Bernhardt

Spearheaded by the Service Employees International Union, fast food workers in American cities demonstrated on Thursday for higher wages. Workers want to raise the federal minimum wage from $7.25 to a whopping $15 per hour.

Scott DeFife, executive vice president of policy and government affairs with the National Restaurant Association, thinks this is for show and that the vast majority of the strikers are activists and paid demonstrators. He argues, "Dramatic increases in a starting wage such as those called for in these rallies will challenge that job growth history, increase prices for restaurant meals, especially in the value segments, and lead to fewer jobs created." The association says that when the minimum wage was last increased in 2007, its research revealed that 58 percent of restaurant owners followed by raising their prices.

Right now entry-level fast food work is under $8 an hour. Economists don't necessarily agree on what the result of raising fast food wages would be.

…Some economists maintain that giving raises to low-paid fast-food and retail workers would stimulate the underperforming economy by increasing their ability to spend. But other economists counter that the stimulus would be negated when the raises forced [sic] restaurants and retailers to raise prices, subtracting from other consumers' spending power. [via NYTimes]

Politicians and pundits think that it is unlikely the franchise industry will change, but rather that these fast food service workers will spark states to raise their minimum wages.

"Workers would genuinely like to have something that looks like a union," says Nelson Lichtenstein, a professor of history at the University of California at Santa Barbara. "That's not going to happen. What is going to happen: They'll create the context for cities and states to pass legislation raising the minimum wage." [via BusinessWeek]

It's good to be a Zor, Rough to be a Zee

Chart: BlueMauMau   Data: Glassdoor.com

The labor union seems to be staging worker demonstrations outside franchised outlets of famous national quick service restaurant chains. But with hair line profit margins, hard-pressed franchised restaurants have little maneuvering room to raise wages. In a rare glimpse into the financials of franchisees, publicly-traded Carrols Restaurant Group (NASDAQ:TAST), Burger King's largest and arguably most successful franchisee, shows this. (See chart by Blue MauMau.)

Carrols Restaurant Group (TAST), a big publicly traded Burger King franchisee, had operating margins of 2.01 percent in 2011; the Burger King corporate chain had margins of 15.52 percent. While that's not an apples-to-apples comparison, it suggests some franchisees may have a tough time serving up bigger paychecks. [via BusinessWeek]

The Coalition of Franchisee Associations, a Washington D.C.-based trade association that solely focuses on the needs of the nearly 850,000 franchise owners in the United States, writes that profit margins from franchised businesses have become more vapor than substance. This is part of the problem. Keith Miller, chairman of the CFA, tells Blue MauMau:

As franchisee representatives, we must do a better job of educating our elected officials, and the public, on our business models. It is the franchisees that invest, sponsor, pay taxes, and employ in our local communities. While industry profits are often quoted, the franchisees only realize a small portion of those.  Over the last few years, franchisees have become more vocal, about shrinking margins. Franchisors, under pressure from investors and stockholders, must maintain revenue to maintain stock prices. This has been accomplished by deep discounting, which props up the revenue, but on the backs of franchisee margins.

A recent Government Accounting Office report on franchise lending stated that 28% of loans over the last 10 years required a guaranty payment by taxpayers on defaulted loans.  For this payment to occur, all assets of the franchisee are exhausted.  On the reported 32,323 loans, that means over 9,000 franchisees lost everything, often including their house.  While the public and media concentrate on the bigger, and perceived more successful brands, we must remember that there are many Quiznos or Cold Stone Creamery systems out there that have closed hundred of franchise outlets. We are still in a very difficult business climate for franchisees.

But is redistribution of wealth the answer?

Burger King Zee and Zor Operating Profit 2011
Chart: BlueMauMau. 2011 Data: BloombergBusinessWeek

The Service Employees International Union seems to understand that there isn't much in the profit margins of franchise owners from which to shake wage concessions, so its president wants franchisees to pay lower royalties.

Ms. Henry, the service employees' president, said the movement hoped to persuade McDonald's and other companies to require franchisees to pay $15 an hour. To help the franchisees afford that, she said, the chains might agree to have their franchises pay them lower fees. [via NYTimes]

John Gordon, restaurant unit financial analyst with San Diego-based Pacific Management Consulting Group, tells Blue MauMau: "I'm hearing that labor organizers have said they hope they can help franchisees rework franchise contracts." The analyst adds, "That won't happen in my lifetime."

Critics say that the government uses taxpayer dollars to artificially boost franchisees by providing food stamps and welfare to their underpaid and impoverished workers. In the meantime the government provides tax breaks for the franchisor firm to pay its chief executive ungodly sums. Journalist and liberal public commentator Bill Moyers objects to such corporate welfare.

The National Employment Law Project estimates that Yum Brands' workers draw nearly $650 million in Medicaid and other public assistance annually. Meanwhile, at the top end of the company's pay ladder, CEO David Novak pocketed $94 million over the years 2011 and 2012 in stock options gains, bonuses and other so-called "performance pay." That was a nice windfall for him, but a big burden for the rest of us taxpayers.

Under the current tax code, corporations can deduct unlimited amounts of such "performance pay" from their federal income taxes. In other words, the more corporations pay their CEO, the lower their tax burden. Novak's $94 million payout, for example, lowered YUM's IRS bill by $33 million. Guess who makes up the difference? [via BillMoyers.com]

53 Democratic members of Congress sent a letter along the same line of reasoning to fast food CEOs, such as Yum Brands CEO David Novak. What is confusing in the letter is that the Congressmen describe the employees of restaurant franchise owners as employees of the franchisor. They are not. Only a small minority of restaurants are owned by Yum. Signed by Representatives Linda Sanchez (D-CA), Keith Ellison (D-MN) and Raul Grijalva (D-AZ), the letter that was also sent to Burger King's, Wendy's and Domino's Pizza CEO stated:

"The seven publicly-traded fast food corporations collectively earned $7.44 billion in profits; paid $52.7 million to their highest-paid executives; and distributed $7.7 billion in dividends and buybacks. Seven billion hard earned taxpayer dollars should not be used to subsidize some of the country's most profitable corporations, while millions of their employees are not paid enough to meet their most basic needs." [via BizJournals]

More adults now depend on a living wage with QSRs

The International Franchise Association, a half-century old trade group that represents franchising, is not pleased. Its CEO Steve Caldeira declared, "These union–driven efforts ignore the fact that the federal minimum wage was created for entry-level, low-skilled workers, and never intended to be a living wage. Franchise restaurant brands have developed training programs that enable entry-level employees to rise into management and ownership…opportunities a living wage will take away." He is alluding to the economic argument that if wages increase dramatically to a "living wage" level, quick service restaurant chains will find innovative ways to automate, outsource and minimize current workers and their tasks.

Reporter and blogger Jonathan Maze of Restaurant Finance Monitor has a different take on "living wage." He cites how society and the economy have changed when it comes to employment in quick service restaurants.

"The problem to us is simple: over the years, manufacturing and other jobs that went to lower-skilled workers have disappeared. They've been increasingly replaced by service jobs that pay lower wages. The recession only made matters worse, cutting millions of more jobs from the economy.

Restaurants have been among the most effective job creators in recent years. In October, for instance, franchise restaurants alone added 11,520 jobs, according to the human resources firm ADP. That's nearly one out of every 10 private sector jobs created that month.

As a result, more workers at QSRs are older and many have to raise a family. According to a study by the Center for Economic and Policy Research, the number of low-wage workers between ages 16 and 19 was 25 percent in 1979. By 2011, that percentage had fallen to 12 percent.

The problem: these jobs aren't targeted at older workers who require a living wage. QSRs by their nature are designed to mass produce food so it's cheap. And that means keeping costs low, including labor costs. So the jobs have traditionally gone to teenagers and transitory workers who often don't stay long.

The protests are an outgrowth of this reality.

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