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Home Publications Blogs Beat the Press Fast Food Prices Could Go Up

Fast Food Prices Could Go Up

Thursday, 04 September 2014 04:46

The Washington Post thinks it has found a fatal flaw in the argument that fast food workers should have higher wages:

"The problem: Fast food is a low-profit margin business. How low? According to Yahoo Finance, 2.4 percent. Just look at the headline: 'Fast-Food Chains Aren’t as Rich as Protesters Think.'"

It is likely that most of the people organizing the push for higher wages in the industry are fully aware of "the problem." If workers got higher wages they would presumably be offset to some extent by lower profits, lower pay for top management, increases in productivity, but there would also be some increase in higher prices.

This would reverse a process whereby fast food prices would have dropped relative to the price of other goods as the wages of workers in the industry fell relative to the economy-wide average. There is no obvious "problem" with this reversal. It essentially means that those on the bottom would enjoy higher real wages and living standards, while those on top would see a relative decline in their living standards. It would only be a relative decline, except for those at the very top, since if the economy is growing normally, higher paid workers could still get a share of productivity gains. 

Comments (16)Add Comment
prices going up anyway
written by djb, September 04, 2014 6:22
Just not wages
WaPo misquotes Yahoo Finance and leaves out vital information
written by Robert Salzberg, September 04, 2014 7:37
Here's the actual quote from Yahoo Finance:

"Either way, the restaurant industry overall is a low-margin business that doesn’t have much spare cash in the till. The average profit margin for the whole industry is just 2.4%, according to Capital IQ,"

The 2.4% number is for the whole restaurant industry not just fast food. WaPo also left out the critical figure that McDonalds' profit margin is 19.8%. 19.8% profit means McDonalds Inc. is screwing both the workers and the local owners.
Fast Food Profits are 6%
written by Robert Salzberg, September 04, 2014 7:55
A quick internet search found research from the National Restaurant Association showed that limited service restaurants, i.e.. fast food, had the highest profit margins in the industry due to, wait for it, lower salary and wages.

"Limited-Service Restaurants
Limited-service restaurants devoted 32 percent of every dollar to the cost of food and beverages, which was nearly identical to the costs for full-service establishments. However, only 29 percent went to salaries and wages, which was lower than that of full-service restaurants. About 8 percent was devoted to restaurant occupancy costs, which was the highest of any type of establishment. Profit before taxes was also the highest for any type of restaurant, at 6 percent."

written by jakes, September 04, 2014 7:57
You are ignoring the fact that high volume businesses traditionally have lower profit margins. That doesn't mean they don't make a lot of money. Grocery stores make about 2% too. But 2% of billions is a lot of money. Jewelry stores, on the other hand, are low volume, and have high profit margins on the goods they sell.
Fascists Predict Americans Will Starve From Lack of Fast Food
written by Last Mover, September 04, 2014 8:07

Michelle Bachmann says if the minimum wage is eliminated the result will be full employment. Richard Fink, top political strategist for the Koch Bros recently said imposition of the minimum wage is fascism per Hitler appeasing the unemployed masses before burying them below the goose step march. LOL, two contemporary fascists see themselves in the mirror and are outed for all to see.

How shallow the tiny minds of their listeners must be to believe such zero-sum drivel. It is zero-sum the same way "fast food is a low profit industry" is drivel used to justify why it can't sustain a wage increase for workers.

Funny how that works. Prices can rise and fall for all kinds of reasons, sometimes sharply. For example look what happened to gasoline prices since the '70s and look what happened to gas guzzlers since then. So where's the news reports on how gas price increases put the car industry out of business?

In contrast, rising house prices per the bubble did put the entire economy out of business big time. But do the likes of Bachmann and Fink even have the mental capacity to make the link between that and increases in the minimum wage ... instead of blaming the bubble on big gubmint as well rather than the private sector that actually drove it?

The glaring stupity of predicting each and every gain to lower class workers as a calamity that does not add value at the margin arises from refusing to consider the starting point and how it got there.

What, you idiots think the takeover of the economy by predators in the 1% had something to do with current wages literally at or below subsistence levels? You probably believe the explosive gains recovered by the one percenters didn't add any significant value either beyond the monopoly rent don't you.

Morons, all of you. Educate yourselves and learn how to think at the margin. All current prices are legitmate. All current wages are legitimate. All current income and wealth is legitimate.

From there, good economists we all know you can be if you just try, assume a can opener and a change in wages or prices and watch what happens. There America, we knew you could do it.

So back to the question. If the minimum wage goes up we're all gonna die from fast food starvation and just what do you plan to do about this coming catastrophe beyond raising wages with big gubmint and make it even worse?
What happened to Micro 101?
written by David M, September 04, 2014 9:12
Aren't prices set by the intersection of supply and demand, especially for goods like fast food with lots of vendors and consumers. Prices should only increase after all the profit margin was whittled away. Unless you're implying markets aren't perfectly competitive...
written by Roger Bloyce, September 04, 2014 10:37
Rather than bemoan the sappy economics, shouldn't the comments here be bemoaning the outlet, namely the Jeff Bezos version of the WAPO?
written by JDM, September 04, 2014 10:54
How much money are newspapers making these days (the Washington Post has been reporting losses not profits) and why aren't these reporters saying they should be paid minimum wage?
written by Brad, September 04, 2014 11:11
Jakes is right, low profit margin industries make up for this by inventory turn. The 2.4% profit margin is simply cherry-picked to make it appear there is nothing to give to workers. Return on Net Assets(RONA)is profit/(Fixed Assets + Non Cash Working Capital). McDonalds sells their inventory every 4 days, while paying suppliers every 30 days. This greatly reduces the denominator of the RONA calculation bringing the value to or even past the RONA% of other large firms. I haven't run the specifics, but I suspect this is a more convincing argument for pay raises than simply saying they can pass the prices to consumers.
Are We Becoming Fixated On the Wrong Metric?
written by Jesse, September 04, 2014 11:21
That Michelle Bachman thought about eliminating the minimum wage entirely and achieving full employment brought this quote to mind.

"The issue isn't just jobs. Even slaves had jobs. The issue is wages."

Jim Hightower
Metric Blindness
written by Jesse, September 04, 2014 11:26

I call this fixation on a misleading statistic 'Metric Blindness.'

Let's measure our economic health by 'the number of jobs' without respect to the quality or returns on those jobs.

Do 'jobs' provide a sustainable recovery, and a tolerable quality of life for families? Or is it a matter of the wages, something like the median wage, that are the true measure of where policy is taking us?

I think that 'jobs' is more of a political symbol, and economists too often fall into that meme trap, and some gratefully so. 'Jobs' is a Potemkin statistic when there is no living wage being received for it.
1% of nothing is nothing
written by Squeezed Turnip, September 04, 2014 12:11
1 percenters don't eat at MacDonalds, so why do they care as long as they get their quart of blood from their (quarter) pound of flesh?

Adding to Mr. Salzburg's observation concerning the 20% profit margin of McDonalds, the franchisers also run about a 10% profit margin on sales.
written by Denis Drew, September 04, 2014 12:58
If fast food prices were cut in half today, most people would not purchase any more burgers. How many could they (we) eat?

We do not know how far below most people's "maximum burger buy line" prices may have sunk during decades of down-drifting minimum wages -- plausibly today's prices could rise 25% higher and people might buy just as many; 50% might cut into business. We DO know today's federal minimum wage is $3.50 an hour below 1968's minimum -- we DO know per capita income near doubled over the same time frame. (See chart below.) It is perfectly plausible fast food prices began dropping deeper and deeper below our collective "maximum buy line" decades ago!

Look at Wal-Mart: at 7% labor costs. DOUBLE Wal-Mart's average wages ($10 to $20 an hour) and ADD health benefits, paid vacations, etc., and prices might go up 10% (7% + 3%?). If Jimmy Hoffa's Teamsters were in there that would have occasioned long ago.

* * * * * * * * * *

double-indexed is for inflation and per capita income growth (2013 dollars):

yr..per capita...real...nominal...dbl-index...%-of


* * * * * * * * * *

PS. There are places in this country where they want to take four years to raise the minimum wage to $13 an hour. What business firm would take four years to reach a price of $13 that they were pretty sure the consumer would pay today -- especially if they realistically supposed they could go all the way to $15 (if not $20!)?

Kinda brings back the big question of 1956: "Does the Negro want too much, too fast?" In 1956, the minimum wage was $8.75 in today's dollars.
written by RB, September 04, 2014 7:18
There are several issue at play here. The min. wage in 1974 was $2.00 an hour. So it did a triple (2 to 4 to $8.00) in 40 years. The price of gas was .53 in 1974. The CEO's salary is 331 times that of the average worker. The CEO of McDonalds went up 9 percent in 2013 to 27.6 million. The last 30 years the U.S. has turned the labor market into a service based industry.

The point is, the imbalances of capitalism are now affecting the structure of society. The government is capitalizing on the bottom 90 percent, and enriching the top 10 percent. This is the new form of capitalization.
written by JDM, September 04, 2014 9:17
I remember when I learned what grocery store margins were and wondering why grocery store owners didn't just put their money in bonds instead. I was 8 years old, and I figured out why before I turned 9. How old are the writers at the Washington Post?
written by Jay, September 04, 2014 11:15
Poor reporting. Healthcare Services has profit margins under 3% too. However, there is no shortage of money being made there either.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.