Yum! Brands
This company is comprised of Taco Bell, KFC and Pizza Hut restaurants. Its franchise operations account for a much smaller percentage of its total revenues than McDonald’s: in 2012 (opens pdf), its revenues from franchised restaurants were only 13% of its total revenues. Its payroll and employees benefits provision accounted for 22% of its company sales (sans franchise revenues). The company re-franchised 468 restaurants in the U.S, so there are currently fewer restaurants the company operates. As of the end of 2012 the company operated 1,733 restaurants, which account for only 23% of its total number of restaurants. The company’s sales in the U.S were $2.55 billion; the labor costs were $751 million, so an increase of 26.7% in the wages will raise the labor cost (assuming all other equal) to $951 million – a nearly $200 million gain, which will reduce the company’s U.S profit margin from 16.3% in 2012 to 8.4%. But the company’s total operating profitability will decline from 16.8% in 2012 to 15.3% – a nearly 1.5 percent point drop.
Unlike the previously mentioned companies, Burger King Worldwide Inc (NYSE:BKW) didn’t have a great year as its revenues dropped by almost 16% in 2012 (y-o-y). One of the reasons for the drop in sales was the company’s cut in number of restaurants in U.S and Canada: the number fell from 939 by the end of 2011 to 183 by the end of 2012. On the other hand, its franchised restaurants grew by 732 to reach 7,293. This shift from operated restaurants to franchised restaurants in the U.S is likely to reduce the adverse impact a raise minimum wage will have on the company.
In 2012 the payroll and employee benefits accounted for almost 30% of the company’s restaurants revenues. Since the company’s restaurants in the U.S & Canada account for 43% of its total number of restaurants, assuming a 26.7% gain in payroll expense in U.S & Canada, the total operating profitability of the company will drop from 21.2% in 2012 to 20.3% – again around a 1 pp decline. But if Burger King Worldwide Inc (NYSE:BKW) will continue to close its operated restaurants in the U.S and shift them to franchised restaurants this could lower the company’s risks related to wages (and other risks), so this 1pp drop could be even smaller.
I think that it’s too early to predict how raising the minimum wage will affect the economy in general and the fast food market in particular. It might lead to a slight drop in the profit margins of leading fast food companies, but this change could also lead to growth in revenues that will cut the adverse impact of a wage increase.
The article Will a Minimum Wage Hike Hurt McDonald’s? originally appeared on Fool.com is written by Lior Cohen.
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