Yum! Brands, Inc. (YUM), McDonald’s Corporation (MCD): Something to Consider for Fast Food Companies

Wages and profitability

Because total wages make up such a large portion of operating costs, it’s very important for investors to pay attention to risks associated with minimum wage. Because these companies also franchise stores, it eliminates some of the risks. When a store is franchised, the parent company isn’t responsible for paying employee wages. Instead, the parent company earns franchise fees from the franchisees.

Burger King is in the best place to reduce the risk of higher wages because of its higher percentage of franchise fees. However, there’s still risk of lower profitability from each individual franchise store.

Final thoughts

This news is not necessarily bad for investors, it just presents a risk moving forward. As minimum wage changes over time, these companies, in particular, will have to adjust their operations. It could mean reduced profitability. New York has already based a budget that would raise minimum wage to $9 per hour by 2015. If this trend moves nationwide and continues to spread worldwide, investors will have to reconsider the valuation they place on these companies.

The issues in China look to be a short-term dilemma. As the chicken contamination is corrected and normal operations resume, same-store growth and revenue will return to normal levels. It’s a worry for now, but it shouldn’t be worrisome for too long.

Austin Higgins has no position in any stocks mentioned. He is the Principal Consultant for Avant Venture Group and focuses on building businesses through innovation, growth and investment. Read his company’s blog at BuildInvestGrow.com and follow him on Twitter @Austin_Higgins.

The Motley Fool recommends Burger King Worldwide Inc (NYSE:BKW) Worldwide and McDonald’s. The Motley Fool owns shares of McDonald’s.