McDonald’s Corporation (MCD), Burger King Worldwide Inc (BKW), Jack in the Box Inc. (JACK): Can Fast-Food Chains Survive a Wage Hike?

Fast-food workers across the nation are demanding higher wages, saying they are unable to survive on minimum wage. Walkouts over the last year — and especially over the last two months — have disrupted normal operations at many fast-food chains, most notably at McDonald’s Corporation (NYSE:MCD).

Everyone wants more money, but fast-food workers are especially desperate for higher wages. An employee who works 60 hours per week at the federal minimum wage ($7.25 per hour) would bring in just $19,368 after taxes if he or she never took a week off. Most workers are unable to find 60 hours of employment each week, which means they bring in even less money — hardly enough to live on and support a family.

As a result, fast-food workers and union organizers are demanding a raise in the minimum wage to $15 per hour — an enormous wage hike. Fast-food workers cite the billions of dollars in profits that McDonald’s Corporation (NYSE:MCD) makes each year as evidence of its ability to hike wages, while McDonald’s Corporation (NYSE:MCD) sympathizers say a doubling of wages would be catastrophic for the company. As usual, both sides have distorted their respective positions, so investors should ignore the noise and get the facts.

Can fast food chains afford a wage hike?
First of all, doubling the federal minimum wage would not double the amount fast-food chains like McDonald’s Corporation (NYSE:MCD), Burger King Worldwide Inc (NYSE:BKW), and Jack in the Box Inc. (NASDAQ:JACK) pay their employees. According to Businessweek, the typical wage worker at fast-food restaurants earns about $9 an hour. The workers making minimum wage are predominately seasonal workers, such as high-school and college students. So a wage increase to $15 per hour would be a two-thirds increase, not a doubling.

However, even a two-thirds wage increase would be devastating to fast-food chains’ profits. Although information on franchisee profit margins is hard to come by, public fast-food chains release enough data about their company-owned restaurants for investors to get insight into their ability to increase wages.

McDonald’s Corporation (NYSE:MCD), Burger King Worldwide Inc (NYSE:BKW), and Jack in the Box Inc. (NASDAQ:JACK) pay wages that equate to 25% to 30% of restaurant sales. An aggressive (i.e., inflated) calculation of these restaurants’ profit margins yields a 10% to 20% margin — this excludes corporate-level sales, general, and administrative expenses (SG&A) that are necessary to advertise and run the company.