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

There has been a lot of talk about minimum wage in the United States recently. Some groups have called for an increase in the wage to a more livable level. Some businesses argue that if they were forced to pay a higher wage, they would have to reduce the amount of hours worked by their employees. One industry this may affect greatly is the fast food industry.

The fast food industry is primarily made up of minimum wage employees. So, if there were any changes to the minimum wage, these companies would be hit the hardest and the quickest. Employees are already voicing a demand for an increase in wages. A group called Fast Food Forward recently organized a protest in New York City targeting major fast food chains. Protesters want to increase minimum wage in the city from $7.25 per hour to $15 per hour.

The changing demands will greatly affect major fast food chains. What do investors need to know?

Yum! Brands, Inc. (NYSE:YUM)

Yum! Brands, Inc. (NYSE:YUM)Yum! Brands, Inc. (NYSE:YUM) operates 39,000 restaurant locations in 125 countries under a number of brand names. The most popular restaurant chains it owns are Taco Bell, KFC, and Pizza Hut.

The company has seen changes in its overall cost of labor from 2011 to 2012. These figures are in relation to total revenue for the year.

Labor Cost in 2012 Labor Cost in 2011
USA 29.45% 30.40%
China 18.52% 16.22%
Other International 24.94% 25.97%

The cost of labor is the highest expense the company has. On average, the cost of labor is greater than the cost of goods in relation to total revenue. The company is at risk for losses if changes in wages are required. Any increase in mandatory wages will have a greater impact on the bottom line than any other expense.

Another major issue Yum Brands has been facing is a decline in same-store sales in China. It has 5,000 stores in China, but because there has been an outbreak of contaminated chicken in some of its stores, it reported a decline of 6% in the Chinese market.

For the first quarter, management expects same-store sales to decline by 25% in Chinese stores. Also, full year earnings per share are expected to drop by 4%-6%. This is a huge change from the double-digit growth the company has been seeing.

Yum! Brands, Inc. (NYSE:YUM) is seeing challenges on two ends right now. First, there are very real and very strong sales issues in China. Second, there is a risk of wage instability in the United States that could very well bring profits down in the future.

Other fast food chains

The Fast Food Forward protest didn’t just target Yum! Brands, Inc. (NYSE:YUM). It also targeted McDonald’s Corporation (NYSE:MCD) and Burger King Worldwide Inc (NYSE:BKW). While the protest was only focused on New York City, the issue could just as easily spread across the county. New York has one of the highest costs of living, with no additional adjustment in the minimum wage. This is a prime location for the beginning of a widespread protest.

In McDonald’s Corporation (NYSE:MCD) most recent quarterly report, it stated that one of the factors adversely affecting profitability is the “long-term trend towards higher wages…in both mature and developing markets.” Across all company-operated stores, the payroll and employee benefits costs were 25.32%. This is an increase from the previous year’s 25.18% expense.

McDonald’s Corporation (NYSE:MCD) is also seeing challenges in the Chinese market. It recently dropped the price for some of its chicken-based products in stores in China. The McNugget originally cost $5.80 in Shanghai, now it’s only $3.22. McDonald’s is trying to offload the rest of its chicken inventory in the wake of the contaminated food scandal. The company will likely see a reduction in same-store sales in China this year, as well.

Burger King Worldwide Inc (NYSE:BKW) operates over 13,500 locations worldwide. The majority of these are franchise locations. Only 418 are company-operated. Burger King announced in its most recent quarterly report that it has suffered from worldwide increases in wages and benefit expenses. In 2012, total wages and benefits expenses were 29.52% of company-owned store revenue. In 2011, the total expense was only 29.36% of revenue.