Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

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.

Franchise Revenue % in 2012
Yum Brands 32.53%
McDonald’s 13.20%
Burger King 40.55%

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.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.